Few stores closed in 2022. UBS says get ready for that to change in 2023, starting with department stores

Published Mon, Dec 19 202210:31 AM ESTUpdated Mon, Dec 19 20223:07 PM EST

Christina Cheddar Berk @in/christina-cheddar-berk-b864404/

After a record number of store closures in 2020, retailers have shuttered far fewer doors over the last two years, but that may be about to change, especially for department stores, according to UBS. By all accounts, it's been a tough holiday season. Shoppers are watching their spending after months of rampant inflation. According to Placer.ai traffic data for November, the number of consumers at U.S. shopping centers was down 5.4% year over year. "Empty stores are a harbinger of deep markdowns as we head into the final stretch of the holiday shopping season," said Deborah Weinswig, an analyst at Coresight Research, in a research note Sunday. According to Weinswig, retailers are hoping to clear out their inventory with steep discounts. Then, when shoppers return after Christmas with gift cards or returns, the stores are counting on shoppers scooping up newer items that just hit the floor at higher prices. But that would be big reversal of current trends. According to market researcher NPD Group, fourth-quarter retail sales revenue through Dec. 10 is 6% below 2021 results, and unit sales are down 10%. "The traditional feeling of spirited chaos is missing from retail this holiday season, and not in a good way," said Marshal Cohen, chief retail industry advisor for NPD, in an email Friday. "With just weeks to go in the holiday shopping season, momentum and the urgency to shop is still missing, as the consumer's need to prioritize higher-priced food is impeding discretionary spending." UBS retail analyst Jay Sole said he expects the challenging traffic trends, weak sales and pressured margins will be prove catalysts for store closures to rise once again after a period of unusually low activity. Department stores will be one sector where the rate of closures is likely to be above the industry average, according to Sole. He also said he believes the lack of store closures has made it harder for retailers to grow sales. When stores were closing, retailers benefited from market share shifting to their business from the ones that went out of business. "The Department Store channel store count dropped 33% from 4Q19 through 1Q21," Sole wrote in a research note last week. "Since then it has been flat. Compares got tougher in 2Q22 as the industry lapped the big store closures. We believe this has made sales growth harder to come by for Sell-rated Nordstrom and Kohl's . Our view is tough compares remain a reason Department Store sales will remain under pressure in the 1H23." In addition, he said that he doesn't believe the slower pace of store closures was a sign of equilibrium between brick-and-mortar retailers and online retailers. According to UBS, the store count for the U.S. softlines industry fell to 83,377 stores in September from a peak of 112,441 in 2013. Instead, he said, many store closures that would have occurred in 2021 or 2022 were accelerated by the pandemic . Many nonessential retailers, particularly those that were located inside indoor shopping malls, were closed for prolonged periods due to the Covid lockdowns and succumbed to the financial pressure . Sole also expects a fast pace of closures among children's clothing stores, footwear retailers, and men's and women's clothing. Nordstrom shares are down about 31% since the start of the year, while Kohl's stock has tumbled about 48%.