Simon Left Holding the Big Box Bag

Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The age of the “big box” is ending. This has to spell trouble down the road for Simon Properties (NYSE: SPG), the largest U.S. mall owner. When a mall operator's customers are under threat, it's under threat. When the people killing your customers are dying, you're dying. 

The big-box boneyard

Consider Best Buy (NYSE: BBY) the canary in this coal mine. Since April 2009, just after rival Circuit City closed, Best Buy's stock is down 58%. Now founder Richard Schultze wants to take the company private, a move haunted by skepticism that anything can save the retailer of electronic goods.

As time goes by, Schultze's offering price for Best Buy keeps declining. He's now expecting to come back in February, after Christmas results have come in, and that offer is not expected to be great. The company issued a $0.17-per-share dividend in December, but investors should consider that payout under threat.

The latest idea from Schultze is to create smaller stores, showcasing flailing brands like Microsoft and Sony. You have to wonder what Stifel Nicolaus analyst David Schick thinks he's seeing when he praises such efforts. Of course, note that at the same time, he's taking estimates down, looking to store closings overseas, and keeping only a hold rating on the stock.

Barnes & Noble (NYSE: BKS) seems to be following down the same path. Since its archrival, Borders, closed its doors in the middle of 2011, BKS is down 25%, despite having an e-book reader called the Nook that drew strong reviews against's Kindle. Overall sales for the company are down 12%, and even online sales are down, as many consumers fear being left with an orphan device.

Staples (NASDAQ: SPLS) actually lost money in its most recent quarter, and its strong third quarter now appears to be an aberration. Annual sales are stalled at about the $25 billion/year revenue, and look poised to roll over, as sales of traditional office supplies like paper, pens and folders decline with more-and-more businesses fully automating around computer servers that may not even be in the store location.

These stores were once all called “category killers” back in the 1990s. Now they're called “big box” retailers. They occupy a lot of land on the fringes of shopping malls. While they were once sucking up shoppers from the malls' center, allowing the property owner to call it even, they're now declining, and leaving the entire mall property to fail.

Simon says sayonara?
Simon may look like a great stock, with growing assets, a stable balance sheet, and a dominant position in the commercial real estate space, especially with the recent problems at rival General Growth Properties (NYSE: GGP). But the Simon-General rivalry could wind up being similar to past “big box” rivalries like Best Buy's with the late Circuit City, Barnes & Noble's with the late Borders Books, and Staples' with OfficeMax and Office Depot, which between them are now worth just one-fourth of Staples' market cap. Sometimes, being the last man standing just means you're the next to fall.

Consider just one city, my own home town of Atlanta. Once it was defined by shopping malls, many of them Simon Malls. Now its Northlake Mall is struggling, and it has given up on another local mall, Gwinnett Place. These follow the failure of other suburban malls, which General Growth and Simon had previously lost interest in. The company is focusing on fewer-and-fewer properties, leaving the rest to fend for themselves, and taking losses. What looks like a focus is in fact a general retreat.

What is happening in Atlanta is happening in other cities across the country. Simon had to sell the Atrium Mall in Newton, Mass. recently at a big discount, notes the Boston Business Journal. Simon had to take the Palm Beach Mall in Florida bankrupt before selling it, notes the Palm Beach Post. Simon also owns the Aurora Park Mall in Colorado, long a source of violence before a shooting last year at its movie theater. 

Malls are no longer an oasis from the problems of the cities and suburbs they exist in. They're part of the fabric. And they are no longer a place where investors can hide from the other problems in urban commercial real estate. In many ways they are the problem. 

See what is happening with the big boxes as symptomatic of something that has to impact Simon. The investment side of Simon's cash flow, which in real estate is the important part, has been steadily burning more than $2 billion each quarter, even while the general economy has been recovering.

Gets who gets left holding the big box after the party is over?

DanaFBlankenhorn has no position in any stocks mentioned. The Motley Fool owns shares of Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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