Short the Stock
March 20, 2017 | By John Cumbelich
The Department Store business model is dead. Macy’s and JC Penney are closing stores by the hundreds. Sears is on the verge of extinction. Mervyns and Gottschalks are bankrupt.
Lest we think that these travails are only affecting the mid-tier brands, let us consider the premium Department Stores. Nordstrom’s shares have fallen over periods of one, three, five and ten years. The company would need to close about 25% of its stores just to return to its productivity of 2006. And Nordstrom shares have lost 45% of their value over the past two years.
Hudson’s Bay Co, the parent to Saks Fifth Avenue and Lord & Taylor, is now in talks to acquire Neiman Marcus and it’s $5 Billion in debt. Interestingly, the Wall Street Journal reported that Hudson’s Bay was looking at the acquisition as a means to “gain scale and cut costs”. Hmmm. Isn’t that precisely what Eddie Lampert said about the merits of the Kmart/Sears merger?
Need more proof? Ross Stores now has a market cap ($24 Billion) twice that of Macy’s, despite having half of its revenue. The market’s lack of confidence in the Department Store business model is clear.
To say that the writing is on the wall is an understatement. This entire industry is going down the tubes and the pace will only accelerate. Here’s a piece of free investment advice: create your own basket of Department Store stocks and then short-sell every one of these dying brands. It’s a sure thing. I would posit that betting that these stocks will begin to grow again is akin to betting against gravity. It might be possible in the very short-term. But certainly not in the long-term, and probably not in the medium-term either.
The implications of this fast unfolding transition in retail will include enormous consequences for hundreds of urban downtowns, regional malls, mall REITs, scores of vendors and tens of thousands of employees.
I liken the retail industries’ present changes to those that have already played out in the music business. Department Stores are the LP records of retail. Think about it – both Department Stores and LP records are products of the early 20th century, when consumption habits and society itself was very, very different. Over the course of the last 40 or 50 years, LP’s market share were first hit by 8-track, then cassettes, then CDs. Finally, Napster, Spotify, Pandora, iTunes and the other internet based music offerings relegated LPs to little more than a nostalgic oddity.
Similarly, Department Stores’ historic market share has been mercilessly eroded over the past half century by general merchandise stores (Target, Walmart), mid-sized apparel brands (Gap, Ann Taylor), Cosmetics retailers (Sephora, ULTA), discount apparel (Ross, TJ Maxx, Marshalls) and finally, Amazon and other internet based retailers.
The market’s reorganization of how music was sold led to the hasty demise of various retailers that had built massive and costly networks of stores to sell music. The Wherehouse, Tower Records, Blockbuster Music among many other music retailers shuttered for good as the internet took off. This industries’ reorganization was a prototype for what we see taking place in retail today.
Importantly, let’s observe that music is still being sold in greater dollar volume than ever before – it’s just being sold via new channels. The same is true of apparel, cosmetics and everything else sold in a department store.
A quick look at the Department Store industry suggests that the enormous overhead of costly real estate, plus the price tag to support a massive sales force, pose unsustainable liabilities in relation to sales, or to internet competitors with no physical real estate or salespeople.
What however are Department Store’s most valuable assets? The brand identities that they have developed over a century, which are deeply embedded in our shopping culture. What to do then?
Here’s a crazy idea. Immediately close 100% of all physical stores. Reinvent your business as an internet store, with zero real estate and labor costs. Sell off all of your $Billion+ real estate located in high-barriers-to-entry, core urban markets. Create and aggressively promote a high visibility web-presence that leverages the currency of your historic retail brand name, and then create a low-margin pricing model that guarantees value (like Costco, Southwest Airlines and Ross Stores) to assure competitive pricing and high customer traffic. Then do what GROWING businesses like Google and Facebook do, and leverage all of that internet traffic by selling advertising on your website to all of your apparel, cosmetics and home fashion customers.
Sound crazy? Not really. Believing that traditional Department Stores will begin to grow again…now that’s crazy.
About John Cumbelich & Associates
John Cumbelich & Associates is a San Francisco Bay Area based firm that provides commercial real estate services to Fortune 500 retailers and select owners and developers of retail commercial properties. The firm's expertise is in developing store networks for retailers seeking to penetrate the Northern California marketplace and the representation of premier Power Center and Lifestyle developments.