While housing prices skyrocketed throughout the nation, consumers with equity to burn spent freely on everything from new furniture to high-end accessories. That led retailers to aggressively expand by opening more locations and trying new concepts.Now with a cratering housing market and a crippling credit crunch sapping consumers' desire and ability to buy, retailers are scaling back expansion plans and closing underperforming stores.
Companies such as Talbots, Pacific Sunwear, Ann Taylor and Zale Corp. are closing stores. Other companies like J.C. Penney have said they will open fewer stores than anticipated.
The International Council of Shopping Centers said in a recent report that the number of announcements about store closings so far this year "does not bode well for the industry in 2008." The council projects that full-year closings could reach 5,770 stores, the highest number since 2004.
Grubb & Ellis, a real estate investment firm, said in a recent report that the weak housing market has already forced retail giants such as Wal-Mart to slow expansion. Wal-Mart said late last year that it would reduce its annual square-foot expansion plans from 9 percent to as low as 5 percent over the next two years.
"Retailers just got overly aggressive," said Jeff Green, president and chief executive of Jeff Green Partners, a retail consulting company. "Now it seems that they have no choice but to pull back."
Property & Portfolio Research, a real estate investment firm, said the retail market is being battered by ill-fated timing.
"Record amounts of new supply came on line in 2007, just as the housing market began to fall and growth in consumer spending receded from lofty levels," said a Property & Portfolio Research report. "The consumer will continue to rein in purchasing especially of housing related goods," while property owners will have a tougher time leasing space than they have since the last recession.
The battered housing market already forced retrenchment in home furnishings last year, said John Connolly, a research analyst with the shopping centers council.
Last year, about a quarter of the store closings were in the home furnishings sector. For example, Bombay Co. went out of business and shuttered 508 stores.
But this year, the announcements of store closings are spreading to less-expected areas, with apparel being hit hardest, Connolly said. Of the 1,600 announced store closings this year, 650 are in the apparel sector.
So far, companies have mostly decided to shut down offshoot brands that are struggling, Connolly said. For instance, Talbots is closing all 66 of its Talbots Kids stores as well as its 12 Talbots Men's locations. Pacific Sunwear is closing its demo chain, which sells urban-inspired apparel.
"It is more of residual of the main brand cutting back on peripheral brands and sticking with its core business," Connolly said.
Also at play, Green said, is the fact that adult women are cutting back on spending to focus on essentials. Wal-Mart said January sales were hampered as people used their holiday gift cards to buy food and other necessities instead of clothes and electronics.
"Women are more likely to buy for themselves when times are good," Green said, only to cut back spending on themselves so they can buy for others such as their children and mates.
Because of that, it should be no surprise that retailers catering to women are taking a cautious approach to growth. Coldwater Creek and Chico's are planning to slow their expansion plans as the economy slows, Green said.
Ann Taylor Store Corp. said in January that it was closing 117 underperforming stores of its flagship brand and its lower-cost Loft chain, and it is delaying the rollout of a planned new concept until 2009.
Kay Krill, Ann Taylor's president and CEO, said that "in light of the current macro environment and retail slowdown" expected in 2008, the company had to take a "very measured approach" to investing money and time into new stores and concepts.
Although 2008 may be bad, 2009 and beyond might be worse, said George Whalin, president of Retail Management Consultants, a firm based in Carlsbad, Calif. That's because many of the stores' expansion plans for this year are already in the works and won't be abandoned. Not so with longer-range plans.
"I don't think we'll see any appreciable slowdown in new stores this year," Whalin said. "If we see it, it'll be next year and the year after that."
Grubb & Ellis has predicted that 2008 would be challenging for the retail real estate market in some areas because housing foreclosures are expected to increase and "mom-and-pop tenants are not able to pull as much equity out of their homes to fund their businesses."
But it wasn't just small retailers who used home equity to finance spending, said Scott Hoyt, director of consumer economics at Moody's Economy.com. Plenty of Americans used the equity in their homes to finance a lifestyle previously beyond their means - all the while pumping up retailers' profits. Economy.com estimated that 34 million households siphoned money out of their homes in the past four years. Now that spigot is turned off.
"It's happening across the board. Consumers are finding it more difficult and more costly than a year ago to get credit to make purchases," Hoyt said.
Property & Portfolio Research puts it this way: "The consumer appears to be faltering and may finally tap out in 2008."
The same may be true for retailers, said Joe Belch, a professor of marketing at San Diego State University.
"Those retailers that were expanding may be hitting a wall, too, it seems."