The Retail Death Spiral Continues | The Mesh Report

The Retail Death Spiral Continues

John Thomas March 23, 2017 Comments Off on The Retail Death Spiral Continues

Never confuse “Gone down a lot” with “Cheap”.

That is the hard earned lesson I have learned after a half century of investing experience.

It appears that many hopeful traders are completely ignoring this advice by sticking their toes into retail stocks at these bombed out levels.

Only yesterday, Ebay CEO Devin Wenig made this amazing statement:  “The fourth quarter, the last holiday season, was a really important inflection point. That was the end of retail as we know it. The restructuring of retail is going to happen much faster than many people expect. I’m not sure that many retailers will make it to the next holiday season.”


The attempt to revive Radio Shack from a chapter 11 filing two years ago fell apart earlier this month. Another electronics retailer, HHGregg, fell on its sword. So did the fashion icon BCBG Max Azria.

Payless is teetering on the edge.

Oh, and news flash!

My friend and mentor, Oracle of Omaha, Warren Buffett, recently dumped his decades old position in Wal-Mart (WMT), and he almost NEVER sells.

It’s looking like retail will be the oil industry of 2017.

For Heaven’s sake, if you have any retailers left in your portfolio, get rid of them before they go to zero.

Sears (SHLD) and Macy’s (M) just announced more store closings nationwide in the wake of disastrous holiday sales figures.

So, I stopped at a Wal-Mart (WMT) the other day on my way to Napa Valley to find out why.

I am not normally a customer of this establishment. But I was on my way to a meeting where a dozen red long stem roses would prove useful. I happened to know you could get these for $10 at Wal-Mart.

After I found my flowers, I browsed around the store to see what else they had for sale. The first thing I noticed was that half the employees were missing their front teeth.

The clothing offered was out of style and made of cheap material. It might as well have been the Chinese embassy. Most concerning, there was almost no one there.

So I was not surprised when the company announced that it was closing 267 stores worldwide. The closures amount to only 1% of Wall-Mart’s total floor space. Some 10,000 American jobs will be lost.

The Wal-Mart downsizing is only the latest evidence of a major change in the global economy that has been evolving over the last two decades.

However, it now appears we have reached a tipping point, and a point of no return. The future is happening faster than anyone thought possible. Call it the Death of Retail.

I remember the first purchases I made at Amazon 20 years ago. The idea was so dubious that I made my initial purchases with a credit card with only a $1,000 limit. That way, if the wheels fell off, my losses would be limited.

This is despite the fact that I knew Jeff Bezos personally as a former Morgan Stanley colleague. And how stupid was that name, Amazon? At least he didn’t call it “Yahoo”.

Today, I do almost all of my shopping at Amazon (AMZN). It saves me immense amounts of time while expanding my choices exponentially. And I don’t have to fight traffic, engage in the parking space wars, or wait in line to pay.

It can accommodate all of my requests, no matter how bizarre or esoteric. A WWII reproduction Army Air Corps canvas flight jacket in size XXL? No problem!

A used 42-inch Sub Zero refrigerator with a front door icemaker and water dispenser? Have it there in two days, with free shipping.

So I was not surprised when I learned this morning that the company accounted for 38% of all online sales in January, a market that is already growing at a breathtaking 20% YOY.

In 2000, after the great “Y2K” disaster that failed to show, I met with Bill Gates Sr. to discuss his foundation’s investments.

It turned out that they had liquidated their entire equity portfolio and placed all their money into bonds. It turned out to be a brilliant move, coming mere months before the Dotcom bust and a 16-year bull market in fixed income.

Mr. Gates (another Eagle Scout) mentioned something fascinating to me. He said that, unlike most other foundations their size, they hadn’t invested a dollar in commercial real estate.

It was his view that the US economy would move entirely online, everyone would work from home, emptying out city centers and rendering commuting unnecessary. Shopping malls would become low rent climbing walls and paint ball game centers.

Mr. Gates’ prediction may finally be occurring. Some counties in the San Francisco Bay area now see 25% of their workers telecommuting.

It is becoming common for staff to work Tuesday-Thursday at the office, and from home on Monday and Friday. Productivity increases. People are bending their jobs to fit their lifestyles. And oh yes, happy people work for less money in exchange for personal freedom, boosting profits.

The Mad Hedge Fund Trader itself may be a model for the future. We are entirely a virtual company, with no office. Everyone works at home across the country and around the world.

The downside to this is that whenever there is a snowstorm anywhere in the country, it affects our output. Two storms are a disaster, and at three, such as this weekend, we grind to a virtual halt.

You may have noticed that I can work from anywhere and anytime (although sending a Trade Alertfrom the back of a camel in the Sahara Desert was a stretch).

Moroccan cell coverage is better than ours, but the dromedary’s swaying movement made it hard to hit the keys.

The cost of global distribution is essentially zero. Profits go into a bonus pool shared by all. Oh, and we’re hiring, especially in marketing.

You can see this in the business prospects of traditional brick and mortar retailers last year, which were dire.

As a result, Macy’s (M) stock plunged by a shocking -57% and Nordstrom (JWN) by -53%. Value players have mistaken the present low prices and subterranean price earnings multiples for a “Black Friday” sale.

It has been like leading lambs to the slaughter.

It is happening because the entire “brick and mortar” industry is getting left behind by the march of history.

Sure, they have been pouring millions into online commerce and jazzed up websites. But they all seem to be poor imitations of Amazon, with higher prices. It is all “Day late and dollar short” stuff.

In the meantime, Amazon soared by 181% this year, and was one of the top performing stocks of 2016. It is thought that Amazon accounted for a staggering 25% of all the new growth in US retail sales last year.

And here is the bad news. Brick and Mortar retailers are about to lose more of their lunch to Chinese Internet giant Alibaba (BABA), which is ramping up its US operations and is FOUR TIMES THE SIZE OF AMAZON!

There’s a good reason why you haven’t heard much from me about retailers. I made the decision 30 years ago never to touch the troubled sector.

I did this when I realized that management never knew beforehand which of their products would succeed and which would bomb, and therefore were constantly clueless about future earnings.

The business for them was an endless roll of the dice. That is a proposition in which I was unwilling to invest. There were always better trades.

I confess that I had to look up the ticker symbols for this story, as I never use them.

However, I also missed the miracle at Amazon. I could never grasp their long tail strategy and their 100 X multiples, even though I knew the founder well. I have had to admire it from the sidelines. At least I wasn’t short.

You will no doubt be enticed to buy retail stocks as the deal of the century by the talking heads on TV, Internet research, and maybe even your own brokers.

Never confuse a low stock price with “cheap”.

It will be much like buying the coal industry (KOL) a few years ago, another industry headed for the dustbin of history. That was when “cheap” was on its way to zero for almost every company.

So the next time someone recommends that you buy retail stocks, you should probably lie down and take a long nap first. When you awaken, hopefully the temptation will be gone.

Or better yet, go shopping at Amazon. The deals are to die for.


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