Mall giant Simon beating back perceptions of Internet threat

Brick-and-mortar retailers experienced a rough holiday season, and the doldrums continued through January—fueling hand-wringing among investors and other observers over whether the Internet has permanently diminished the American shopping mall.

Simon Property Group Inc. executives strongly believe otherwise. And on their fourth-quarter conference call Jan. 31, they backed up their bravado with impressive results. Funds from operations for the period topped analysts’ consensus estimate by 5 cents per share, and CEO David Simon predicted even better performance for 2014.
 

Simon

Even so, questions from analysts about the shifting nature of retailing dominated the call.

David Simon called the concerns an overreaction. He said a slew of factors worked against retailers in the second half of the year—including bad weather in some parts of the country, uncertainty surrounding the impact of Obamacare, and higher taxes—all of which caused consumers to be “very cautious.”

But even when mall stores struggle, there actually is little immediate impact on Simon’s profit, David Simon pointed out. Retailers are locked in to long-term leases. And when performance goes so far south that they shutter stores, Simon often can re-lease the space at a higher rate.

“We are absolute believers that our business will continue to grow,” Simon said on the call.

Analysts found Simon’sbullish outlook persuasive, in part because many of Simon’s malls target upscale shoppers less affected by economic ups and downs. Also working in the company’s favor: Vacancies are declining at a time little new mall space is under construction.

“The mall is dead? Not so much,” Citi Research wrote after the call.

“Tipping point tough to find in Simon earnings release,” read the headline for Goldman Sachs’ report.

Another reason for optimism, according to analysts, is that the old mind-set of viewing the Internet as primarily a threat to traditional retail stores is outdated.

That’s a point executives of Indianapolis-based Finish Line Inc. hammered home in late December during their fiscal third-quarter conference call. They noted that more than half of their customers have multiple points of contact—via computers, tablets, social media, mobile phones or in store—before making a purchase.

Lyon

“Brick-and-mortar and digital are completely interconnected,” CEO Glenn Lyon said on the call. “The line between store and site traffic and sales transactions has become increasingly blurred as we now offer a seamless experience for the customer, no matter which channel they choose to shop.”

Lyon pointed out, for example, that 25 percent of visitors to finishline.com are researching purchases to buy offline. And when members of the company’s Winners Circle loyalty program receive promotional emails, 87 percent are more likely to make in-store purchases than buy online.

Even shoppers who buy online may trek to the store to pick up their purchases. Finish Line and other retailers increasingly are using their mall stores as conveniently located distribution centers for online purchases.

“Never before during my retail career has the retail industry been in such a constant state of change,” Lyon, 63, said on the call.

A business in search of a name

When Simon Property Group officials in December announced plans to spin off their strip centers and lower-performing malls into a new Indianapolis-based public company, they called the new business SpinCo, a placeholder until they come up with the actual name.

It’s clear there is consternation within Simon’s downtown headquarters over what that name should be. The mothership, Simon Property Group, already bears the surname of the founders. So what moniker would befit the new company?

One analyst joked on the conference call that it should go by the name Sterrett, in honor of longtime Chief Financial Officer Stephen Sterrett, who recently announced he will retire next year.

“Yeah, that rolls right off the tongue,” Sterrett, 58, quipped.

Twice during the call, David Simon invited analysts to submit their suggestions. He emphasized that giving up and sticking with SpinCo was not an option.

“Honestly, I probably shouldn’t say this publicly,” Simon said, “but the hardest thing about SpinCo is coming up with the appropriate name.”•