Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

Retailers need to kick their addiction to bricks and mortar.

For decades, the rule of thumb in the retail industry was: If you build it, they will come. In other words, more stores tend to equal higher sales. No longer. 

Retailers are growing their store base by about 2 percent each year, on average, but accompanying sales increases are not keeping up, according to new research from Morgan Stanley analyst Simeon Gutman. The combination of slower in-store sales growth, an increase in less-profitable online sales, and steady spending on stores has made it harder for many retailers to maintain healthy profit margins. Stock prices are responding accordingly.  

Heavy Load
E-commerce sales, not physical stores, are driving a bigger portion of retailers' year-over-year sales growth at established stores
Source: Morgan Stanley Research, company reports
*Note: Reported average growth in same-store-sales from 2012 to 2015, broken down by how much of the growth came from stores and how much of the growth came from e-commerce

But closing stores isn't the answer -- at least not yet. Despite the general consensus that the U.S. is over-stored and recurring calls to shutter hundreds of stores across the country, Gutman argues retailers first need simply to stop opening new ones. It's an argument worth heeding. 

United States of Stores
America has more retail square footage than Australia, the U.K., Germany and Mexico combined
Source: ICSC, Morgan Stanley Research

The idea seems pretty obvious, but retailers are a slow-moving bunch. They remain addicted to the quick high new store openings provide, regardless of the long-term effects. Just look at the likes of Whole Foods, Macy's, and Walmart -- all are struggling but still hope adding new stores will somehow be the magical antidote to their woes. 

Plus, closing stores could mean permanently losing customers. That's because shoppers are often more lazy than loyal: Faced with the closure of the nearest location of a retail chain, only about half of consumers would venture to a different location, according to a Morgan Stanley survey of 600 consumers in late 2015. The other half would switch to a different nearby retailer or go online -- and in many cases, that means a visit to, not the retailer's website. So as long as a store isn't losing money, Gutman writes, it's probably best to keep it open for now. 

Substitution Effect
If their local store is closed, how likely are shoppers to go to one of the retailer's other locations?
Source: AlphaWise, Morgan Stanley Research

Instead, retailers should pretty much just stop opening new stores. Just kick the habit.

Take supplement retailer GNC, whose stock has sunk by 41 percent this year and this week floated the idea of putting itself up for sale. As GNC's square footage has grown by 4 percent over the past four years, its sales per square foot (stripping out any sales increase from e-commerce) has sunk by 4 percent, Gutman notes. On the other side of the equation, Home Depot's square footage has grown by only 0.2 percent over the past four years, but its sales per square foot (excluding e-commerce) have increased by 4.5 percent, according to Gutman.

Diminishing Returns
The more stores retailers build, the less productive their store base becomes
Source: Morgan Stanley Research
Note: Data based on a basket of 24 hardline and broadline retailers including Walmart, Target, Home Depot, and Lowe's

One way for investors to figure out which companies are following Home Depot's example and keeping a lid on unproductive store growth is by watching a company's return on invested capital (ROIC), a metric Gutman figures has a 90 percent correlation with stock performance at the retailers he follows. The idea is that the better a retailer deploys its capital, the higher its stock price tends to go. 

Dumb Money
Average return on invested capital at retailers has been declining over the past few years
Source: Morgan Stanley
Note: Average return on invested capital for a basket of 18 hardline and broadline retailers

One notable company whose ROIC is moving in the wrong direction is Walmart: While the world's biggest retailer has started to decrease its U.S. square footage growth after a building boom, it continues to build hundreds of stores a year. Walmart's ROIC decreased to 12.5 percent in 2015 from 14.3 percent in 2013, according to Bloomberg data. Compare that to the 27 percent ROIC Home Depot booked last year. Gutman predicts Walmart will add 10 million square feet this year, nearly as much as the other 23 retailers he covers combined. All on the heels of Walmart's first annual sales decline since it went public 45 years ago.

Declining ROIC is also worrisome for Dick's Sporting Goods, according to Gutman. He downgraded the company on Thursday to "underweight" from "equal weight," noting Dick's 7 percent increase in square footage from 2013 to 2015 and 1.5 percent decline in sales per square foot (when excluding e-commerce sales) during that time. With Sport's Authority's bankruptcy and impending store closures, Dick's is eager to pick up some of its competitor's locations. That could help boost short-term sales, but comes with diminishing returns, as mounting competition squeezes specialty athletic gear retailers

A better plan for Dick's and other struggling retailers might be to focus on how to make their existing stores better. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Shelly Banjo in New York at

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Mark Gongloff at