Published May 16, 2017

The Retail Industry Is at Its Breaking Point

By Justin Spittler, editor, Casey Daily Dispatch

The bloodbath began last Thursday morning…

By the end of the day, Macy’s (M) closed down 17%. Sears fell 10%. Nordstrom fell 8%. Kohl’s fell 8%. J.C. Penney fell 7%.

Macy’s sparked the selloff by sharing dreadful financial results.

The iconic retailer’s profits fell 39% in the first quarter. Its same-store sales slid 4.6%.

Same-store sales measures the change in annual sales at stores that have been open for at least one year. It’s one of the best ways to track the health of retail companies.

Macy's also announced plans to shut down 100 stores. That’s 15% of the company’s total store count.

Macy’s CEO Jeff Gennette didn’t rule out additional store closures either, adding, “I’m not going to say that we’re not going to close more stores.”

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• The bleeding spilled over into Friday…

That morning, J.C. Penney shared its own horrendous financial results.

Its same-store sales declined 3.5% during the first quarter. That’s far worse than the 0.7% decline Wall Street expected.

J.C. Penney’s stock plunged 14% on the news. The iconic retailer is now down 45% since the start of the year. It’s trading at its lowest price ever.

And just like the day before, panic quickly spread across Wall Street.

Nordstrom closed Friday down 11%. Sears fell 7%. Macy’s fell 3%. Kohl’s fell 2%.

These are huge losses. But you would have been spared had you been reading the Dispatch.

• After all, I’ve been warning about a retail apocalypse for months…

On March 10, I said the retail industry was “close to its tipping point.”

Two weeks later, I said, “the retail apocalypse has only just begun.” I predicted that Sears’ stock would crash and eventually “trigger a violent chain reaction in the retail sector…one that could put countless other retailers out of business.”

And that’s exactly what’s happened.

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• Retailers have now closed more than 3,200 stores since the start of the year…

At this rate, the industry will close 8,000 stores this year. That would blow past the 6,200 stores that shut down in 2008…at the height of the global financial crisis.

Not only that, 14 US retailers have already filed for bankruptcy this year. At this rate, 52 retailers will go bankrupt this year. That would be the most in at least seven years.

• This is bad news for investors who own traditional retailers like Sears and Macy’s…

It’s also a serious threat to REITs that own and operate malls.

(REIT stands for real estate investment trust. These assets allow everyday investors to invest in large real estate projects. They trade on major exchanges like stocks.)

Just look the chart below of the Bloomberg REIT Regional Mall Index.

This key index has plummeted 33% since last August.

That’s an enormous decline for such a short period. But it’s likely headed even lower.

And that’s because department stores are what real estate professionals call “anchor tenants.”

They occupy tens of thousands of square feet in malls. There aren’t many other businesses that need that much space. This makes them hard to replace.

Not only that, many tenants inside the mall have a “co-tenancy clause.” This allows them to renegotiate or even terminate their lease if an anchor tenant like Sears or J.C. Penney walks.

In short, department stores are a mall’s vital organs. If they fail, the entire mall can die.

• If you haven’t already, get out of mall stocks immediately…

You may even want to short (bet against) a mall REIT. Here are five to consider…

  • Simon Property Group (SPG)

  • Macerich (MAC)

  • GGP (GGP)

  • Taubman Centers (TCO)

  • CBL & Associates Properties (CBL)

Of this group, CBL is likely the weakest. It has the thinnest profit margins…a sky-high debt-to-equity ratio of 397%…and the least amount of cash per share.

Regards,

Justin Spittler
Delray Beach, Florida
May 16, 2017

P.S. Be sure to read tomorrow’s Dispatch. In it, I’ll tell you about the only kind of retailer worth owning right now. This special kind of retailer should thrive during the retail apocalypse…just like it did during the 2008–2009 financial crisis.