Stores are beginning to open back up, yet how many will be able to weather the coming wave of bankruptcies?
Over 50% of department stores in malls are predicted to close by 2021.
That’s according to Green Street Advisors, one of the most respected data analytics companies specializing in the real estate sector.
If this dire prediction plays out, expect it to lead to even more pain in the retail sector …
These department stores — being the anchors of their respective malls — are the primary gravitational force drawing in consumers, with the “spillover” feeding the smaller, adjacent retailers.
Without these anchors, much of that spillover would stop — leading many of these smaller retailers to look to break their own leases, resulting in a rent-death-spiral for mall owners.
From CNBC:
One likely scenario to play out at malls is that in-line tenants — such as Gap or Victoria’s Secret — will use their co-tenancy clauses to speak up as department stores go dark.
Put simply, these clauses give companies the ability to demand rent relief, or to break leases early, when anchor space sits vacant. That pressure could be what puts some malls entirely out of business.
***According to Green Street, there are about 1,000 malls still open in the U.S. And roughly 60% of those have department store retailers
This list includes J.C. Penney (about 19% of mall anchor space), Sears (4%), Macy’s (18%), and other assorted retailers such as Nordstrom, Neiman Marcus, Dillard’s, and Lord & Taylor.
These companies read like a “who’s who” of financial distress …
Reports in recent weeks indicate that J.C. Penney has been exploring bankruptcy filing options. It allegedly has the cash position to ride out several more months of store-closures, but longer-term, it faces an unsustainable future in light of sagging revenues and massive debt.
Sears’ last profitable year was back in 2010. Since then, it has lost $12 billion. It’s been closing stores for years, making bankruptcy appear to be an inevitability.
Neiman Marcus has been considering filing for bankruptcy in light of its $4.3 billion debt obligations.
Nordstrom recently borrowed $600 million against its real estate in an effort to offset additional liquidity-challenges.
Finally, just two weeks ago, we learned that Macy’s was looking to raise $5 billion from a debt offering to avoid bankruptcy.
By the way, if you haven’t been paying attention, Macy’s stock has plummeted 75% in the last 12 months.
***But the anchors aren’t the only retailers suffering
Yesterday, preppy retailer J.Crew filed for bankruptcy, with reports tying the closure to economic fallout from Coronavirus-related store closures.
It likely won’t be the last …
Two weeks ago, clothing-operator, Gap, warned that it might not have the cash flow to keep afloat. The retailer said that it will be taking various actions to preserve cash, including no longer paying rent at its temporarily-shuttered stores.
Meanwhile, here in 2020, we’ve already seen bankruptcies from jeans-company True Religion, Modell’s Sporting Goods, Art Van Furniture, and Pier 1 Imports.
In recent weeks, S&P Global (a credit rating, market data company) has downgraded 50 of the 125 retailers and restaurants it tracks. This includes mall-regulars such as Jo-Ann Stores and Party City. S&P Global reports that the number of retailers it considers “distressed” has doubled.
Forbes sums up the dire situation as follows:
To say this is going to be devastating to American retailers is to put it mildly. With little to no revenues coming in for non-essential retailers through at least the end of April, other than sales from digital channels, retailers will face a day of reckoning later this year or early next.
***This retail apocalypse isn’t new — if you’ve been reading Eric Fry, you know that the retail sector has been changing dramatically for years
Eric, our global macro specialist, has been writing about the destruction in the retail sector for many months. That’s because the Coronavirus hasn’t caused these bankruptcies — it’s merely accelerated them.
The origin lies elsewhere — the “Amazonization” of retail.
From Eric, in our Feb. 25, 2019 Digest:
We’re seeing right before our eyes, this living, breathing, vibrant example of creative destruction. You have Amazon coming in and creating a whole new way of doing things and then simultaneously destroying a lot of other businesses.
The obvious victim is bricks-and-mortar retail. I mean, those companies are dying one by one by one by one. We’ve already seen a zillion retailers go out of business and they’re going to keep going out of business.
Last week, Eric updated his subscribers on this disturbing market evolution, adding additional detail:
Even before the coronavirus, many “best of breed” retailers were struggling to compete …
The coronavirus is supercharging this trend …
… most brick-and-mortar retailers are failing to innovate. As a result, they are sinking slowly into a tar pit of irrelevance and obsolescence. They are going the way of the woolly mammoth.
In 2019 alone, an estimated 12,000 retail stores closed. And the tally of store closures continues growing by the day. Investment bank UBS estimates that U.S. retailers will shutter another 75,000 physical stores by 2026.
***While the Coronavirus has kneecapped the earnings of many brick-and-mortar retailers, the bigger danger is how it is now pushing even more shoppers toward e-commerce
Some malls and retailers are re-opening their doors as social lockdowns ease. For example, this week, mall giant Simon Property group is re-opening 49 malls. But this doesn’t necessarily mean shoppers will return to the stores.
A survey by Cowen Research released last week found a “general lack of confidence among consumers in returning to key business industries.” These industries included retail.
Given this lack of confidence, expect many consumers who formerly were “in store” shoppers to continue as “online shoppers.” And even as confidence returns over time, many of these shoppers won’t return to stores — “e-commerce” will be their primary shopping channel.
Back to Eric:
… e-commerce isn’t just about destroying the old ways of retailing and taking market share. It is about establishing an entirely new mode of commerce.
That’s a big reason why “big box” retailers have been struggling for many years. Sears, Blockbuster, RadioShack, Circuit City, Borders, Sports Authority, and Toys “R” Us have all gone to retailing heaven (or are almost there).
***If you’ve been following Eric’s work, you recognize shades of the Technochasm here
That’s Eric’s name for the growing wealth gap between the “haves” and “have nots” in society, as well as the growing divide between companies that use and adapt to new technologies (and prosper) versus those companies that cling to old ways (and suffer).
Eric has written a great deal on beloved brands from yesterday that are not adapting well to today’s technologies and market climate. He’s been warning investors to get these types of stocks out of their portfolios:
Today there are so many ticking time bombs in so many people’s portfolios, because of bad business structures … heavy debt loads … and completely outdated business models that are being disrupted by fast-moving and creative, technological startups.
If you own doomed firms like these you are all but guaranteed to miss out on the biggest gains of the years to come.
For examples of companies adapting successfully to this new age of retail (beyond the obvious Amazon), Eric points toward Lululemon and Kroger. Both are incorporating new technologies into their business models and reaping the rewards. But if you own old-school retailers that aren’t doing this, watch out.
Click here for more from Eric on the Technochasm.
Before we wrap up, one last thing to keep on your horizon …
If enough retailers go under, what will be the next shoe to drop?
Well, how about retail REITs?
Above, we noted how clothing-retailer Gap has stopped paying rent. So, who’s left holding the bill?
Simon Property Group — the biggest mall owner in America with 412 Gap stores (including Banana Republic and Old Navy). It turns out Gap is Simon’s biggest in-line tenant — and it hasn’t been paying rent. Not exactly a great combo for Simon shareholders hoping to continue receiving a healthy dividend …
We’ll continue to keep you up to speed here in the Digest.
Have a good evening,
Jeff Remsburg
