Everyone shops, but where and how we shop has changed in ways that none of us ever imagined.
What has changed with our shopping habits and our retail landscape, once dotted with familiar names and good stocks to own, is the investment horizon... The pros and cons of retail investing today.
It's not as easy as you think.
Not all retailers that look like they're headed for oblivion will die off for good. Some will seek bankruptcy and disappear, and some will come back to life, rising like a phoenix from the ashes.
The truth is, there's a ton of money to be made trading and investing in so-called retail stocks if you know what you're doing.
Here's what the landscape looks like right now and how to see over the horizon to make smart bets...
The Growing List of Bankrupt Retailers
If you've heard the death threats shouted at retailers, you have an idea of what I'm talking about. Lots of them are in big trouble.
The list of retailers who've filed for bankruptcy is a long one. The most recent filers include...
- Sports Authority
- Vestis Retail Group (operator of Sports Chalet and Eastern Mountain Sports)
- Aeropostale
- Linens 'n Things
- PacSun
- American Apparel
- RadioShack
- WetSeal
- Eddie Bauer
Then there are the retailers who've declared bankruptcy (some more than once) and are still around. Many are struggling mightily and will likely declare BK again before disappearing for good. Surprisingly, some down-on-their-knees retailers will turn around and be good short-term bets to ride higher.
I'll tell you all about that group, with some intimate details, in upcoming articles here.
But today I want to talk about why retailers are suffering and how to make money on the huge, dying set of losers who will have to declare bankruptcy, wiping out their equity holders.
Of course, the Internet is king of all disruptors. Looking at retail today requires looking at all retailers through the lens of Internet accessibility.
It's cheaper to do business across the web than it is to own bricks-and-mortar stores, that's obvious. What's not clear to investors is how retailers look at bricks-and-mortar stores, even in the Internet age.
Physical stores create brand awareness, which is one of the principal reasons retailers have traditionally wanted more stores. If one store sets up in a popular mall or shopping area, it was almost a necessity that competing retailers locate a space nearby.
A lot of shoppers still enjoy going out to shop, wanting to see, touch, and try on the clothes. They also appreciate the interaction with salespeople who help them distinguish between options when there are lots of competing products available.
Shopping still has the legacy of being a fun day out, an event to enjoy.
But the ease of Internet shopping, the cheaper prices, the ability to comparison shop, and the free shipping has made heading to your favorite mall or retail shopping center look like a waste of time and money.
For retailers with bricks-and-mortar stores, it's come down to one metric.
When the Numbers Don't Add Up
While total sales, revenue, and net profits are of course important, bricks-and-mortar retailers have to view their sales through the cost of their stores on a sales per square foot basis
It's basic math for big shopkeepers, and that math is killing them.
According to Green Street Advisors, a premier real estate research firm, sales at the nation's department stores averaged $165 per square foot in 2006. As of spring 2016, that number was down 24% to $124... and it's been falling steadily since then.
Meanwhile, those same department stores only reduced their physical footprint by 7% over the decade.
Green Street estimated last year that big department stores occupy about two-thirds of all mall anchor space. Without losing any more sales to the Internet, big department stores would have to cut one-fifth of their current stores just to maintain 2016 sales per square foot numbers.
The loss of those stores, which is inevitable, will decimate malls and other retailers who rely on these anchors to drive foot traffic.
Sure, a lot of retailers are ramping up e-commerce sites and increasing e-commerce sales. But those sales pale in comparison to their revenue from store sales, and the prospect of replacing store sales with an equal amount of web sales is highly unlikely.
Consulting firm Bain & Co. recently reported that falling sales at bricks-and-mortar stores isn't being replaced by Internet sales. In fact, dwindling bricks-and-mortar stores are dragging down e-commerce sales by about 20%. Some of the lost sales are the result of diminished brand awareness or prestige, as shuttered stores send a negative message to shoppers.
It's not only traditional bricks-and-mortar retailers who are suffering. Even bricks-and-mortar grocery stores are suffering.
There are several well-known retailers and grocers who are going to declare bankruptcy in 2017, and I've got a private list of retailers who I expect will declare BK in 2017 if they don't reduce their outstanding debt loads and ramp up sales and profit margins immediately.
It's going to be an ugly few years for retailers, but highly profitable for traders and investors who understand how retail really works, how the debt has to be accounted for, and the games retailers play with their reported sales numbers.
Still, it won't be all doom and gloom, and there will be a few spectacular upside bets to make when a handful of retailers not only survive near-death experiences, but end up thriving in the new retail universe.
We'll be covering all that right here... and we'll be naming names.
Sincerely,
Shah
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.