Regal Cinemas is the latest bricks ‘n mortar victim … the slow-bleed of a new normal … getting on the right side of the Technochasm
The second largest cinema in America is closing its doors.
On Monday, we learned Regal Cinemas is suspending operations at all of its U.S. locations (more than 500) after briefly re-opening in August.
Behind the shut-down is another batch of movie-release postponements from Hollywood.
The latest is the newest James Bond installment, “No Time to Die.” It had originally been scheduled for release this past April, but was pushed to November, and is now being pushed again to April 2021.
Regal is yet another bricks ‘n mortar business falling victim to the continuing impact of the coronavirus.
***U.S. retail store closings set a record in the first half of 2020, putting them on pace for a record number of full-year bankruptcies and liquidations
This coronavirus-induced retail collapse could overtake that of 2010, which saw 48 retailers file for bankruptcy after the 2007-09 recession.
Through mid-August, 29 different retailers have sought bankruptcy protection in 2020. That has already surpassed 2019’s total filings of 22.
From The Wall Street Journal:
Temporary government-mandated store closures and social-distancing measures have intensified challenges that bricks-and-mortar retailers had faced before the pandemic, according to (professional-services firm) BDO.
Consumers stuck at home are buying more online than ever, with rising internet sales expected to partially offset losses from physical stores, the report said.
That trend has put more pressure on bricks-and-mortar locations, compounded by excessive debt, store saturation, high unemployment and changing shopper behaviors.
The list of retailer bankruptcies includes a slew of household names: Neiman Marcus, J.C. Penney, Pier 1 Imports, Tuesday Morning, GNC Holdings, Lucky Brand, Brooks Brothers, Ann Taylor, Stein Mart, Men’s Wearhouse, and Jos. A. Bank.
***But the 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 years.
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, all the way back 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.
Back in May, Eric updated subscribers on the trend:
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.
***There are two risks to the “physical economy” operating today — the first one obvious, the second more subtle
The first risk is the wave of closures which we’ve highlighted today, which are going to continue.
These are the businesses that require significant in-person activity or prolonged, close proximity, such as Regal Cinemas.
Barring a vaccine which is quickly disseminated throughout the population, these businesses are in serious danger. Especially given the recent uptick in coronavirus cases that has prompted new lockdowns, such as in New York.
From The Wall Street Journal:
New York will reimpose lockdown restrictions in parts of the state that have seen recent surges in new coronavirus cases, Gov. Andrew Cuomo said Tuesday, and he warned of wider limitations if infection rates continued to rise.
The second risk is different. It’s not a guillotine chop, it’s more of a slow bleed-out.
Specifically, it’s how the coronavirus is changing our day-to-day patterns. How we buy. What we buy. How we socialize. How we work.
The impact of this is the slow bleed of revenues from businesses that helped us live life yesterday, as we transition toward how we’ll live life tomorrow.
The initial victims are more apparent — buying groceries online instead of in-store, which hurts the corner mom ‘n pop store.
Or perhaps ordering a new shirt from Amazon instead of going to the mall …
Using Uber Eats instead of going to a restaurant … buying school/office supplies online instead of going to Home Depot … ordering flowers and plants online — even pumpkins here in October — instead of going to a bricks ‘n mortar location.
But the slow-bleed is also impacting far larger parts of the economy …
Thanks to companies like Zoom, going into the office is no longer a requirement for many companies. So, what’s going to happen to all that office space?
Below, is a graphic showing how rent collections were changing earlier this spring.
Office REITs are on top compared with retail REITs below.
While office REIT rentals have held up better than retail, they’re struggling. And remember, this graphic shows April and May numbers.
***The key issue is how many companies will change their work-models permanently in the wake of the coronavirus
From the San Diego Union-Tribune in late June:
While it’s still in the early innings, there are signs that employers are embracing remote work across a number of industries, including tech, finance and consumer goods.
Nationwide Insurance, Facebook and Twitter are among the companies nationally that have signaled that their need for physical office space will be significantly reduced in the future.
Morgan Stanley and Barclays have made similar statements.
The Charlotte Observer announced last week that it will exit its physical office space, with personnel working from home through the remainder of 2020. The newspaper aims to find new office space in 2021.
Now, follow the money …
On a small scale, how might fewer workers going into an office every day impact the small retailers in a central business district that live off these workers? (Think local restaurants, mom ‘n pop drug stores, convenience stores …)
On a large scale, think about the banks. They have $2.38 trillion of commercial real estate loans on their books. They could see a flood of landlords asking to restructure loans because tenants are falling behind on their rents.
Now, to avoid a misunderstanding, we’re not suggesting the death of office space.
But we are suggesting that if you want to invest with tailwinds — rather than against them — you need to consider the extent to which your portfolio might be facing the slow-bleed of shifting societal patterns, and purge your portfolio of those stocks.
***In many ways, what we’re talking about is the Technochasm
Regular Digest readers recognize the term.
It’s Eric’s word to describe 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).
The coronavirus is accelerating this divide. And each of us would be wise to give our stocks an objective look to analyze how dependent they are on yesterday’s ways of doing life.
At the end of the day, we all want a vaccine … the re-opening of the economy … a return to normalcy …
But for some companies and business models, there won’t be a return. There will only be a new normal.
There’s our danger.
To watch Eric’s research video on the Technochasm, click here.
I’ll give him the final word of caution:
You simply can’t afford to hold these stocks in your portfolio any longer.
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 …
If you own doomed firms like these you are all but guaranteed to miss out on the biggest gains of the years to come.
Have a good evening,
Jeff Remsburg
