Simon Property Group’s financial results provided a clear picture of what to expect for retailers. Some prominent retailers will disclose their quarterly financial results this week.
During last Monday’s earnings release, the mall giant’s CEO, David Simon, gave some insights on what to expect. Simon Property is the country’s largest mall owner, with 167 retail malls and outlet centers in its portfolio and a market valuation of around $40 billion. Gap, Victoria’s Secret owner L Brands, Coach parent Tapestry, Macy’s, and J.C. Penney are among its main tenants. Among retailers that are disclosing results this week, L Brands and Macy as well.
The Indianapolis-based landlord has insight into traffic patterns at malls across the country.
During the company’s earnings call last Monday, Simon stated, “We have a lot of data.” “We now have a better understanding of the consumer than ever before. We now have… knowledge that we did not previously have.”
Here are five key takeaways from his remarks for retail stock investors.
Teen retail is expanding
When asked which retailers are expanding and opening new locations right now, David Simon mentioned American Eagle and Urban Outfitters.
Both companies cater to a younger demographic. According to Piper Sandler’s biannual “Taking Stock with Teens” report, teens plan to spend an average of $2,165 in 2021, an increase from a record low tracked last fall.
Aerie, a lingerie and loungewear brand owned by American Eagle, has seen explosive growth as a result of stay-at-home trends. Anthropologie and Free People are also owned by Urban Outfitters. American Eagle stock has increased by more than 350% in the last year, while Urban Outfitters stock has increased by about 130 percent.
Simon also mentioned Crocs as a company that is popular with shoppers looking for a new pair of shoes.
“Crocs was hot a decade ago,” the CEO said during the conference call. “People thought it had lost its zeal. Perhaps it had. However, it is now killing it [today].”
Crocs stock has increased by more than 320 percent in the last year. The shoemaker, which has been seen on the feet of celebrities such as Justin Bieber, recently raised its full-year forecast and stated that demand for the Crocs brand is “stronger than ever.”
The place to be is in the suburbs.
“Suburbia is hot right now,” Simon told analysts. “Suburbia is a great place to live. And we happen to have a lot of great, well-located suburban real estate that we will continue to use.”
During the health crisis, residents of major metropolitan areas like New York City fled in droves to larger homes with backyards.
This has also forced retailers to reconsider their stores, particularly flagship stores that used to cater to large tourist crowds.
Malls are benefiting from the growth of suburbia. As more millennials purchase homes, they are looking for new furniture and décor to fill the space.
According to NPD Group data, the categories with the highest growth in dollar sales online in 2020 will be small appliances, video games, housewares, consumer electronics, and toys.
Simon, for one, does not believe that relocating to the suburbs is a viable option in the short term.
“This will play out over a number of years,” he predicted.
Restaurants are making a strong comeback.
Restaurants interested in leasing space are another source of encouragement.
“It’s very interesting to note that restaurant demand is at an all-time high,” Simon said. “We’re seeing a lot of restaurateurs who… want to open their doors as soon as possible. We’re seeing a lot of interest in that area.”
Green Street retail analyst Vince Tibone recently reiterated the firm’s “sell” rating on Simon stock, but cited leasing callouts, including restaurants, as positives.
“The release was mixed with some encouraging signals, while other metrics indicate mall fundamentals remain under pressure amid the reopening environment,” Tibone said of Simon’s first-quarter results.
There are still open positions at the company. For the fiscal year ended March 31, Simon reported an occupancy rate of 90.8 percent across its U.S. malls and outlet properties, compared to 94 percent the previous year.
Luxury spending is on the rise.
Another bright spot emerging from the Covid pandemic appears to be luxury.
On the earnings call, David Simon singled out Prada, Gucci, LVMH’s Louis Vuitton, Marc Jacobs, and Bottega Veneta as strong luxury retail tenants signing new leases or renewing leases in Simon’s malls.
According to Compass point real estate analyst, Floris van Dijkum continued strength from luxury tenants could help propel Simon’s financials back to growth sooner rather than later. Simon is still rated as a buy by the firm.
“There appears to be an additional upside to our estimates should the company recoup more of its unpaid rent from last year as well as lease additional space,” van Dijkum wrote in a client note. “The company has the best balance sheet in the mall industry and could go on the offensive again later this year to further consolidate the ‘A’ mall industry.”
Simon has a price target of $150 at Compass Point. On Monday morning, the stock was trading at around $122 per share. Year to date, the stock is up about 43%.
However, the euphoria may be fleeting.
Proceed with caution, as the boost that some malls and shopping centers are experiencing may be fleeting.
“Between being cooped up, being locked down, the stimulus, and celebrating the fact that the country is still around… there’s clearly some level of euphoria around that,” David Simon said.
“It’s impossible for me to tell you what percentage that is….” On the other hand, there are still areas of the country that haven’t seen that yet,” he added.
He cited California and New York as two states where Covid restrictions continue to stifle store traffic. International tourism has yet to return to malls and outlet centers, according to Simon.