Image source: Raysonho
Late last year, the largest retail mall owners, Simon Property Group and GGP invested alongside Authentic Brands Group to buy out the assets of troubled teen retailer, Aéropostale. As part of the restructuring, Aeropostale cut the number of stores to 240 from 800, and Simon believes that this is a good investment that can double the number of stores to 500 locations. While this is a good move by Authentic Brands to bring in the two largest retail mall landlords, it is a questionable use of capital given the retail implosion happening to traditional retailers. Some speculate that Simon and GGP invested to maintain their occupancy levels which seems more likely given that maintaining face with the equity market is much more important than any IRR on a relatively small investment for these large owners. It will be interesting to see how the traditional retail mall implosion plays out. Since the announcement of this investment in October, both Simon and GGP stocks are down ~15% and down approximately 40% since their recent highs in July.
A few weeks ago, analyst Edward Mui of Morningstar recommended three large retail REITs: “High-quality, well located, and compelling physical retail environments will still be successful even as online shopping grows.”
This in the midst of The Retail Apocalypse is Officially Descending Upon America with an expected 3,500 stores expected to close down in the next couple of months. The American consumer is tapped out, and while certain retail locations will still perform as consumers want experiences of dining out, strolling through nice areas, etc., according to the U.S. Census Bureau, national department store revenue is down by $7.2 billion than what it was in 2001.
Legacy retailers are getting hit hard right now. According to Bloomberg, Payless Shoes is expected to announce 500-1,000 store closures next week. On the other hand, Amazon and other online retailers continue to expand.
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.
- 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)
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.
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?
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.