Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

The Retail Apocalypse: It’s Far Worse than You Think

America’s malls face what amounts to a retail Armageddon—the mass closing of hundreds if not thousands of stores and the extinction of entire chains and brands. Even though this devastation has not been well covered by the media, it is accelerating and reshaping our communities and perhaps our entire nation.

Tens of thousands of jobs, billions of dollars in revenue, thousands of stores, untold amounts of market capitalization and a great deal of sales and property tax revenue that local, regional and state governments depend upon is about to disappear. Iconic brands, even stores that are regarded as cherished American institutions, are about to disappear, perhaps for good.

The retail apocalypse is accelerating because of what is termed the death spiral. The death spiral occurs when the cost of a retailer’s operations exceeds its sales. This state of affairs is now routine at stores across America, including some you may shop at.

Some Highlights of the Retail Apocalypse in the American Heartland


  • Walmart Stores Inc. (NYSE: WMT) will close more stores than it plans to open for the first time in living memory. By count, Walmart will close 154 stores but only open 135 new stores. The cause of the closings is clear; the biggest name in retail suffered a drop in revenue in the third quarter of 2015 for the first time in recent memory. Walmart reported a TTM revenue of $485.62 billion in July 2015 that dropped to $484.03 billion in October 2015. In other words, Walmart’s revenue shrank by $1.59 billion during the third quarter.


  • JC Penney (NYSE: JCP) has plans to close at least 40 stores this year. Seven Penney’s shut down the week of January 13, 2016, alone, according to The Consumerist. JC Penney is in very sorry shape; on October 31, 2015, it reported a negative net income of -$501 million, a profit margin of -4.73%, an earnings per share ratio of -1.643 and a free cash flow of -$325 million. Not surprisingly, JC Penney’s stock was trading at $6.99 a share on February 12, 2016. Penney’s also had a market capitalization of $2.139 billion and an enterprise value of $6.780 billion on the same day. That means Penney’s real estate—its department stores—could be more valuable than the chain itself.


  • Then there’s Sear’s Holdings (NASDAQ: SHLD), which is in such sorry shape the management could be trying to cover up the true number of store closings. Sears has stopped publicizing a complete count of its store closings because of how bad it makes the company look. Sears, which also owns Kmart, was planning to close 50 stores, but that number has been raised. It is uncertain how much longer Sears and Kmart can stay open because the retailer lost nearly two thirds of its market capitalization over the past year. On February 13, 2015, all of Sears’ stock was worth $3.82 billion; by February 12, 2016, all of Sears’ shares were valued at $1.648 billion. That means Sears lost $2.172 billion in share value over the past year. There is simply no way Sears can stay open with such losses occurring.


  • The nation’s third largest drugstore operator, Rite Aid (NYSE: RAD), sold itself to Walgreens Boots Alliance (NASDAQ: WBA) to avoid collapse in November. Retail analysts think Walgreens will have to sell or shut down several hundred drugstores because of the merger. Walgreens will have to close locations that are too close to each other and others to comply with federal antitrust laws.


  • Sporting goods retailer Finish Line (NASDAQ: FINL) will close 150 of its 617 stores. That is nearly one fourth of its footprint. Finish Line is definitely struggling; it reported a profit margin of -5.71% and a free cash flow of -$31.41 million on November 30, 2015. To make matters worse, Finish Line reported a net income of $58.68 million on revenues of $1.86 billion. With narrow profit margins like that, it’s a miracle that chain will stay open.


  • The Milwaukee-based grocer Roundy’s (NYSE: RNDY), which operates the Mariano’s, Pick N’ Save, Copps and Metro Market chains in Wisconsin and Chicago, sold itself to Kroger (NYSE: KR) to avoid collapse in November. At the time of the sale, Roundy’s was facing an $8.6 million loss, a profit margin of -.15% and a net income of -$281.53 million.


  • Macy’s (NYSE: M) will close 40 of its 770 stores. Macy’s reported a free cash flow of -$449 million on October 31, 2015. Like Walmart, Macy’s saw its revenues drop over 2015. The iconic department store started the year with a TTM revenue of $28.11 billion that fell to $27.57 billion by October.

The truly scary aspect of this is that these are just the highlights of the apocalypse. All the collateral damage associated with it, such as dead or dying malls, the closing of smaller businesses that depend on foot traffic from large retailers, and the closures or cutbacks at lesser chains, are not reported.

What Is Causing the Retail Apocalypse? It’s Income Inequality, stupid.

The causes of the retail apocalypse are many, but there are some trends that seem to be driving it. These trends include:

Rising income inequality, growing poverty and the decline of the middle class means that Americans have less disposable income to spend. The percentage of Americans identified as middle class by income shrank from 67% in 1971 to 53% in 2014, according to the Pew Research Center.

At the same time, incomes for average Americans are falling; the average household income in 2014 was $53,657, down from $54,462 in 2013, according to the U.S. Census Bureau. The number of Americans in poverty was also increasing, rising from 46.3 million 2013 to 46.7 million. That means 14.8% U.S. citizens, or about one in seven, were poor.

This situation hurts retail because people have less to spend. It also encourages discounting because bargains are all many consumers can afford to buy. This explains why middle-class retailers like Macy’s are shrinking while discounters such as Aldi, Kroger, and the dollar stores like Dollar General (NYSE: DG) are growing dramatically.

Disturbingly, the retail apocalypse drives income inequality and poverty because more people are thrown into poverty as stores close. Pew classified around 28% of those working in retail as lower income. That means they are often the most vulnerable to job losses and wage cuts.

How Discounting Drives the Retail Apocalypse

A side of effect of shrinking incomes is the dramatic increase in aggressive discounting. Discounters grow because they can offer lower prices. When they reach a certain size, discounters get enough leverage to force suppliers to lower costs, which makes even deeper discounts possible.

This makes it very hard for smaller retailers and those with higher overheads to compete. Kroger’s grocery prices were around 5% lower than those at Roundy’s at the time of acquisition.


The reason for that is Kroger’s buying power; the company operates around 2,800 supermarkets in 35 states. Kroger had revenues of $108.87 billion on October 31, 2015, before it absorbed Roundy’s. That enables Kroger to buy products from suppliers at a steep discount and pass them on to cash-strapped customers.

What’s driving the apocalypse is that this situation is not unique to Kroger; there’s its rival, the privately-held Safeway, which operated 1,326 stores in 13 states. There’s Walmart with $484 billion in revenue and 4,042 stores in the United States alone.

The privately-held Aldi currently operates around 1,300 stores and plans to double in size. Dollar General, Walgreens and Dollar Tree each operate around 12,000 small discount stores in the U.S. To these numbers we can add Costco Wholesale (NASDAQ: COST), which had $116.55 billion in revenue on November 30, 2015.

Finally, there’s the company that could be the most dangerous discounter of all: (NASDAQ: AMZN), a retail giant that does not need stores at all. Amazon’s TTM revenue grew by $6.41 billion over the fourth quarter of 2015, rising to $107.01 billion on December 31, 2015.

The rise in income inequality and the growth of discounters means that the retail apocalypse is about to get far worse. Expect the rising number of store closures to become a major topic for the media and a top political issue this year. There’s no way that either the media or political elites will be able to continue to ignore this growing catastrophe.

Disclosure: your friendly neighborhood blogger owns shares of Kroger.