Any doubts that the Retail Apocalypse is for real will be dispelled by a quick look at the Bon-Ton Stores’ (NASDAQ: BONT) financial report. Bon-Ton reported revenues of $2.619 billion on April 30, 2017, but its stock was trading at 47¢ a share on June 7, 2017.
That’s absolutely pathetic for a company that supposedly operates 267 stores in 26 states. Its’ operations include such historic brand names as Bergner’s, Boston Store, Carson’s, Elder-Beeman, Herbergers and Younkers. Most of those are department stores and the latest earnings report indicates they might be on the verge of extinction.
Bon-Ton’s Earnings Report Proves Department Stores are on the Verge of Extinction
Bon-Tons’ earnings report proves that department stores are no longer making money and might be on the verge of extinction. The evidence that Bon-Ton and other department stores are dying includes:
- A “profit margin” of -10.96% on April 30, 2017.
- A loss of -$82.92 million instead of a net income on the same day.
- A “free cash flow” of -$40.78 million.
- A market capitalization of $10.07 million on June 6, 2017.
- An enterprise value of $898.81 million on June 7, 2017.
- Total Liabilities of $1.538 billion on April 30, 2017.
- $7.012 million in cash and short-term invests on April 30, 2017.
- Generating $15.69 million in cash from operations for the quarter that ended on April 30, 2017.
- During the last quarter Bon-Ton generated more cash from financing $35.17 million than from its operations. Bon-Ton made $15.69 million in cash from operations during the last quarter.
Judging by these numbers the value of Bon-Ton’s real estate greatly exceeds the value of its retail operations. This company looks like an organization that is headed straight for bankruptcy and liquidation.
After looking at Bon-Ton’s earnings report it is easy to conclude that department stores have no future or a very limited future. The only department stores that may survive are specialty locations or those that offer customers something else.
Bon-Ton’s predicament shows us why industry leader Macy’s (NYSE: M) is closing locations, cutting staff and considering plans to rent office space in its stores. The department store business in the United States might be dead or very close to it.
What is Killing Department Stores?
The potential demise of Bon-Ton raises the intriguing questions: what is killing department stores and how long will their death take?
Some culprits in the death of the department store include:
- Mass discounters like Walmart (NYSE: WMT), Target (NYSE: TGT) and Costco Wholesale (NASDAQ: COST). These chains sell almost everything department stores at lower prices. Many of them enjoy economies of scale and lower operating costs that allow for extremely low prices, department stores simply cannot match. A growing threat to department stores is the entry of new players such as the grocer Kroger (NYSE: KR) into deep discounting. Kroger’s Marketplace stores are now competing directly with department stores in such areas as jewelry, clothes, hardware, shoes and even furniture.
- Amazon (NASDAQ: AMZN) by demonstrating that it is possible to profitably mass discount on line, Amazon may have put the final nail into department stores’ coffin. The Everything Store now competes directly with department stores in several areas including clothing. It now offers at least eight exclusive clothing lines and owns the largest online shoe emporium Zappos. Amazon is expected to become the nation’s largest clothing retailer this year, which means it is effectively eating one of department stores’ core businesses.
- Online retail in general. Amazon’s success has spurred massive investment in ecommerce by Walmart and Target. Walmart’s online capabilities are now beginning to match or exceed those of Amazon which should frighten investors away from department stores. A major problem is that Amazon and Walmart.com can now undercut virtually all department store prices and offer free delivery. Target is also developing into a major destination for online fashions.
- Changing shopping habits. This is the biggest threat to department stores. Tens of millions of Americans have simply gotten out of the shopping habit. When they want something these people simply sit down at the computer or pick up their phone or tablet. The trend is most prevalent among department stores’ historic clientele the middle class. One of the biggest culprits in department stores’ demise is the soccer mom who would rather spend her Saturday afternoon at her kids’ game than at the mall.
- America is getting older. Department stores biggest problem is that their best customers are getting older. JC Penney (NYSE: JCP) even targets its marketing at 60 year old women. The problem with that is three fold, first people tend to buy less and less as they age. Then at some point they die which means they are not buying or shopping at all. Demographics are certainly against department stores here, millennials (those between 21 and 36) now outnumber Baby Boomers (those aged 53 to 71) according to the Census Bureau. That’s disastrous for department stores, because Millennials who were psychologically scared by the economic crisis of 2008 do not pay full price for clothing, Business Insider noted. Things are about to get a lot worse for department stores because Boomers are starting to die off, Generation X (those aged 37 to 52) will outnumber them by 2028. It is hard to run a business when most of your customers are at the nursing home or worse the graveyard.
- Income Inequality and Wage Stagnation. Americans simply have less money to spend at department stores. The Pew Research Center found that the income of the average middle class family fell by $5,000 between 1999 and 2014. The collapse in income is what is driving an entire generation of Americans to shop at discounters. Things are about to get a lot worse as the Baby Boomers retire; 46% of them have no money saved for retirement, so they’ll end up living on Social Security. The average Social Security payment is around $1,350 a month.
The lesson here is clear the department store business model no longer works in America. Investors should stay away from this sector, far, far away if they want to make money. The Bon-Ton Stores’ present reality is the future for brands like Macy’s; and JC Penney’s, unless they can change radically.
Expect Bon-Ton to be delisted from the stock markets and liquidated soon. It will be the first of many department stores to die off in the next few years.