Simon Cuts Profit Forecast As Consumer Spending, Demand Slow
Inflationary pressures and concerns about a potential U.S. recession are dimming the financial outlook of the country's largest owner of malls and shopping centers.
Simon Property Group expects its annual net income for shareholders to range between $6.39 and $6.49 per share, down from its previous forecast of between $6.45 and $6.60 per share, as leasing demand from retailers falls, it reported in its earnings statement on Wednesday.
The shopping center and mall giant saw a dent in its quarterly earnings, with net income attributed to shareholders falling $10M year-over-year in the second quarter to $486M, according to its quarterly report. Simon also raised its base rent this year a little more than 3% to protect its margins, Reuters reported.
Simon's U.S. leasing ticked up for the first six months of the year, with 615 new and 1,070 renewed leases combining for 5.8M SF. During the same period in 2022, Simon signed 673 new and 814 renewed leases on fixed minimum rents, comprising 4.8M SF. New lease rent averaged $65.84 per SF so far this year, up from $54.87 per SF in 2022.
Simon also increased its dividend by more than 8% over Q2 2022.
Simon’s revised profit projections come as U.S. retail sales ticked up 3% during the first six months of 2023 compared to the previous year, but with consumers — including middle- and high-income shoppers — flocking more toward discount retailers as inflation persists.
More than 60% of consumers were hunting for bargains this year, with 57.9% switching to cheaper food and grocery brands, according to a GlobalData consumer poll reported by CoStar.
Evidence of a bargain shopper trend can be seen in the new stores that have been rolled out this year. New store openings eclipsed store closing by some 1,000 units so far this year, according to Coresight Research data cited by CoStar, led by discount chains Dollar General, which opened more than 1,000 stores, Family Dollar, Dollar Tree and Five Below.
Shuttered stores were led by Bed Bath & Beyond, which is closing all of its more than 850 stores following bankruptcy. Other shrinking chains included Tuesday Morning and its 463 shuttered stores, CVS Health with 300 closed stores and Walgreens Boots Alliance with 149 store closings, according to Coresight.
In Simon's earnings call Wednesday afternoon, CEO David Simon highlighted the company's growing relationships with luxury brands like LVMH and Kering as a long-term tailwind, even as sales in the category were flat.
"I don't like the word lean in, but we will do as much as we can to continue to foster those relationships, and that is a huge differentiating point that we have at Simon Property Group," Simon said, according to an earnings call transcript. "So it's all systems go there. Yes, sales will flatten, they'll go up, they'll go down. But their commitment to their customer and what they do in the stores, I think goes unabated."
Simon said he is optimistic that retail sales won't resemble a dramatic slowdown in the second half of the year because inflation and interest rates had already started to take a bite out of spending in the back half of last year.
"I think across the board, our comps get easier for our retailers in the second half, so we're actually optimistic," he said. "And I think generally, the economy, as we all know, seems to [be] relatively stable. Obviously, it's a very uncertain world. So anything can happen."
