Here Comes Retail Apocalypse 2016

It looks as if 2016 is going to be the year of the retail apocalypse. In addition to store closings, we are likely to see at least one major retailer, possibly Sears Holdings (NASDAQ: SHLD), shut down its brick-and-mortar operations completely.

Current trends in the retail industry and the economy indicate that we will see a massive wave of store closings in 2016. The most noticeable of these closures will be in the ailing department store, office supply and clothes sectors, but we’ll also see a lot of storefronts shuttered in consolidating sectors like drugs and groceries.

Some of the most noticeable waves of store closings will be:

• Walgreens (NASDAQ: WBA) – America’s largest drugstore operator bought out the struggling Rite Aid (NYSE: RAD) last year. Since many Rite Aid and Walgreens locations overlap, there will be lots of store closings. Some experts think that Walgreens will have to sell or close up to 1,000 drugstores. This could hit areas like Southern California and Colorado, where Rite Aid and Walgreens compete directly hard. One consequence of this could be to lower the salaries for pharmacists and pharmacy technicians by putting large numbers of unemployed pharmacy professionals in the employment market.

 

• Macy’s (NYSE: M) – The iconic department store chain, which also owns Bloomingdales, announced plans to close around 40 stores (about five percent of its footprint) late last year. There has been media speculation that even more store closings are coming because sales dropped about 3.9% between third quarter 2014 and third quarter 2015. One strong possibility is that Macy’s will shutter some historic downtown locations in major cities in order to sell off valuable real estate. It is also likely to pull out of some regions of the country, such as the Midwest, where income inequality is undermining the economy.

 

• Office Depot/Office Max and Staples – The office supply sector has been hard hit by both online retail and the growth of club stores like Costco Wholesale. It is not clear what will happen here, since the Federal Trade Commission is trying to block the Office Depot and Staples merger on questionable antitrust grounds. Large numbers of Office Depot (NASDAQ: ODP) closings are likely because that chain is already in the death spiral. It was closing 400 stores, the numbers likely to increase if the merger stays off. Its stock was trading at $5.70 a share, and it reported a net income of -$91 million on September 30, 2015. Staples (NASDAQ: SPLS) was a little better off; it reported a net income of $32.53 million on October 31, 2015, and a stock price of $9.56 a share. My take is that somebody, perhaps Alibaba, is likely to buy one of these chains, particularly Staples, just to get the online operations and shut down the brick-and-mortar locations. Staples is a likely acquisition target because it has a very impressive online operation that would add a lot of value to Alibaba Express or Walmart.com.

 

• Sears Holdings (NASDAQ: SHLD) – This ailing retail giant, which also owns Kmart, can be best described as a dead man walking. Its stock price recently dipped below $20, falling to $19.47 on January 6, 2016. That gave it a market cap of just $2.077 billion, making it a prime takeover target. Not surprisingly, CEO Eddie Lampert is trying to protect his investment by transferring much of the company’s property to his real estate investment trust, Seritage Holdings (NYSE: SRG). Lampert has also hinted that he plans to transfer more stores to Seritage, which could mean more closings are imminent because at many Sears locations the property itself is more valuable than the store. One possibility this year is that Lampert will try to close down Kmart or sell it off to raise more cash. He’s likely to do the same to Sears Auto Centers. Another potential development would be to turn Sears into a purely online retailer.

 

• This sector is still enormously profitable, as Kroger’s success demonstrates, but it is also facing a big shake out. The problem here is that regional and local chains simply lack the economies of scale necessary to compete with deep discounters like Kroger, Amazon, Walmart and Costco. One big regional grocer, Wisconsin-based Roundy’s, just sold itself to Kroger to avoid the death spiral; another, the New Jersey and New York A&P, collapsed completely in 2015. Expect to see more grocers collapse or sell themselves to Kroger (NYSE: KR) or the privately-held Safeway/Albertsons combo. The trend is likely to get worse as Safeway consolidates into something like Kroger and starts matching Kroger’s prices. Likely victims include Winn Dixie, Supervalu and fast-growing organic grocers like Whole Foods Market (NASDAQ: WFM) and Sprouts Farmers’ Markets (NASDAQ: SFM). These chains are growing fast, but they lack the resources of the grocery giants.

 

• Clothing retailers. No sector has been harder hit by the rise of online retail than specialty clothing retailers like Aeropostale and Abercrombie & Fitch. Their target demographic, younger shoppers, is most likely to buy online, and they are faced with high real estate costs at malls with declining traffic. Aeropostale (NYSE: ARO) is clearly in the death spiral; its stock was trading at 25¢ a share on January 6, 2015. The company’s revenue has also fallen dramatically in recent years, dropping from $2.397 billion in 2012 to $1.6 billion in October 2015. Expect this chain and many of its peers to disappear completely in 2016. In the sector, Aeropostale is already planning to close around 175 stores, Children’s Place 200 stores and American Eagle Outfitters 150 stores.

 

• Various discounters. One ailing discounter, Pier One Importers, is planning to close 160 stores over the next few years. Fast expanding dollar stores such as Dollar General Stores and Five Below could be hit next because of massive expansions and low margins. Dollar General (NYSE: DG) reported a free cash flow of just $83.66 million on revenues of $20.02 billion for third quarter 2015. One chain that could be on shaky ground is Dollar Tree Stores (NASDAQ: DLTR), which more than doubled in size by absorbing the ailing Family Dollar last year. All it would take to send one of these chains into the death spiral would be an economic downturn or a rise in gas prices.

 

The Retail Apocalypse Heats Up

Expect to see the retail apocalypse get far worse this year because two trends driving it will accelerate.

The first is the aging and dying off of older shoppers that prefer department stores to big boxes and online retail. This could be real catastrophic for chains like Sears and Macy’s. Older, loyal shoppers are disappearing, and nobody is taking their place.

The second is income inequality, which hurts those chains in regions most exposed to it, such as the upper Midwest and parts of the South. The middle class, which was the major market for department stores, is disappearing in some of those regions, leaving retailers without customers. Disturbingly, the retail apocalypse drives income inequality because retail jobs that were once a ticket to the middle class for some Americans are disappearing.

These trends are made worse by the ascendance of online retail. Online retailers like Amazon are most likely to take chains’ best customers, upper middle class people with growing incomes, leaving them with the poorest, least sophisticated customers whose incomes are shrinking.

It looks as if 2016 will be known as the year of the retail apocalypse, particularly if it sees the demise of a national institution such as Sears.

Disclosure your blogger owns shares of Kroger.