By Justin Spittler
One of the world's most iconic retailers is on its deathbed.
Sears is one of America’s oldest companies. It opened its first store in 1886, five years before the zipper was invented.
The company later pioneered the mail-order catalog business. At one point, it was also the world’s biggest retailer.
Those were the good ol' days. But they're never coming back.
Just look at this chart. You can see that Sears Holdings Corp. (SHLD) has plunged more than 90% over the last decade. That’s a staggering decline.
Anyone could look at this chart and tell you Sears is finished.
But the company didn’t officially admit this until a few days ago. On Wednesday, Sears management shared its dire outlook in the company’s latest annual report:
Our historical operating results indicate substantial doubt exists related to the company's ability to continue as a going concern.
In other words, management just admitted what everyone else has been saying for years.
• Sears plunged 14% on the news…
Wednesday was the stock’s worst day in more than two years.
To be clear, Sears hasn’t officially thrown in the towel. It’s actually doing everything it can to survive.
It’s laid off thousands of workers. It plans to close 150 (10%) of its stores. And it’s selling core assets to raise cash.
Just a few weeks ago, it sold its Craftsman Tools brand to Stanley Black & Decker Inc. for $900 million. Management is also thinking about parting ways with its Kenmore and DieHard brands.
Normally, I’d say a company’s in “survival mode” when it’s selling key assets to raise money. But I’m not going to say that this time...because Sears won't survive this.
Right now, the company is like a dying patient that’s tried every possible procedure.
And nothing has worked.
It can’t afford another surgery. So it’s selling its life-support system to the highest bidder.
• Now, these desperate measures could buy Sears time…
But make no mistake. Its days are numbered.
Now, you might not think that this is your problem if you don’t own shares of Sears.
But you have to understand something... Sears isn’t the only major retailer fighting for its life.
J.C. Penney (JCP) is down 94% since 2007.
Macy’s (M) stock price is down 56% over the last two years.
Regular readers know why this is happening.
Now, I didn’t write this issue just to rehash this argument. I wrote it because I think the collapse of Sears could trigger a violent chain reaction in the retail sector…one that could put countless other retailers out of business.
It could even spark the worst real estate crisis since the U.S. housing market imploded a decade ago.
I know this is a bold statement. But I have the facts to back it up.
Before I share them with you, you have to understand something about retail real estate…
• Department stores are what real estate professionals like to call “anchor tenants”…
These are the most important tenants in shopping malls.
They occupy the biggest spaces. They account for a large chunk of the mall’s rental income. And they drive the most foot traffic.
But that’s not the only reason anchor tenants are critical to the health of a mall.
You see, many retail lease agreements include something called a “co-tenancy” clause. This clause allows smaller stores like Gap, Williams Sonoma, and Foot Locker to negotiate lower rental rates if a tenant like Sears walks. Some co-tenancy clauses even allow tenants to prematurely terminate their lease.
The good news is that many co-tenancy clauses are only triggered if more than one anchor tenant goes dark. The bad news is that department stores are failing left and right.
• J.C. Penney plans to close 120 stores in the coming months…
That’s about 14% of its stores.
Meanwhile, Macy’s (M) plans to close 100 of its stores.
These department store closures are already rippling across the retail sector.
Just look at how many stores these major companies plan to close in the coming months:
Payless – 1,000 stores
RadioShack – 552 stores
The Limited – 250 stores
Wet Seal – 171 stores
American Apparel – 110 stores
Abercrombie & Fitch – 60 stores
Guess – 60 stores
And that’s just scratching the surface. According to Business Insider, retailers expect to close more than 3,500 stores in the coming months.
As if that’s not enough, three of the above companies—Payless, RadioShack, and American Apparel—have all filed for bankruptcy in the past year.
• The “retail apocalypse” is turning malls across America into wastelands…
Just look at what happened to this mall in Akron, Ohio.
And another in Harvey, Illinois.
Sadly, this is just the beginning.
According to real estate research firm Green Street Advisors, 334 U.S. shopping malls are now at “high risk” of closing. That’s about one-third of the nation’s malls.
• Investors are not taking this threat seriously…
You can see what I mean in the chart below.
It compares the Bloomberg Regional Mall Index with Casey Research’s Department Store Index. This is our in-house index that tracks the performance of Sears, Macy’s, Nordstrom, and J.C. Penney.
Department stores are down big. And yet, mall stocks are still treading water.
I don’t expect this to last much longer.
If you haven’t already, get out of mall real estate investment trusts (REITs) now. It’s only a matter of time before their shares nosedive like major department stores.
I also encourage you to read Monday’s Dispatch. In it, I’ll explain why the retail apocalypse could soon spread to the banking system.
Delray Beach, Florida
March 24, 2017
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