"Almost Cataclysmic": Barclays Reveals Which Restaurants Are Most Exposed To Collapsing Malls

We"ve spent a lot of time this year discussing the complete collapse of mall-based retailers, a collapse which has resulted in more store closures in Q1 2017 than all of 2016 and will likely claim more victims by the end of this year than any year since the great recession nearly a decade ago.  Here are a couple of recent examples:

But those mall-based apparel companies aren"t the only ones suffering the dire consequences of collapsing mall traffic.  For years, the casual dining space has become more and more saturated with new concepts resulting in thinner and thinner margins for the restaurant industry.  Now, with foot traffic in malls collapsing these same restaurants are about to experience the brutal realization that declining traffic, massive fixed costs, rising minimum wages and razor thin margins aren"t a great combo. 

Thankfully, Barclays" restaurant team, led by Jeffrey Bernstein, has identified which publicly-traded restaurants are about to get screwed the most.  Here"s a summary:

Of the large publicly-traded casual dining chains, Cheesecake Factory "wins" the "most screwed" award with 93% of their locations heavily dependent on mall traffic.

Meanwhile, proving they went full mall-tard (something you should never do, btw), CAKE"s second largest casual dining concept, Grand Lux, is also over 90% dependent on mall traffic. 

Here are more details from Barclays:

Cheesecake Factory (CAKE) operates 90%+ of their stores in a location we define as mall dependent. To be fair, CAKE is often viewed as a destination, with its own separate entrance, and therefore less mall-dependent. And most are in ‘A’ malls which house high-end retailers that draw a more affluent consumer. But the consumer shift to on-line shopping is less about affluence, and more about a change in behavior.

BJ’s Restaurants (BJRI) & Olive Garden (DRI) are the only other portfolio leading casual diners with an outsized percentage of stores mall dependent, at ~60% & ~50%, resp. With that said, we are Underweight BJRI & Overweight DRI. Importantly, this analysis is just one component of a mosaic when formulating our ratings. BJRI is expanding from regional to national, and competes within a very competitive varied menu segment, both of which pose challenges. Olive Garden is already a strong national brand, and the only one competing within the Italian segment, while offering a strong value platform.

As for the remaining casual diners, all operate 25-40% of their stores mall dependent. These include the three steak chains, Outback (BLMN), Texas Roadhouse (TXRH) and LongHorn (DRI), all at 30-40%. We are Overweight all three. Steak concepts are more special occasion, and therefore less mall-reliant, with resilience demonstrated by a positive comp for all in 1H17. Otherwise, Buffalo Wild (BWLD) is also Overweight. While comps have eased and wing prices are elevated, the brand is introducing a new c-suite, has three new activist board members, & potential for large refranchising / cost cutting. Lastly, Chili’s (EAT) also competes within a very competitive varied menu segment, and is viewed as over-stored, and is now looking to redefine a ‘very clear identity’.

Finally, here is a list of states that should probably start preparing for higher restaurant layoffs in the near future...yes, we"re looking at you and your $15 minimum wage California.

2017 Retail Bankruptcies Soar To 'Great Recession' Highs

As U.S. equity markets continue their march back toward all-time highs, courtesy of the latest BTFD binge trade, at least one "small" segment of the U.S. economy does not seem to be participating in the rally as 9 brick-and-mortar retailers have already filed for bankruptcy protection in 1Q 2017 alone.  That volume of filings matches the total number of retail bankruptcies for all of 2016 and puts the industry on pace to exceed even the "great recession" highs. Per CNBC:

Nine retailers have filed in just the first three months of 2017, according to data provided exclusively to CNBC from AlixPartners consulting firm. That equals the number for all of 2016. It also puts the industry on pace for the highest number of such filings since 2009, when 18 retailers resorted to that action.

The rising number of retail bankruptcies comes as consumers are making more purchases online, and shifting their spending toward travel and other experiences. Meanwhile, the supply of physical stores continues to outweigh shopper demand, putting pressure on the industry"s profits.

"It"s just kind of this perfect storm where things are coming together, and it"s going to continue for awhile," Deb Rieger-Paganis, a managing director in the turnaround and restructuring practice at AlixPartners, told CNBC.

Many of the early retail victims include companies that were snapped up by Private Equity interests during the last down cycle and aggressively levered.  In addition to the following nine retailers that have already liquidated or are working to reorganize, Payless Shoes and Bebe are also expected to file at some point in the not so distant future.

• Gordmans Stores


• Gander Mountain


• General Wireless Operations (formerly RadioShack)


• HHGregg


• BCBG Max Azria


• Michigan Sporting Goods Distributors


• Eastern Outfitters


• Wet Seal


• Limited Stores

Of course, as Deb Rieger-Paganis, a managing director in the turnaround and restructuring practice at AlixPartners, points out, retail bankruptcies and/or store closures, especially from anchor tenants, can push the whole retail space into a downward spiral as "people don"t like to shop where there"s a lot of vacant space."  So while larger retailers like Macy"s, J.C. Penney, Sears and Kmart have avoided chapter 11 so far in this cycle, they"re all in the process of closing hundreds of stores and those vacancies are likely to have ripple effects through the industry.

Meanwhile, as we pointed out last month (see "America"s Desperate Mall Owners Turn To Grocers, Doctors & High Schools To Fill Empty Space"), America"s mall owners are having such a hard time filling empty retail space that they"re turning to high schools, doctors offices and grocery stores.

Once a shining beacon of American capitalism, malls around the U.S. are failing at an alarming rate due to a combination of shifting consumption patterns, years of underinvestment by mall owners and a spate of retailer bankruptcies over the past 12 months that have left large swaths of once prime real estate empty (see "Number Of Distressed US Retailers Highest Since The Great Recession"). 

Now, as the vacant square footage grows larger, mall owners are being increasingly forced to turn to non-conventional tenants to fill empty space.  Per the Wall Street Journal, the latest target of mall owners is yet another struggling industry, grocers, with everyone from Whole Foods to Kroger looking to snap up square footage at discount prices.

Natick Mall in Natick, Mass., is leasing 194,000 square feet of space vacated by J.C. Penney Co. to upscale grocer Wegmans Food Markets Inc., which is planning to open a store in 2018.

College Mall in Bloomington, Ind., plans to bring in 365 by Whole Foods Market in the fall.

Grocery giant Kroger Co., meanwhile, has purchased a former Macy’s Inc. location at Kingsdale Shopping Center in Upper Arlington, Ohio, and plans to build a new store in its place.

But we"re sure it will all work out just fine and wall street will go on buying those mall reits with reckless abandon...you know, because dividend yields.