The Gymboree Group, Inc. (Gymboree) is not exactly jumping for joy this year, as the children’s clothing retailer is set to close half of its retail outlets. This presents another setback for the regional mall industry, though DBRS expects the direct impact of any closures on CMBS transactions to be relatively light. With an average store size of less than 2,000 square feet, Gymboree (which also owns the Janie and Jack and Crazy 8 chains) is not a major tenant for any of the retail properties in DBRS’s Viewpoint database. However, the loss of income from the tenant will strike another blow to some malls that may already have weak cash flow. One industrial property has Gymboree as a single tenant, but with a lease in place that extends until 2030, DBRS does not consider the loan to be at risk.
In June 2017, Gymboree filed for Chapter 11 bankruptcy protection. The company reported that its Q2 2017 sales had dropped 6.4% and that comparable sales were down 5.0%. The company closed one-quarter of its stores and reduced its debt by more than $900 million when it emerged in September, which helped it stave off liquidation. Gymboree also launched a new digital strategy via a new website that it expects will shift more sales online. Yet this week, Reuters published a report stating that the company had engaged a consulting firm to review its leases and reduce its costs. This could result in mass closures if landlords are unwilling to make concessions to keep the tenant.
DBRS’s view is that large Tier 1 malls, which are considered those with sales greater than $450 per square foot, will likely have little to fear from Gymboree’s vacating its spaces. In many cases, owners of these malls will reject the requests for rent relief, as they may be able to secure more financially stable tenants for the spaces. On the other hand, lower-quality regional malls that are already reeling from the losses of anchor stores may find that the loss of Gymboree will have a direct impact on the bottom line. In recent years, these malls have often been unable to backfill even small spaces or do so at significantly lower rent than what large national tenants would pay.
An interesting contrast to Gymboree is fellow mall retailer, Children’s Place Inc. (Children’s Place), which made significant investments in technology, both in e-commerce as well as in its supply chain. These e-commerce efforts have given the Children’s Place a stronger retail presence. The Children’s Place reported that it generated improved sales at its stores, even in malls where Gymboree stores had closed as a result of poor sales. With Gymboree being loaded down with debt from its private-equity buyout in 2010, the company had less available capital for these types of investments. According to current Children’s Place CEO, Jane Elfers, The Children’s Place increased its online sales from 9.0% to 23.0% between 2010 and 2017, expecting that half of its sales could move online. The Children’s Place has been closing about 30 unprofitable locations annually, but it has more than 1,000 stores. This may suggest that the robustness of an omnichannel strategy can complement the brick-and-mortar retail.
While the reported Gymboree closures will likely not act as a sole catalyst for a decline of a mall, DBRS cautions that there are regional malls that can ill afford to lose one more national retail tenants. Those malls already exhibit weak cash flow and sales along with high vacancy. Going forward, mall tenants that cause investors to lose sleep share many characteristics: a lack of strategy, high levels of debt that limit potential investments and flagging sales.
For a copy of the report, refer to the DBRS website or e-mail firstname.lastname@example.org.
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