Here’s Why Simon Property Is Defying Critics With New Billion-Dollar Bet On Retailer

When mall giant Simon Property Group bought fashion retailer Aéropostale out of bankruptcy in 2016, it was seen by the market as an act of weakness, a short-term gamble from a company desperate to avoid a new swath of empty storefronts across its portfolio.

Seven years on, Simon has swelled the portfolio of retail brands it owns stakes in as part of a joint venture with brand specialist Authentic Brands Group called SPARC. In that time, it has been both lauded as a brave visionary for investing in distressed, largely bankrupt retailers and criticized for avoiding vacancies by keeping dead-men-walking retail brands alive well past their sell-by date.

And in the last month, it has taken its investment in retail brands as well as retail real estate up a notch.

It is taking a $1B bet on department store chain JCPenney, which it co-owns with Brookfield, in the hope of turning around the fortunes of the loss-making chain. 

And in a move that has intrigued the retail sector, it has sold a third of its portfolio of retailers to hot Chinese Generation Z fashion brand Shein, a deal that it hopes will boost the e-commerce sales of its brands — but will also see the previously online-only Shein take its first physical locations in Simon malls, with the possibility of a wider rollout to come. 

It is still hard to say if Simon's move to buy up retailers has been a success or if it is throwing good money after bad. But right now, it isn't backing away from the strategy.

“A number of critics simply view SPARC Group as a Noah’s Ark designed to save Simon’s distressed retail tenants,” said Gwen Morrison, a retail consultant and former CEO of The Store, WPP’s global retail practice. “I’d agree that there are inherent conflicts with the traditional mall operator-retailer relationship in this model. But their portfolio of brands has significant value.” 

Real estate companies have owned retailers before, but rarely to the extent of Simon. Created ostensibly as a lifeline to help slam the brakes on shuttering storefronts in its malls, Simon came together with ABG and General Growth Properties to buy the assets of Aéropostale out of bankruptcy in 2016. GGP was acquired by Brookfield Property Group in 2018.

In the deal, Aéropostale was divided into two parts: the intellectual property and the trademarks under ABG, plus an operating company that included the running of stores, originally named Aero OpCo. The business evolved into Simon Properties Authentic Retail Concepts, or SPARC Group, and, having established that platform, Simon and ABG began seeking more brands to add to the fold.

It acquired Nautica from VF Corp. in 2018, but it was 2020 when the company accelerated and agreed on a deal to acquire big-box fashion retailer Forever 21 from bankruptcy for $81M. The same year, it bought Lucky Brand out of Chapter 11 for $140M and purchased Brooks Brothers, also in bankruptcy, for $325M. SPARC’s most recent additions were the 2021 acquisitions of Eddie Bauer, with roughly 300 stores, and the brand of sports retailer Reebok.

When announcing that acquisition, SPARC said it owned retailers that had 1,600 stores.

But is that a powerhouse portfolio of retailers bought below market value and primed for expansion or a sorry list of yesterday’s retail names?

“The challenge for the institutional owners of huge portfolios of American malls, such as Simon, is that if a legacy retailer closes down, you can lose 100 stores or more across your estate all at once,” Triple Five Group principal Paul Ghermezian said.

Triple Five owns the American Dream mall in New Jersey.

“That’s like losing an entire mall in one go,” he said. “So it’s understandable that they would want to find a way of keeping them in their malls and keeping them relevant.” 

SPARC is a rent payer, although the company stresses that less than 50% of the brands’ stores are in Simon malls.

Financial information about the success of SPARC is hard to find, but what Simon has chosen to publicly disclose is mixed. It owns around 12% of ABG as part of the joint venture, valued at roughly $1.5B, Simon said during an earnings call earlier this year. In its 2022 annual report, it said it had made a 9x profit on that stake.

In its financial results, Simon groups together the income from its investments in SPARC and JCPenney under a category called "other platforms," alongside investments in developer Jamestown and online discount fashion market Rue Gilt Groupe. 

In the three months to June 30, its share of the net operating income from those platforms was $109M, down from $174M in the same period last year. Simon, ABG and SPARC all declined to comment for this story. 

Shein And A $1B Investment

Simon and its partners have made two big announcements in recent weeks, one in a very old retail world, one in the very new.

Simon and Brookfield Properties came together in 2020 to buy department store chain JCPenney for $300M and the assumption of $500M in debt. SPARC wasn't involved in that deal.

After widespread closures, JCPenney has about 650 stores in the U.S. and recently pledged to spend $1B from existing facilities to upgrade its online offerings, stores and merchandise in a bid to turn its flagging fortunes around.

While CEO Marc Rosen has a stellar résumé, having spent over 14 years at Walmart and more than seven years at Levi’s, in the latter as president, many remain unconvinced that JCPenney can be reinvigorated and instead fear a cozy relationship developing between the various ownership parties.

“My take on this combo is that it was a knee-jerk, short-term tactical move that offered a home for ABG’s stale brands in stale Simon Property malls,” The Robin Report founder and CEO Robin Lewis said. “And the fact that SPG acquired JCPenney instantly gives more space to push ABG’s brands into. I see it as a great big negative synergy.”

Lewis, a long-time skeptic of the rationale behind SPARC, said that a marriage of convenience is actually likely to suit no one.

“Simon and Brookfield’s acquisition of JCPenney is a head-scratcher since JCP has been struggling to stay afloat for over two decades and was bailed out by two of its largest landlords. Today, their path forward is no less than a monumental challenge,” Lewis said.

Despite such concerns, SPARC achieved a coup this month when Chinese Gen Z fast-fashion phenomenon Shein entered into a “strategic partnership” under which Shein will acquire an approximately one-third interest in SPARC. In addition, SPARC will become a minority shareholder in Shein.

The deal means Shein will bring its e-commerce fast-fashion expertise and global reach to SPARC, providing a platform to further grow its brands, the companies said in their announcement of the agreement.

“My understanding is that SPARC is aiming for a holistic view of shoppers across their brand portfolio and formats, both physical and digital,” Morrison said. “This should help Simon launch into e-commerce and eventually deliver more relevant, personalised experiences in their malls as they invest in innovative, connected retail concepts.”

As part of the deal, Shein shop-in-shops will open up within Forever 21 stores across Simon malls, representing the first permanent physical presence Shein has had in the U.S. and giving it a platform ahead of a widely anticipated initial public offering on the New York Stock Exchange.

And Simon certainly has the real estate should Shein embark on a nationwide store rollout in the future, with a portfolio of shopping, dining and entertainment properties that spans everything from regional malls and hotels to designer outlet brand Premium Outlets and The Mills. It operates nearly 200 malls and outlet centers in the U.S.

“Overall, I think the creation of SPARC was born out of a need to keep retailers alive so that Simon did not face the prospect of loads of gaps opening up in its malls,” GlobalData Retail Managing Director Neil Saunders said. “By choice, I don’t think Simon particularly wants to operate retailers, but its hand was forced by a wave of bankruptcies.

“Getting Authentic Brands Group on board was a masterstroke, as ABG has a good track record of operating retail brands and has been able to nurture many of the companies integrated into SPARC.”

“If you take a big-box taker such as Forever 21, which in itself expanded by taking over from ailing department stores, then that is also a difficult space to fill and could impact the mall as a whole,” Triple Five's Ghermezian said. “So from the landlord point of view, acquisition and brand development can also be focused on the preservation of rent and keeping vacancies down.”

However, Saunders cautioned that there have been mixed results across the acquisitions.

“I think SPARC has been broadly successful. Aéropostale, for example, has been revitalized under SPARC ownership, and while it may not be the most significant name in young fashion, the proposition and its prospects have improved,” he added. “Other buys are more questionable. Forever 21 needs a lot more effort to get it back on track. However, as the deal with Shein shows, SPARC is willing to think creatively to maximize value.”