The ‘Retail Apocalypse’ Isn’t as Bad as You Think

Reisterstown Road Plaza was “the mall that would never die”…

At one time, it was Maryland’s largest shopping center. Management was quick to replace vacancies, shift anchor stores, and even renovate whole wings. And for decades, it was a shopping destination on the northwest side of Baltimore. The plaza rode out store closures, economic recessions, and even a fire that destroyed one of its anchor retailers.

Today, it’s dead.

And until recently, it was home to the city’s Division of Vital Records office… but not much more.

If you needed a birth certificate in Baltimore, you’d wait in a line of people stretching past empty shops with metal gates pulled down from the ceiling. The city’s office provided some light. But other than that, and a few flickering fluorescent lights, it was dark.

The dead-mall connoisseurs at MallHistory.com call visiting the plaza a “true dead experience.”

We drove out to the plaza to get a picture, and found the records office had moved to an exterior location in the shopping center. Even a city department looking for cheap rent must have found the location unappealing.

We’ve seen the decay in retail firsthand… and suspect that you have, too. Most Americans can find a dilapidated strip mall or empty big-box store within a 10-minute drive from their house.

High-dollar trendy areas like New York City’s SoHo neighborhood have nearly a quarter of storefronts available – even as prices fall.

Desperate property owners have undertaken plans to convert dead malls into warehouse space for Amazon (AMZN) and FedEx (FDX).

The mall in downtown Scranton, Pennsylvania is a ghost town. The only activity centers around a play place for children and an outpost of the public library.

You don’t often get to watch an industry decline this rapidly in real time, with its struggles stemming from several causes…

Amazon and other online retailers have eaten into retailers’ margins. Millennials and younger generations have different spending habits. They don’t spend weekends hanging out at the mall like kids did 10 years ago. And private-equity firms bought up many retailers with loads of debt and they can no longer handle the burden.

In 2017 alone, we’ve seen bankruptcy filings from mall mainstays like True Religion, Wet Seal, BCBG, The Limited, Rue21, Gymboree, Vanity, Eastern Outfitters, Gander Mountain, MC Sports, RadioShack, hhgregg, Gordmans, Payless, and Marsh. And shares of anchor stores like Sears (SHLD) and JC Penny (JCP) have plunged in the past five years… dropping more than 75% and 80%, respectively. (Just yesterday, Sears Canada announced it was closing all of its stores.)

Most surprising: the death of retail is happening during a raging bull market…

Wherever you look today, it’s hard to find investments to buy because everything is already up. Even cheap, boring consumer staples companies like Colgate-Palmolive (CL) trades for 27 times earnings… and it makes toothpaste and hand soap – not usually a huge growth sector.

Retail is one of the only lagging sectors as everything else spirals higher with what my colleague Steve Sjuggerud calls the “Melt Up.”

That gives us a chance to find an unnoticed, well-priced gem in the retail sector…

The retail situation is bad… but nowhere near as bad as you think it is.

The sight of shuttered stores and loved brands from our childhood going belly up creates an emotional response. We feel worse when a company we see and use goes under than when some industrial company does.

However, tales of retail’s imminent death are exaggerated.

Brick-and-mortar retail sales have grown 3% over the last year. The drop that began in 2014 seems to be coming back, as you can see in the chart below.

Sure, Amazon’s making business tougher. But in-person retail is still growing faster than the broad economy. You wouldn’t know that from the headlines.

And of the 23 brick-and-mortar retail companies in the S&P 500 that announced earnings last quarter, only three had declining sales (Kohl’s, L Brands, and Macy’s).

In other words, retail has its share of big losers… But there are plenty of winners as well.

You can still find some health in retail… even in surprising places.

Take the “dead mall” we mentioned in the beginning – Reisterstown Road Plaza. Management hasn’t given up yet. The empty wing where the records office used to be is undergoing some sort of renovation. And sections of the mall do still have storefronts – a mix of local mom-and-pop shops, lower-end chain stores, and a few service providers like nail salons.

We still don’t think you should be investing in lower-tier malls. But if this retail site has some life, you can bet the “death of retail” is overblown.

The formula for your investment dollars is simple… Bad retail companies are going under. Good retail companies are not.

And you don’t need a Wall Street research team to separate the good from the bad. Go to Wal-Mart (WMT) or Target (TGT) this weekend and see the crowds. Sure, you can’t gauge the next quarter’s earnings by looking at one store… But they’re clearly not going out of business. Then compare that foot traffic to customers in RadioShack or Sears.

Even quality retail firms do face real challenges today. That’s why we’re not buying them directly… We’re not excited enough to start piling into shares without knowing what their future earnings may show. However, we do know that the best stores aren’t going out of business. For many quality retailers, even as their share prices have fallen, their bonds have retained high credit ratings and held up in price.

We need a cheap way to profit from that specific insight.

In a recent issue of my newsletter, I recommended an investment in a high-quality retail real estate investment trust (“REIT”). It rents property to only the best retailers. Even if these retailers don’t grow, they’ll earn more than enough to keep making their rent… which will flow straight into our pockets.

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What We’re Reading…

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Retirement Millionaire Daily Research Team
Buffalo, New York
October 11, 2017