"The Retail Bubble Has Burst" - Summarizing The Dark 4Q Earnings Commentary Of Retail CEOs

Tyler Durden's picture

Amazon's willingness to sell almost any product imaginable at a loss, combined with a massive bubble in retail real estate square footage courtesy of decades of low interest rates seems to finally be catching up with the traditional bricks-and-mortar retailers of America. 

As evidence, Scott Krisiloff of Avondale Asset Management compiled the following sample of relatively downtrodden commentary from America's largest retail CEOs, all of who seem to be throwing in the towel on hopes of any near term upside for their industry:

Everything is not awesome, in fact, it's kind of awful

“Our industry is the midst of a seismic shift, and, of course, you read the headlines. In fact, many of you write the reports, we’re operating in an incredibly challenging environment. All across the retail industry, many of our competitors are aggressively rationalizing their assets. They are closing stores, exiting markets. They’re cutting costs just to keep their heads above water. We’ve not seen this number of distressed retailers since 2009 in the Great Recession.”   - Target CEO Brian Cornell

Cheap debt created a massive retail real estate bubble that is now bursting right before our eyes

“Retail square feet per capita in the United States is more than six times that of Europe or Japan. And this doesn’t count digital commerce. Our industry, not unlike the housing industry, saw too much square footage capacity added in the 90’s and early 2000’s. Thousands of new doors opened and rents soared; this created a bubble, and like housing, that bubble has now burst. We are seeing the results; doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.” —Urban Outfitters CEO Richard Hayne (Retail)

Profitability "race to the bottom" is on as brick-and-mortar stores make "investments" (a.k.a. "slashes prices") to drive volume

“We certainly view 2017 as a year of investment. In 2018, we’ll continue to transition as these different initiatives begin to mature. As we get into 2019 and beyond, we certainly expect stability and a return to growth…We’ve got to invest to grow. We’ve got to reimagine our stores. ” —Target CEO Brian Cornell (Retail)

 

“we plan to do what any good portfolio manager would. Invest resources in the most promising opportunities, diversify to lower risk, and increase liquidity…Our highest priority is where we’ve had the most recent success, digital” —Urban Outfitters CEO Richard Hayne (Retail)

Inflation may not be as strong as advertised

“Regarding deflation, overall, primarily in the US, we have seen deflation in the 1%, 1.5% range in February. Departments such as foods, sundries, frozen foods, liquor meat, dairy showed the most deflation on the foods and sundries side. On the non-food side consumer electronics continue to be deflationary, primarily in the TV category…The collective view is inflationary, or less deflationary, for the next few months and maybe a little inflationary, but it’s a crap shoot.” —Costco CFO Richard Galanti (Retail)

 

“we also have to acknowledge the ongoing challenges facing our industry. Our customers are facing a difficult retail environment due to deflation and increased competition. We view deflation as cyclical, inflation will come back at some point but while it’s here, it’s leading to some very real challenges for us and our retail customers.” —UNFI CEO Steven Spinner (Food Distributor)

Retail real estate glut + Market share loss to online = Disaster for REITs

“This would be fine if the increase in DTC sales were wholly additive, but they’re not. Digital shopping is partially replacing store shopping and thus is negatively impacting store traffic and store generated sales. Flat to negative store ‘comps’ are causing occupancy deleverage and eroding four-wall margins.” —Urban Outfitters CEO Richard Hayne (Retail)

But, chin up because this is all 'good news' as retail shares will tank and create opportunities for those on wall street who survive

“these inflection points come around every generation or so. And strong retailers endure, while others, well, they don’t. Pick your era defining change throughout history from downtown department stores to suburban malls, catalogs, e-commerce.” —Target CEO Brian Cornell (Retail)

* * *

Meanwhile, as we pointed out earlier this week, the biggest losers in this retail melt down will inevitably be the investors in America's massively levered REIT companies. 

In fact, the latest note from one of the world's most vocal mega-bears, Horseman Capital's Russell Clark, perfectly summarized the slow-motion train wreck that is currently wreaking havoc on mall REITs in a note titled "Mall Rats":

“Intriguingly we have started to see volumes of real estate transactions for shopping malls fall. This means that the number of transactions to buy or sell properties is beginning to decline. Last time this happened, rents began to fall a year later.

His full note is below:

MALL RATS

Shopping mall REITS have been a fantastic investment over the years. Not only have they provided investors with large capital gains, they have also typically offered above market dividend yields. My interpretation of the REIT model is that the operator collects rents from a diverse number of retailers. This is then passed on to the end investors after costs and financing. The REIT manager reduces risk by diversifying the retailers paying rent, and by also spreading the risk geographically. If the REIT manager can acquire more real estate assets at a yield higher than what it needs to pay out as dividend yield, then the REIT can issue more shares and grow indefinitely. Mall REITs have generally done well, except during the financial crisis.

However, it seems to me that North America could well have too many shopping malls. On a per capita basis, the US has twice the space of Australia and 5 times that in the UK.

One source of REITs revenue growth comes from acquiring more malls. Intriguingly we have started to see volumes of real estate transactions for shopping malls fall. This means that the number of transactions to buy or sell properties is beginning to decline. Last time this happened, rents began to fall a year later. Perhaps it’s a sign that buyers believe rents have some downside risk?

Many people in the market are aware of the problems that the large department stores in the US are currently facing, and their resultant plans to retrench. This affects two of the largest shopping mall REITs that have the department stores as tenants. The reality is that the shopping mall REITs charge extremely low rents to the department stores. The large shopping malls use the department stores to lure traffic, and then make their money from higher rents charged to speciality retailers. Often the per square foot rent of the specialty retailer can be 30 times or higher that paid by the anchor tenant. Looking at the top 2 shopping mall operators, they disclose their top rent payers. Recent share prices performance of 8 shared tenants has been poor, and management commentary has seeming implied that they may also be looking to reduce store count.

It should also be pointed out that many tenants have a clause in their lease to reduce rents should an anchor close a store. Thus, even though the loss of rent due to an anchor closing is minimal, the knock-on effect of reduced rents from the remaining tenants is a serious concern for the REITs.

One of the other problems that shopping mall REITs face is that the size that the large department stores take up is more than 400 million square feet. The largest and most successfully specialty retailer is TJ Maxx which currently has 100 million square feet. It is difficult to see any single retailer quickly being able to fill the space made vacant by department store closures.

Back in the lead up to the financial crisis we found that the share prices of REITs and their tenants were very closely related. Recently we have seen tenants share price weaken again, but REITS remain relatively strong.

Investors are advised to exercise caution with the shopping mall REITs

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mofreedom's picture

Don't just sit there do something...if we build it and they don't come...oh...well...

Sad.

espirit's picture

I made the same 4Q call before Black Friday '16.

Maybe I should be an eCONomist when I grow up.

mofreedom's picture

I made that call in 2006...way too early...what are you gonna do with free money...WASTE IT BIG TIME.

CRM114's picture

I spend about 95% of my income on wine, women, and song...the rest I waste.

BarkingCat's picture

After running a cost analysis on my 5 year marriage and the following loss of assets due to divorce, I now only hire women on hourly basis.  The cost savings are amazing. 

 

 

 

 

 

 

(only a joke)

kavlar's picture
kavlar (not verified) BarkingCat Mar 10, 2017 8:59 PM

It'll get worse. The American CURSE is relentless.

http://biblicisminstitute.wordpress.com/2014/07/17/is-america-cursed/

Giant Meteor's picture

What is it with you bliblic institute guys. You all seem to have joined on the same day just like the ShempWave peeps. What the fuck, over ? Btw, I was your downvote .. 

 

DownWithYogaPants's picture

Hey now don't be dissin' mah 3 stooges now!

 

Giant Meteor's picture

Second belly laugh  .. thanks!

flicker life's picture
flicker life (not verified) Giant Meteor Mar 11, 2017 8:26 AM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

Giant Meteor's picture

Scrolled down to see your disclaimer. My first response before seeing it was, "I've heard this before" which I have, and these guys weren't joking either!

You know times like these (Friday nites the little woman is on kitchen strike) I sometimes muse such things. I mean best I could do was peanut butter and mayo sammich with a dash of pickled relish. Seems we're out of butter pickles ..

A great familiy tradition!

I've thought about the ole, "you're fired" but in my antiquated and sometimes ornery condition, all these years, what the hell, i'll be lucky that she doesn't throw ME out.

Besides, sometimes like amazon, I make it up in volume .. (I mean the peanut butter mayo sammiich)

Clint Liquor's picture

The truth is always funnier than fiction.

Remember the old adage 'if it floats, flys or fucks, rent it'.

gatorengineer's picture

If you made a correct call you are automatically disqualified.

espirit's picture

No doubt.

But, I wasn't long RETAIL.

hooligan2009's picture

maybe it's because nobody wants the cheap chinese imports and the craft mom&pop stores are going to make a comeback

espirit's picture

Most likely it's inflation eating into a no-wage-growth eCONomy.

Handful of Dust's picture

Plus, zero yield on savings and zero COLA since about 2008.

Seniors are decimated and spend as little as possible so they can eat.

Barrack bin Bama not only destroyed the American working class (middle class) but also the AARP peeples.

No one has money to spend except government employees and the FSA.

imo, the bloodbath in retail is only beginning---we'll see the ripple effect with hundreds of Big Malls go bankrupt along with thousands of strip malls, along with restaurants, etc.

Giant Meteor's picture

Absofuckinglutely. And at the worst of all possible times too.

Not to get all gloomy and shit, but this and the many reasons already mentioned, shit, its already a giant crater, fixin to get larger I "imagine." Lots of old folks out there, not doin so well.

And yes, I do give a fuck about them, my elders, as most all civilized cultures, once did  ..

Another shame on the nation.

And before some sanctimonious prick shouts out, who gives a fuck, their problem, should have prepared better, etc. I will already stipulate that yes, you do exist, as does your "argument."

 

TeethVillage88s's picture

Under-Rated Post, I've watched Malls with a buddy since 2008... the foot traffic is not good here. I've seen store fronts go empty and change businesses... we lost Radio Shack... there are questions about anchor stores like Sears, JC Penney... got a jacket at JC Penney not so long ago... much more expensive.

Biggest thing this year for Christmas was the addition of the Wise men.

- Wealthy Islamic Clerics with their wives walking or shopping in our malls where... there were none before in previous years

Last of the Middle Class's picture

10 trillion in QE will bring on decades of inflation in order to cover for it.

Mr Perspective's picture

Too many whores, and the've all got a dose of the clap....

TeethVillage88s's picture

16.375 Million Employees Dec ... down to 15.6 Million

So... .7 Million down by Feb 2017. Data is lagging.

https://fred.stlouisfed.org/series/CEU4200000001
All Employees: Retail Trade (CEU4200000001)
Feb 2017: 15,606.5 Thousands of Persons, Not Seasonally Adjusted

- It goes up and it goes down around Christmas and even quarterly, but they are part time low paying jobs
- Probably not significant

Osmium's picture

Gander Mountain has filed for chapter 11.  Not sure how the store here has been able to stay open as long as it has.  Very few customers.

TeethVillage88s's picture

GD... I hope I still get my .338 Lapua Magnum

.338 Lapua Magnum - Wikipedia
https://en.wikipedia.org/wiki/.338_Lapua_Magnum

chosen's picture

Target has responded by not fully stocking their shelves.  I have responded by no longer shopping at Target.

mofreedom's picture

Forgive me:  I do like Walmart because their employees are way more friendly than the stuck up bleepers at Targets here in commie Minnesota.

chosen's picture

I have no objection to Walmart.  The one near me is full of negroes and mexicans, but they don't bother me and the employees are civil.

mofreedom's picture

One Walmart in St Paul stinks to high heaven due the Muslims, and their shelves are BLEAK!

By the way, I only buy smokes from Muslims, not corporate America cause they always want to scan my ID.  I would exclusively buy my booze from a Muslim if they would sell it to me...though corp america, where I'm from, does not want to scan my ID for booze.

Bleep!

CRM114's picture

It's not the cheap chinese imports, it's that the cheap chinese imports became crap about 2-3 years ago.

The buyers ramped up profit margins as far as they dared.....then senior management decided they could drop quality too.

To be accurate, I think it was chinese manufacturers who dropped quality to stay afloat, and US senior retail management decided to accept it.

 

Wrong.

Stan522's picture

These big retailers (brick and mortar) are the victim of Amazon and other online stores.... It doesn't get much more simpler than that......

LetThemEatRand's picture

It is pretty obvious.  Amazon and its growing list of online competitors would still thrive even without cheap Chinese imports.  Big box stores like Target and obviously Walmart sell the same Chinese shit, so that's not the issue.  It's much easier to order online than go to a store to get the same thing.  

Smedley's picture

I for one bet no one is buyin' their crap too!!!

:D

Fake Numbers......

Giant Meteor's picture

Just upvoted you, and everyone else on this thread. I'm in a good mood tonight cuz a fellow ZH'er just nominated me for Vice President. Sure, I wanted the top job, but I'm seriously considering it. Anyway, survived another day, lived to tell the tale. Every day above ground, and pumpin oxygen, all that. Lots of good points made on this thread ..

The world, it is a changin .. or rather, the rules are ..

LetThemEatRand's picture

Upvoted you (twice now) for the Imagine retail rendition.  

Dougs Decks's picture

I almost wrote you in at the last Elec,,, Had to go with Trump,,, One last try,,,

TeethVillage88s's picture

Tax Inversion Anyone?

- Caterpillar, Agents search offices, recent Inversion

Corporate Income Taxes Receipts 1998 = $ 188.7 Billion
Corporate Income Taxes Receipts 2002 = $ 148.0 Billion (Recession)
Corporate Income Taxes Receipts 2006 = $ 353.9 Billion
Corporate Income Taxes Receipts 2007 = $ 370.2 Billion
Corporate Income Taxes Receipts 2008 = $ 304.3 Billion
Corporate Income Taxes Receipts 2009 = $ 138.2 Billion (Recession)
Corporate Income Taxes Receipts 2012 = $ 242.3 Billion
Corporate Income Taxes Receipts 2013 = $ 273.5 Billion
Corporate Income Taxes Receipts 2014 = $ 320.7 Billion
Corporate Income Taxes Receipts 2015 = $ 343.5 Billion
Corporate Income Taxes Receipts 2016 = $ 299.6 Billion

Individual Income Taxes Receipts 1998 = $ 828.6 Billion
Individual Income Taxes Receipts 2002 = $ 858.3 Billion (Recession)
Individual Income Taxes Receipts 2006 = $1.044 Trillion
Individual Income Taxes Receipts 2007 = $1.163 Trillion
Individual Income Taxes Receipts 2008 = $1.146 Trillion
Individual Income Taxes Receipts 2009 = $ .915.3 Trillion (Recession)
Individual Income Taxes Receipts 2012 = $1.132 Trillion
Individual Income Taxes Receipts 2013 = $1.316 Trillion
Individual Income Taxes Receipts 2014 = $1.395 Trillion
Individual Income Taxes Receipts 2015 = $1.541 Trillion
Individual Income Taxes Receipts 2016 = $1.546 Trillion

DocBerg's picture

Target is also suffering from a lack of common sense in their washroom policies. 

mofreedom's picture

I know, I took a poop in their sink and it just stuck there.

Giant Meteor's picture

So you're the guy!

Damn you, Damn you all to HELL !

Shout out, Charlton Heston ..

Giant Meteor's picture

"We’ve got to reimagine our stores. ” 

Almost pissed on myself laughing with that line ..

Who knew thats all there is to it!

"Imagine" (all the retail crashing) 

Imagine there's no target

It's easy if you try

No sears below us

Above us only sky (net)

Imagine all the people

Living for today... Aha-ah...

 

Imagine there's no K-Mart

It isn't hard to do

Nothing to kill or die for

And no walmart, too

Imagine all the people

Living life in peace... You...

 

You may say I'm a dreamer

But I'm not the only one

I hope someday you'll join us

And the world will be as one

 

Imagine no chinese toasters

I wonder if you can

No need for barnes or noble

A brotherhood of man

Imagine all the people

Sharing all the world... You...

 

You may say I'm a dreamer

But I'm not the only one

I hope someday you'll join us

And the world will live as one

John Lennon (rip)

RabbitOne's picture

The retail bubble has been bursting for years. It is not from China or the internet, but demographics. All one has to do is look at where the retail bubble came from - the baby boom generation. With 10,000 boomers retiring each day their need to buy from retailers has gone down drastically.

When I worked (now retired) I was spending large amounts on every thing from work shoes to business suits. Now I lounge around in Levi’s and tennis shoes. Then there is housewares. The new purchases in the last five years are a coffee maker and smoothie blender. My wife and I just do not retail shop much any more.

This demographic trend of retiring baby boomers has not peaked. Soon it will effect the auto industry as boomers go from driving 25K a year down to 5K a year and keep purchased vehicles 10 years.  

NoPension's picture

I work with my hands. Building and un Fucking things. Every time a friend dies or moves, I get a call.
I have 4 chop saws. Enough hand tools to outfit ten work trucks.
My buddy, 65... just sold his house. I'm going tomorrow with a trailer. He's got a full shop worth of tools, and give me whatever I want. The rest gets auctioned ( hauled away for pennies) in two weeks. All the furniture, etc.
He'll be lucky if anybody shows. He said it goes to the dump, if not!

Point is....we have too much shit already. My wife is seriously freaking out about what to do if I go first.
I don't really care. Haha! I'll be dead...get it!

CRM114's picture

"and un Fucking things"

 

+100 - I love that!

Giant Meteor's picture

Absolutely!

Right over the , ahem, "target."

Good show!