5 things investors in retail stocks can learn from the biggest U.S. mall owner

Published Mon, May 17 202112:54 PM EDT

Simon Property Group 's earnings shed light on what might be ahead for retailers as some notable names release quarterly reports this week. When the mall giant reported its quarterly earnings last Monday , chief executive David Simon had plenty of insights about how the retail sector – which include his tenants – is faring more than a year into the pandemic. With 167 shopping malls and outlet centers in its portfolio — and a market cap of about $40 billion — Simon Property is by far the largest mall owner in the United States. Some of its biggest tenants include Gap , Victoria's Secret owner L Brands , Coach parent Tapestry , Macy's and J.C. Penney. Indeed, L Brands and Macy's are among the retailers publishing earnings this week . The Indianapolis-based landlord has a glimpse into traffic trends at malls across the nation. "We have a lot of data," Simon said during the company's earnings call last Monday. "We understand the consumer better than ever. We have … knowledge that we didn't necessarily have before." Here are five takeaways that investors in retail stocks can glean from his remarks. 1. Teen retail is growing When asked which retailers are in growth mode today and opening new stores, David Simon named American Eagle and Urban Outfitters . Both companies cater to younger consumers. Teens on average are planning to spend about $2,165 in 2021, according to Piper Sandler's biannual "Taking Stock with Teens" report , which would represent an increase from a record low tracked last fall. American Eagle owns Aerie, a lingerie and loungewear brand that has seen explosive growth, thanks to stay-at-home trends . Urban Outfitters also owns Anthropologie and Free People. American Eagle shares are up more than 350% over the past 12 months, while Urban Outfitters' stock is up about 130%. Simon also mentioned Crocs as a business that is resonating with shoppers in search of a new pair of shoes. "Crocs was hot a decade ago," the CEO told analysts on the call. "People thought it lost its mojo. Maybe it had. But it's now killing it [today]." Crocs shares have soared more than 320% over the past 12 months. The shoemaker, often spotted on the feet of celebrities like Justin Bieber, recently raised its full-year outlook and said demand for the Crocs brand is "stronger than ever." 2. Suburbia is the place to be "Suburbia is hot," Simon told analysts. "Suburbia is the place to be. And we just happen to have a lot of great, well-located suburban real estate that we'll continue to take advantage of." During the health crisis, residents in major metros such as New York City fled in droves to bigger homes with backyards. This has also forced retailers to rethink their stores — especially flagship shops that used to cater to heavy tourist populations. As suburbia is flourishing, malls are reaping the benefits. More millennials are buying homes , and they're looking for new furniture and décor to fill the space. Small appliances, video games, housewares, consumer electronics and toys were the categories with the strongest growth in dollar sales online in 2020, according to data from NPD Group. Simon doesn't think the move to the 'burbs is a short-term scenario, either. "This will play out for several years," he said. 3. Restaurants are coming back strong Another vote of confidence is coming from restaurants, which are interested in leasing space. "Very interestingly, the restaurants' demand is at the very high level," Simon said. "We're seeing a lot of restaurateurs that … want to get opened quicker. We're seeing really good demand there." Green Street retail analyst Vince Tibone recently reiterated the firm's "sell" rating on Simon shares, but cited the leasing callouts — including restaurants — as positives. "The release was mixed with some encouraging signals, while other metrics suggest mall fundamentals remain pressured amid the reopening environment," Tibone said about Simon's first-quarter results. The company still has vacancies to fill elsewhere. For the period ended March 31, Simon reported an occupancy rate across its U.S. malls and outlet properties of 90.8%, compared with 94% a year earlier. 4. Luxury spending is booming Luxury appears to be another bright spot coming out of the Covid pandemic. On the earnings call, David Simon called out Prada, Gucci, LVMH's Louis Vuitton, Marc Jacobs and Bottega Veneta as strong luxury retail tenants that are signing new leases in Simon's malls or renewing leases. Continued strength from luxury tenants could help propel Simon's financials back to growth sooner rather than later, according to Compass point real estate analyst Floris van Dijkum. The firm has maintained its buy rating on Simon. "There appears to be further upside to our estimates should the company claw back more of its unpaid rent from last year as well as lease additional space," van Dijkum said in a note to clients. "The company has the strongest balance sheet in the mall sector and could go on offense again later this year to further consolidate the 'A' mall industry." Compass Point's price target on Simon is $150. Shares were trading at around $122 a piece on Monday morning. The stock is up about 43% year to date. 5. But the 'euphoria' could be short-lived Proceed with caution, however, because the boost that some malls and shopping centers are seeing could be short-lived . "Between being cooped up, between being locked down, between the stimulus, between celebrating that the country is still around ... there's clearly some level of euphoria around that," David Simon said. "It would be impossible for me to tell you what percent that is. ... On the other hand, we're still seeing pockets of the country that haven't really seen that yet," he added. He cited California and New York as two examples where store traffic remains suppressed by Covid restrictions. International tourism has also yet to return to malls and outlet centers, Simon said. —CNBC's Christopher Hayes contributed to this reporting.