Source: Flickr
Is your portfolio prepared for Retail 5.0?
We think 20% of today’s companies are likely to account for 90% of tomorrow’s market cap. Retail bankruptcies should keep accelerating – both public and private. Another important trend to watch is the disintermediation of Strip Malls, Big Box Specialty and Off-Price centers.
Retail: Consensus Thinking Is Overly Simplistic
In light of the challenging retail environment, most analysts who cover the space agree that Retail is ‘uninvestable.’ Here's the consensus argument in a nutshell:
- Amazon is taking over the world
- Retail is uninvestible
- Brick & Mortar is dead and commercial real estate is at acute risk
Hedgeye Retail analyst Brian McGough argues such a consensus call is too simplistic. There are many parts of the space that are very investable – you just have to carefully pick your spots.
Why?
Most analysts don’t properly measure the rise of e-commerce. There’s a square footage equivalent associated with e-comm. By our math, there is 13.6 billion in Retail-related square footage today which will grow to 26 billion over the next 20 years.
McGough presented his thoughts on the history and future of retail during an institutional call recently. He highlighted the companies which could end up filing for bankruptcy, as well as the companies that could double from here.
It's easy to understand why investors are freaked out. Retail bankruptcies this quarter already exceed the level in the first quarter of 2009, when the economy was in midst of global financial crisis.
The chart above shows this surprising spike in 2017 retail bankruptcies. (Note this includes the assumption that Gander Mountain will file Chapter 11 – the company is rumored to be preparing to file for bankruptcy as early as this month.)
Bankruptcies in 2017 so far include:
- Wet Seal
- Ben Hogan
- Eastern Outfitters (Bob’s Stores/Eastern Mountain Sports)
- Marbles: The Brain Store
- BCBG
The Chapter 11s just keep on coming. There are many more to come – 2017 should be a record year.
What's Next
The Chart of the Day below from today's Early Look shows a smattering of recent retail bankruptcies and what we think are the nine most "high risk" companies, dangerously leveraged with poor cash flow.
For investors, we'd like to highlight Hanesbrands (HBI) and Kohl's (KSS).
- McGough recently wrote "My ‘Big Short’ Call on Hanesbrands Could Become the Best of My Career."
- On Kohl's, here's a brief primer on our call, "Kohl's: The Ugly Path To The Inevitable Dividend Cut."
Look out...
Clearly, the retail environment is getting more challenging and dynamic. As a result, mergers and acquisitions are on the rise. On that front, McGough says:
“As far as this wave of M&A I think we have to think really big. Don’t let people tell you that can’t happen, or this company is too big or no one would buy this. That simply can’t be said. We’re going to see a lot of cross sector deals.”
This is critical context for investors in Retail stocks, McGough says, and the coming two decades will present both risks and promising opportunities. Be careful. “The box you don’t think outside of could be your coffin,” McGough says. Don’t get buried.
Want more? The video below is an excerpt from McGough's hour-long Retail 5.0 presentation to institutional clients.
