Market Mad House

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

The Death Spiral

Will the Retail Apocalypse Kill Department Stores?

The business being hardest hit by the retail apocalypse is department stores. The latest victim is JC Penney (NYSE: JCP) which has announced plans to close 140 stores and two distribution centers.

That move will eliminate 6,000 jobs and more than 10% of JCP’s footprint. The reason for the closings was Penney’s lousy performance which included a net income of just $1 million on January 31, 2017. That’s right a chain that supposedly operates 1,021 stores and employees 105,000 people generated just $1 million in income from $12.55 billion in revenues.

Revenue Collapse at Department Stores

Now for the truly frightening part, JC Penney was actually doing better than some of its competitors. Penney’s revenues held steady through 2016, it reported $12.63 billion in revenues in January 2016 and $12.55 billion a year later.

Meanwhile Dillard’s (NYSE: DDS) revenue fell by $345 million or a little over 5%. Dillard’s reported $6.755 billion in revenues in January 2016, and $6.418 billion in January 2017.

Kohl’s (NYSE: KSS) revenues fell by $510 million in 2016. The chain started the year with $19.20 billion in revenues and finished with $18.69 billion in revenues. In terms of revenues Penney’s actually did better than those competitors.

Revenues at department at stores are truly horrific, JCP, Kohl’s and Dillard’s all reported revenue losses in every quarter of 2016. To make matters worse all three revenues reported revenue declines during holiday season 2016.

Penney’s for example saw its revenues fall from $12.58 billion in October 2016 to $12.55 billion in October. Kohl’s revenues fell from $18.87 billion in October 2016 to $18.69 billion in January. Dillard’s revenues fell from $6.755 billion to $6.418 billion during the 2016 holidays.

A Steady and Irreversible Decline in Sales

It looks as if all three chains are suffering from a steady and irreversible decline in sales. JC Penney’s vaunted turnaround seems to have stalled and possibly reversed.

My prediction is that Kohl’s and Dillard’s will have to follow JC Penney and Macy’s (NYSE: M) lead and start closing stores to reduce costs and raise cash through real estate sales. One strong possibility is that retailers will start pulling out of entire regions of the country particularly the south and the Rustbelt.

Such closings are inevitable because of the limited amounts of cash at the department stores. Dillard’s had just $347 million cash and short term investments and assets of just $3.88 billion on January 31, 2017. Penney had $887 million in cash and short-term investments and assets of $9.314 billion on the same day. Kohl’s was a little better off it had assets of $13.57 billion and $1.074 billion in the bank on January 31, 2017.

On the Edge of the Death Spiral

Those numbers mean that all three department store brands are hovering on the edge of the death spiral. Penney’s in particular might be about to start down the spiral.

These stores are close to the death spiral because their cash resources are very limited. JCP had a free cash flow of just $590 million on January 31, 2017. Kohl’s reported a free cash flow of $691 million on the same day and Dillard’s was dealing with a free cash flow of $359.67 million.

A major problem all three retailers will face is paying for merchandise particularly goods on consignment like all the appliances Penney’s has added to its inventory in recent months. This might lead to a crisis because none of these retailers has a wealthy benefactor like Sear’s (NASDAQ: SHLD) does.

Sears’ CEO Eddie Lampert has kept that sorry company afloat with a series of huge loans from his hedge fund. Penney’s, Dillard’s and Kohl’s lack such sugar daddies the only way they will be raise money is to sell assets or take out high interest loans. Both of those options might force reductions to operations, particularly if they have to use some of the real estate as loan collateral.

This puts the chains in a vice they have to raise more cash but they have to cut operations which reduces cash flow. It also means such measures as reducing inventory and layoffs.

Has Amazon Killed Department Stores?

The only winner from all this appears to be Amazon (NASDAQ: AMZN) Amazon now competes directly with department stores in many categories.

Amazon now offers eight proprietary clothing lines similar to those at department stores. One of them Buttoned Down is only available to Prime Members. If that was not enough Amazon also sells a wide variety of household items such as towels and small appliances through its Amazon Basics.

Tellingly Amazon’s revenues grew by $28.98 billion in 2016, rising from $107.01 billion in December 2015 to $135.99 billion a year later. The amount of Amazon’s revenue growth now exceeds the revenues of JC Penney and Dillard’s combined which would be $18.96 billion. That growth would also exceed the total revenues of Dillard’s and Kohl’s which would be $25.10 billion.

It looks as if Amazon has absorbed all the momentum in retail and the only place department stores can go is down. If this continues at least one major department store chain; possibly Penney’s will shut down within the next few year.

The retail apocalypse is about to get far worse and the great American institution known as department stores might soon be history. Take your children to the mall and the department stores now so they can say they saw one. You might not have a chance to show them those palaces of retail in just a few years.





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