Retail Death Spiral with 5,000+ Store Closures

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It is clear that the American consumer is tapped out, losing interest in big brands and moving towards shopping online. According to Cushman & Wakefield, mall traffic declined by 50% from 2010 to 2013!  Over the last 18 months, the following department store retailers and mall stores have announced (or in the case of Payless Shoes soon to be announced) the closure of over 5,000 stores!  How is that going to help Trump’s employment plan?  Thousands of low-skilled jobs will be lost in this wreck not to mention the shuttering of more retail malls as anchor tenants fail.  Smaller retailers at malls sometimes have co-tenancy clauses that allow them to leave or pay a reduced rent if the mall’s anchor tenant leaves.  It’s a vicious cycle that has started and is only going to benefit Amazon and other online retailers.

Department Stores

  • JCPenney: 138 of 1,000 stores
  • Macy’s: 168 of 730 stores
  • Sears & Kmart: 150 stores
  • Kohl’s: 650 of 1,150 stores
  • Target: 13 stores
  • hhgreg: 88 of 210 stores (Ch. 11)

Mall Stores & Other Retailers

  • Abercrombie & Fitch: 114 of 900 stores
  • Guess: 60 stores
  • Gap/Gap Kids: 40 stores
  • Crocs: 160 of 560 stores
  • The Limited: 250 of 250 stores (Ch. 11)
  • Wet Seal: 500+ stores (Ch. 11)
  • Foot Locker: 151 stores
  • Bebe: 170 stores (shift to online only)
  • Chico: 120 stores
  • Gander Mountain: 60 stores (Ch. 11)
  • Eastern Mountain: 35 stores
  • American Apparel: 110 of 110 remaining stores (closed 120 previously)
  • American Eagle: 150 stores
  • Sports Authority: 140 stores
  • Sports Chalet: 48 stores
  • BCBG: 118 stores of 418 stores (Ch. 11)
  • Radio Shack: 552 stores
  • Payless Shoes: 500 to 1,000 stores (to be announced next week according to Bloomberg)
  • Barnes & Noble: 223 stores
  • Walmart: 154 stores
  • Finish Line: 150 stores
  • Staples: 118 stores
  • Office Depot: 400 stores
  • Tiffany’s: 6 of 313 stores
  • CVS: 70 stores
  • Pier One Imports: 100 stores
  • Family Christian: 240 stores
  • Aeropostale: 200 stores… saved by buyout including GGP and Simon Properties

Where are Schools for the Real World?

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I wish life were a multiple choice, Scantron Form 882-E test. I would crush it.

In my years of formal education, I became a rockstar of Scantron tests. After you had been through enough multiple choice exams, you almost didn’t have to know the subject to eliminate three of the answers. It was then down to the last two, so you at least had a 50/50 probability. Not bad! All you had to do was show up with a sharpened No. 2 pencil and make sure you had enough runway of clean eraser. I was always one of the first to hand in my form and skip out the door to freedom.

What happened to those cozy, green and white forms? Sadly, I have not held a slim one since college. They were surprisingly so rigid. I loved holding them horizontally as they defied gravity and never seemed to bend!

If only work had more Scantron Form 882-e’s, I would be amazingly wealthy and a lot of people would report into me.

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How solid are car companies?

Record low interest rates have fueled asset bubbles in pretty much every sector. Since 2010, auto sales have benefited from low interest rates as well. As of late last year, nearly 1 in 5 subprime auto loan borrowers are at least 60 days behind on payments (S&P).

Ford recently announced softer auto sales and is trying to make the move away from lower margin fleet sales. With net income of $4.6bn and massive annual investment of nearly $38bn a year (which has been consistent the last few years), Ford is making some big bets on the future of automotive. As self-driving technology ramps up, the number of vehicle sales may drop quite substantially. Will Ford, GM and Fiat Chrysler be able to compete with Tesla? I wouldn’t necessarily short the auto companies with the strong dollar/Trump effects, but I wouldn’t go long either.

Short Physical Retail

Last summer, we took a short position on GGP, one of the largest retail mall owners in the U.S. The rationale was American consumers are (i) tapped out, (ii) shifting to online purchases and (iii) looking for more niche, high-quality products and experiences (decline of big brands). GGP does have some well located malls in areas that won’t get hit so hard (i.e., Ala Moana in Honolulu); however, it also has broad exposure to big box retailers including Sears, JC Penney, and Macy’s, that no doubt will affect its portfolio and relatively high levels of debt. GGP went so far as to invest in one of its tenants, Aeropostale, to save the company from shutting down. How many tenants can it save?

Can airlines soar higher?

Southwest (LUV) is near its all-time high. Yes, President Trump seems to be talking up more fiscal stimulus, but LUV is trading at 14-15x PE and has run up 45% in the last six months. The weird part is Warren Buffett who hates airlines as a business has made a big bet on the domestic airline sector. Should be interesting to see how things play out over the next 18 months.

Disclosure: long LEAP put options on LUV.