The retail sector has the lowest Zacks Sector Rank with more of negative earnings estimate revision in recent past, indicating a bearish outlook and negative investor sentiment.
Authored by Carey Wedler via TheAntiMedia.org, Consumerism has long been a defining element of American society, but retail giants are now shutting down thousands of their locations amid a long-anticipated “retail apocalypse." BI reports that over the next couple months, more than 3,500 stores are expected to close: “Department stores like JCPenney, Macy’s, Sears, and Kmart are among the companies shutting down stores, along with middle-of-the-mall chains like Crocs, BCBG, Abercrombie & Fitch, and Guess.” Some stores, like Bebe and The Limited, are closing all of their locations to focus more on online sales. Other larger chains, like JC Penney, are “aggressively paring down their store counts to unload unprofitable locations and try to staunch losses,” Business Insider notes. Sears and K-Mart are following a similar trajectory moving forward. Sears is shutting down 150 Sears and Kmart locations, about 10% of their shops. JCPenney is shutting down 138 stores, about 14% of their total locations. These closures are the consequence of several different factors. First, the United States has more shopping mall square footage per person than other parts of the world. In America, retailers reserve 23.5 square feet per person; in Canada and Australia, the countries with the second- and third-most space have 16.4 and 11.1, respectively. Another reason retail brick and mortars are failing is the growth of e-commerce. Between 2010 and 2013, visits to shopping malls declined 50%, according to data from real estate research firm Cushman and Wakefield. Meanwhile, online sales from huge online outposts, like Amazon, have exploded. Back in 2015, Forbes observed this trend: “Earlier this year, the stock market value of Amazon.com surpassed that of Walmart, a turn of events that many saw as indicative of how badly brick-and-mortar big box retailers have lagged behind in building up their e-commerce.” “Walmart is now hustling to bridge the gap, pouring billions into its tech to claw back some market share. Target, also a laggard, is similarly spending as much on tech as on its 1,800 stores. Both those companies, though, generate digital sales that are still only a small percentage of total sales, and a fraction of Amazon’s.” At that time, Business Insider noted: “The list of failures is getting longer by the day. Macy’s? Cooked – down 42% over the past six months. Nordstrom? Down 20% over the same timeframe. Dick’s Sporting Goods? Awful earnings sent this athletic retailer lower more than 10% yesterday alone. There’s absolutely no way to sugarcoat it—the retail sector is crashing.” Though Americans increasingly prefer to shop online, their preferences are also changing. Shoppers are choosing to spend their money on “restaurants, travel, and technology than ever before, while spending less on apparel and accessories,” Business Insider reports. Further, as longtime retail analyst Howard Davidowitz observed in 2014, “What’s going on is the customers don’t have the fucking money. That’s it. This isn’t rocket science.” As prosperity declines, shopping habits shift, and major retailers like Macy’s, Sears, and JCPenney close their doors, their decisions are likely to have ripple effects on smaller stores in shopping malls. Business Insider explains that in addition to dwindling attendance and income for mall owners, major department store closures can trigger “‘co-tenancy clauses’ that allow the other mall tenants to terminate their leases or renegotiate the terms, typically with a period of lower rents, until another retailer moves into the anchor space.” As fewer retail giants seek retail space, many malls are facing dire fates, and many expect low-performing malls to be hit hardest by the changing scope of retail, noting roughly 30% of malls will face increased risk of shutting down. Shopping malls first became popular in the economically fruitful era of the 1950s and 60s. Inspired by major department stores of the 19th century — like Sears and Macy’s, which are now struggling — 20th-century malls grew rapidly, in part, because of government subsidies provided in the form of tax breaks. Smithsonian Magazine has explained that over the decades, real estate developers overshot their expectations, constructing increasing numbers of malls despite a lack of population growth. By 1999, the downward trend we see intensifying today had already begun: “Shopping centers that hadn’t been renovated in years began to show signs of wear and tear, and the middle-aged, middle-class shoppers that once flooded their shops began to disappear, turning the once sterile suburban shopping centers into perceived havens for crime. Increasingly rundown and redundant, malls started turning into ghost towns—first losing shoppers and then losing stores.” Almost twenty years later, the trend has only intensified, and retailers are evidently bracing for an even deeper plunge. As CNBC noted earlier this year: “At $12.7 billion, U.S. department store revenue is $7.2 billion lower than it was in 2001, according to the U.S. Census Bureau. Expect these trends to continue.”
When we commented yesterday morning on the unexpected "going concern" notice in Sears' just filed 10-K which sent the stock crashing, we pointed out the immediate spin provided by Eddie Lampert's distressed retailer which promised that its comeback plan may help alleviate the concerns, “satisfying our estimated liquidity needs 12 months from the issuance of the financial statements", to which however we added the footnote that "the question is what happens when vendors start demanding cash on delivery as concerns about SHLD.'s liquidity concerns continue to grow." As it turned out, we wouldn't have long to wait, because overnight Reuters reported that the worst case Sears scenario we envisioned for Sears is now taking shape and that suppliers to Sears have told Reuters they are doubling down on defensive measures, such as reducing shipments and asking for better payment terms, to protect against the risk of nonpayment as the company warned about its finances. The company's disclosure turned the focus to its vendors as tension is expected to mount ahead of the key fourth-quarter selling season amid rising concern about a potential bankruptcy, they said. Quoted by Reuters, the managing director of a Bangladesh-based textile firm said his company is using only a handful of its production lines to manufacture products for Sears' 2017 holiday sales. Last year, nearly half of the company's lines in its four factories were producing for Sears. "We have to protect ourselves from the risk of nonpayment," said the managing director, who declined to be identified for fear of disrupting his company's relationship with Sears. Furthermore, precisely as we predicted, Mark Cohen, the former CEO of Sears Canada and director of retail studies at Columbia Business School said vendors will keep a close eye on Sears' finances. "Whatever vendors continue to support them are now going to put them on even more of a short string. That means they’ll ship them smaller quantities and demand payment either in advance or immediately upon delivery." He added: "Sears stores are pathetically badly inventoried today and they will become worse." Another supplier to Sears, Arnold Kamler, CEO of New Jersey-based bicycle manufacturer and importer Kent International Inc, said he was not surprised by Sears' Tuesday announcement. He said he noticed a warning sign last year when Sears pushed to increase its purchases, which occurred "because a lot of their current suppliers were either cutting them off or limited them on credit." Kamler said he declined to sell Sears more product and that he receives a report once a week from his accounting department because of concerns around billing, payments and deductions. The Bangladesh-based clothing supplier said Sears' announcement is making him re-evaluate accepting new orders. "So far there was only speculation that they would declare bankruptcy in 2017. But now they are acknowledging it, which definitely complicates our relationship with them and our decision to accept future orders from Sears," the executive said. A second clothing supplier from Bangladesh who did not wish to be named said he renegotiated payment terms with Sears a year ago and was being paid within 15 days of sending a shipment, compared with the traditional 60 days. He is considering asking the company for an advance payment on orders going forward. * * * Sears disagreed, and according to Jason Hollar, the company's CFO, Sears' move to raise capital in recent months is helping strengthen the company's balance sheet he claimed in a blog post. Sears is "a viable business that can meet its financial and other obligations for the foreseeable future," Hollar said. He cited a $1 billion increase in liquidity from a new secured loan facility and a new asset-based loan that provided $250 million more in "financial flexibility." The only problem with this is that Sears continues to be a melting ice cube which while not as bad as Tesla, is burning through hundreds of millions each year, money which in recent years has come out of Eddie Lampert's pocket, either directly or indirectly, with loan gurantees. At some point even Lampert will realize that throwing away billions to sustain the Sears zombie is no longer a viable strategy, especially if the vendor freak out prompts a sudden need for cash which the company does not have. Speaking of Sears' cash, here are some more details from Reuters: Sears' cash position has shrunk dramatically in recent years. Sears, which lost $2.22 billion in the year ended Jan. 28, 2017, had $286 million in cash on hand, down from $609 million in 2012. Retailers in distress often use their accounts receivable to finance operations, and Sears had $466 million in receivables, down from $635 million in 2012. So is a bankrtupcy inevitable? Well, yes, and increasingly so with every passing day that the company avoids filing. Neil Saunders, managing director at retail research firm GlobalData, said tension will grow as the year goes on. "As we move towards the last quarter, I think we'll find there are more and more suppliers that are not necessarily willing to engage with Sears" and will demand cash up-front. Another sign of Sears' weakness is that insurance companies that once provided policies to Sears vendors - insuring against nonpayment for their goods - are no longer doing so. Doug Collins, regional director for risk services at Atradius Trade Credit Insurance, said his firm has stopped providing insurance to Sears vendors. "We tried to hang in as long as we could," he said. "Vendors may try to get a few more cycles in before the worst happens, and then it just depends if they're lucky or not." Of course, if that's the case, then Sears has nothing to worry about: if the past 9 years of trading this "market" has shown, is that luck - or hope - is the only strategy that matters for this market, and courtesy of central banks, it always somehow shows up in the last moment.
Republicans Struggle to Unite on Health Bill (WSJ) Trump Still Negotiating in Bid to Save Healthcare Bill Before Vote (BBG) Trump Tantrum looms on Wall Street if healthcare effort stalls (Reuters) High stakes for Trump in vote on healthcare plan (Reuters) GOP Lawmaker Sparks New Battle Over Trump Spy Claim (WSJ) Lawmaker says U.S. foreign surveillance 'unmasked' Trump associates (Reuters) Arrests mount after UK parliament attack (Reuters) Trump Jr. Called a 'Disgrace' for Criticizing London Mayor (BBG) 'What a mad world' says minister who tried to save wounded officer in parliament (Reuters) U.S. embassies ordered to identify population groups for tougher visa screening (Reuters) SNB Spent 67.1 Billion Francs on Currency Interventions in 2016 (BBG) 0% Financing Deals Bite Back Retailers as Fed Raises Rates (WSJ) Where De Beers Hid Its $5 Billion Diamond Stash (BBG) Democrats Seize on Disability Ruling in Opposing Gorsuch (WSJ) Inside the Troubled Kushner Tower: Empty Offices and Mounting Debt by Caleb Melby and David Kocieniewski March (BBG) Inside Alabama’s Auto Jobs Boom: Cheap Wages, Little Training, Crushed Limbs (BBG) Teva to Cut as Many as 6,000 Jobs: Israeli Newspaper (BBG) Stanford’s New Freshman Class Is for Successful Retirees (BBG) China says U.S. should respect China's air defense zone (Reuters) Drugmakers Take to Airwaves to Counter Trump's `Murder' Charge (BBG) Overnight Media Digest WSJ - Elliott Management Corp, one of the biggest activist investors in the U.S., is pushing Dutch paint and chemicals giant Akzo Nobel NV — which traces its roots in part to dynamite inventor Alfred Nobel—to enter into talks with PPG Industries Inc, a Pittsburgh-based rival. http://on.wsj.com/2muLioW - AT&T Inc and Verizon Communications Inc joined a growing number of companies pulling much of their advertising from Google, expanding a controversy over the internet giant's ad placements on objectionable content and deepening the financial impact on the company even after it announced measures to assuage concerns. http://on.wsj.com/2muPa9x - Sears Holdings Corp's raised doubts in a securities filing about its ability to keep operating after seven years of losses, sending the retailer's share price tumbling and spooking some of its landlords. http://on.wsj.com/2muElUF - Nike Inc said a sneaker homage to the cult classic film "Space Jam" was a smash hit, but the retro shoes were a rare highlight in otherwise troubling results for the world's largest athletic company. http://on.wsj.com/2muLnce - Nick Denton will leave bankruptcy having weathered a multimillion-dollar judgment from an invasion-of-privacy lawsuit that forced the chapter 11 sale of his Gawker media business. http://on.wsj.com/2muB9bW - Starbucks Corp plans to hire more U.S. military veterans and their spouses after facing backlash over its promise to hire refugees. Presiding over his last annual shareholders meeting as chief executive, Howard Schultz said Starbucks will hire 15,000 veterans and their spouses by 2025, on top of more than 10,000 hired since a pledge he made four years ago. http://on.wsj.com/2muFDiB - General Electric Co said it would double its planned cost cuts in industrial operations over two years and more closely tie top executives' bonuses to profit in its core business. http://on.wsj.com/2muJEUe - China Petroleum & Chemical Corp said it would acquire controlling stakes in Chevron Corp's businesses in South Africa and Botswana, in a roughly $900 million deal that underscores the ambition of China's struggling oil companies to earn more money abroad as profits shrink at home. http://on.wsj.com/2muLfJw FT One of Britain's biggest water companies, Thames Water, was handed a record 20 million pound ($25 million) fine on Wednesday for pumping sewage into the River Thames. Two of UK's biggest teaching unions, the National Union of Teachers and the Association of Teachers and Lecturers, will merge to form the National Education Union with more than 450,000 members. Britain's markets watchdog did not wrongfully identify a former JPMorgan executive in the "London Whale" scandal, the Supreme Court ruled on Wednesday in a landmark case that endorses a regulatory policy of speedy corporate settlements. NYT - Federal prosecutors are investigating North Korea's possible role in the theft of $81 million from the central bank of Bangladesh in what security officials fear could be a new front in cyberwarfare. http://nyti.ms/2nfjR11 - AT&T and Johnson & Johnson, among the biggest advertisers in the United States, were among several companies to say on Wednesday that they would stop their ads from running on YouTube and other Google properties amid concern that Google is not doing enough to prevent brands from appearing next to offensive material, like hate speech. http://nyti.ms/2nEPwKs - Akzo Nobel, the Dutch paint and chemicals company that makes Dulux paint, said on Wednesday that it had rejected a second takeover bid from PPG Industries, turning away a $24 billion deal that would have created an industry behemoth. http://nyti.ms/2mSvzeG - President Trump's second pick to lead the Labor Department told senators on Wednesday that he would not allow partisan political considerations or conservative ideologues to shape his department, pushing back against accusations by Democrats that he had looked away as subordinates at the Justice Department stacked his office with ideological allies during the George W. Bush administration. http://nyti.ms/2npSNwr Canada THE GLOBE AND MAIL ** Finance Minister Bill Morneau has put off tax hikes on wealthier Canadians, delivering a budget Wednesday that promises new money for job training, child care and social housing but offers no plan to improve the country's debt outlook. https://tgam.ca/2neJZJk ** The Asian Infrastructure Investment Bank has made Canada a prospective member, welcoming Ottawa into an institution that marks one of China's leading efforts to take a place of global leadership. https://tgam.ca/2nqU6LQ ** Mounting troubles at U.S. parent Sears Holdings Corp raise questions about the fate of Sears Canada Inc , which has also suffered from declining financial results. https://tgam.ca/2n8nNij NATIONAL POST ** Vancouver-based streaming company Silver Wheaton Corp is proposing a name change to Wheaton Precious Metals Corp as it seeks a brand that better reflects the increasingly large contribution gold is making to its bottom line. http://bit.ly/2nUIRsF ** Trican Well Service Ltd said it would issue new shares to buy fracking competitor Canyon Services Group Inc for C$637 million ($478 million) Wednesday even though both companies have oilfield service equipment sitting idle. http://bit.ly/2mTNwJF ** Restaurant chain Freshii Inc posted strong sales at locations open for more than a year in its first quarter as a public company as it pursues an aggressive global expansion plan. http://bit.ly/2o7T30q Britain The Times Centrica Plc gave its chief executive a 37 per cent pay rise last year, to 4.2 million pounds ($5.24 million), despite freezing its payouts to investors. http://bit.ly/2n95IRq Geely, the Chinese carmaker, has revealed plans to launch Britain's first dedicated electric van manufacturing plant in the factory it built in Coventry to assemble battery-driven black cabs. http://bit.ly/2n8YU6n The Guardian Several of Heineken N.V.'s brands have been absent from Tesco Plc shelves for six weeks after annual talks over pricing ended in a stalemate. http://bit.ly/2ndKqUc More than 1,000 jobs are at risk after shoe retailer Brantano collapsed into administration. http://bit.ly/2n93zVD The Telegraph First Utility has set its sights on the broadband sector in an attempt to widen its consumer appeal as retail competition heats up. http://bit.ly/2n97HFs The owner of The Guardian and The Observer newspapers is to make compulsory redundancies for the first time in its history as management attempts to stem years of financial losses. http://bit.ly/2ndYxZC Sky News An unarmed police officer who was among four victims of a terror attack in Westminster has been named as PC Keith Palmer. http://bit.ly/2n98zd4 The Independent Amer Sajed, one of Barclays Plc's senior-most executives, is retiring to fight for civil liberties in U.S. http://ind.pn/2n91RDG Thames Water has been fined 20.3 million pounds for polluting the River Thames with 1.4 billion litres of raw sewage. http://ind.pn/2n98HJz
(Reuters) - Suppliers to Sears Holdings Corp told Reuters they are doubling down on defensive measures, such as reducing shipments and asking for better payment terms, to protect against the risk of nonpayment as the company warned about its finances.
When was the last time that you stepped foot in a Sears retail store? Customers might find themselves unable to locate their familiar Sears store soon.
In Sears Holdings latest annual report which was just filed, they acknowledged what so many have been saying for years: the company’s future is very much in doubt.
(Reuters) - Sears Holdings Corp's shares tumbled as much as 16 percent on Wednesday as bondholders and investors questioned how long the storied retailer could remain in business after it flagged doubts that it could continue as a going concern.
Retail Nightmare Just Won't End: Sears Crashes On "Going Concern" Warning, Payless To File Bankruptcy In Days
Lately not a day seems to pass without some materially adverse news hitting a prominent retailer, or the broader space, and today it is perennial default candidate Sears to crash at the open after issuing a "going concern" in its latest 10-K, warning overnight, wrning “substantial doubt” about its ability to keep operating, raising fresh concerns about a company that has lost more than $10 billion in recent years. “Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern,” Eddie Lampert's company said although always eager to put a positive twist on the worst of news, the company added that its comeback plan may help alleviate the concerns, “satisfying our estimated liquidity needs 12 months from the issuance of the financial statements.” Of course, the question is what happens when vendors start demanding cash on delivery as concerns about SHLD's liquidity concerns continue to grow. Sears’s stock fell as low as $7.30 in premarket trading before rebounding modestly . It had been down 2 percent this year through Tuesday’s close. The disclosure comes after more optimistic signs from the company, which has been working on a turnaround under Chief Executive Officer Eddie Lampert. As Bloomberg notes, Sears posted a narrower loss than predicted in the fourth quarter, and it has pledged to lower its debt burden and cut annual expenses by at least $1 billion. As discussed one month ago, Lampert said he aims to reduce debt and pension obligations by $1.5 billion, an announcement which sent the stock surging although the optimism has been largely eliminated by now. The CEO has helped keep the ailing retailer afloat by offering more than $1 billion of assistance, including a $500 million loan facility announced in January. As part of its comeback plan, Sears had closed stores, sold real estate and offloaded businesses. Earlier this month, the department-store chain completed the sale of its Craftsman tool brand to Stanley Black & Decker Inc. for about $900 million. “While our historical operating results indicate substantial doubt exists, we want to be very clear that we’re taking decisive actions to mitigate that doubt,” Howard Riefs, a Sears spokesman, told Bloomberg. * * * In a separate report, Payless Inc., yet another struggling discount shoe chain, was preparing to file for bankruptcy as soon as next week, according to people familiar with the matter Bloomberg noted, and added that the company is initially planning to close 400 to 500 stores as it reorganizes operations. Payless had originally looked to shutter as many as 1,000 locations, and the number may still be in flux, according to one of the people. Payless’s bankruptcy would add to a tumultuous year in retail, with several bankruptcies and hundreds of store closings -- even at companies that aren’t distressed. The industry is racing to try to adapt to more online purchasing and a shift away from mall shopping. Payless was bought by private equity firms Golden Gate Capital and Blum Capital Partners in 2012 as part of the breakup of publicly traded Collective Brands Inc. The company, founded in 1956 in Topeka, Kansas, employs almost 22,000 people, according to its website. It has more than 4,000 stores in 30 countries. As a result of the hundreds of upcoming storefronts between just these two companies, mall operators are bracing for another collapse in rental revenue, which in turn continues to provide fuel to the "big short" trade, namely shorting the debt of mall REITs via CMBX, which as of this morning, hit new lows.
Despite an improving economy and upbeat consumer confidence, the performance of the mall real estate investment trusts has been lackluster in recent times.
One week ago we reported that "Mega-Bears Smell Blood As Mall REITs Tumble" in which we wrote that "just like 10 years ago, when the "big short" was putting on the RMBX trade, and to a smaller extent, its cousin the CMBX, so now too some are starting to short CMBS through the CMBX. They are betting against securities backed by malls in weaker locations where stores could close in quick succession, triggering debt defaults." This morning Bloomberg has followed up our post with a not-so-subtly-titled "Wall Street Has Found Its Next Big Short" in which it writes that "Wall Street speculators are zeroing in on the next U.S. credit crisis: the mall.... It’s no secret many mall complexes have been struggling for years as Americans do more of their shopping online. But now, they’re catching the eye of hedge-fund types who think some may soon buckle under their debts, much the way many homeowners did nearly a decade ago." The trade, as we discussed before, is not so much shorting the equities where a persistent threat of a short squeeze has burned the bears on more than one occasion, but going long default risk via CMBX or otherwise shorting the CMBS complex. Like the run-up to the housing debacle, a small but growing group of firms are positioning to profit from a collapse that could spur a wave of defaults. Their target: securities backed not by subprime mortgages, but by loans taken out by beleaguered mall and shopping center operators. With bad news piling up for anchor chains like Macy’s and J.C. Penney, bearish bets against commercial mortgage-backed securities are growing. To be sure, as we first noted last week and as Bloomberg confirms, the activity surrounding CMBS shorting has soared: In recent weeks, firms such as Alder Hill Management -- an outfit started by protégés of hedge-fund billionaire David Tepper -- have ramped up wagers against the bonds, which have held up far better than the shares of beaten-down retailers. By one measure, short positions on two of the riskiest slices of CMBS surged to $5.3 billion last month -- a 50 percent jump from a year ago. The trade itself is similar to those that Michael Burry and Steve Eisman made against the housing market before the financial crisis, made famous by the book and movie “The Big Short.” Often called credit protection, buyers of the contracts are paid for CMBS losses that occur when malls and shopping centers fall behind on their loans. In return, they pay monthly premiums to the seller (usually a bank) as long as they hold the position. This year, traders bought a net $985 million contracts that target the two riskiest types of CMBS, according to the Depository Trust & Clearing Corp. That’s more than five times the purchases in the prior three months. Further, based on fundamentals, the trade indeed appears justified: "Sold in 2012, the mortgage bonds have a higher concentration of loans to regional malls and shopping centers than similar securities issued since the financial crisis. And because of the way CMBS are structured, the BBB- and BB rated notes are the first to suffer losses when underlying loans go belly up." “These malls are dying, and we see very limited prospect of a turnaround in performance,” according to a January report from Alder Hill, which began shorting the securities. “We expect 2017 to be a tipping point.” Cracks have started to appear. Prices on the BBB- pool of CMBS have slumped from roughly 96 cents on the dollar in late January to 87.08 cents last week, index data compiled by Markit show. For now, there is little hope of a recovery on the horizon as more and more retailers continue to fail, leaving even more vacant, and thus non-rent collecting, mall space. Just this morning, Gordmans Stores, the century-old discount department store chain, filed for bankruptcy with plans to liquidate its inventory and assets. According to Bloomberg, the company, which posted losses in five of the past six quarters, listed total debt of $131 million in Chapter 11 papers filed Monday in Nebraska federal court. Gordmans said in a statement that it has an agreement with Tiger Capital Group and Great American Group “for the sale in liquidation of the inventory and other assets of Gordmans’ retail stores and distribution centers,” subject to court approval or a better offer. Omaha, Nebraska-based Gordmans, which operates over 100 stores in 22 states and employs about 5,100 people, is the latest victim in a retail industry suffering from sluggish mall traffic and a move by shoppers to the internet. The shift has been especially rough on department stores, including regional chains like Gordmans that once enjoyed strong customer loyalty, but even national concerns like Sears Holdings Corp. and Macy’s Inc. have had to close hundreds of locations to cope with the slump Gordmans, founded in 1915 by Russian immigrant Sam Richman, was acquired by PE firm Sun Capital in 2008 which took it public two years later. Funds managed by Sun Capital hold about 49.6% of Gordmans’ equity, according to a court filing. Growth slowed in 2014, and losses began to mount. Same-store sales fell more than 9 percent in the most recently reported quarter. The company announced job cuts in January, citing the “sluggish retail environment.” “Like many other apparel and retail companies, the debtors have fallen victim in recent months to adverse macro-economic trends, especially a general shift away from brick-and-mortar to online retail channels, a shift in consumer demographics, and expensive leases,” Chief Financial Officer James B. Brown said in court papers. While Gordman's decline was long in the making, its financial conditions deteriorated rapidly in March, when vendors began to refuse to ship new inventory, Brown said. After entertaining various offers, the company concluded that its best recourse was the liquidation deal with Tiger and Great American. To be sure, Gordman's is hardly the last retailer to shutter and while many of its comps have yet to default, the pain is tangible: retailers had one of the worst Christmas-shopping seasons in memory, J.C. Penney said in February it plans to shutter up to 140 stores. That echoed Macy’s decision last year to close some 100 outlets and Sears’s move to shut about 150 locations. Meanwhile, delinquencies on retail loans have risen to 6.5%, one percent higher than CMBS as a whole, according to Wells Fargo. * * * So does that mean that shorting malls is now accepted as the next "big short"? Some are not convinced. Take for example Credit Suisse who said last month non-CMBS specialists - perhaps an apt name is "CMBS tourists" - are helping drive the recent run-up in demand for credit protection. That raises concern too many people are chasing the same trade. Of course, it may simply be that Credit Suisse analysts are being paid in CMBS “The short feels crowded to us,” said Matthew Weinstein, principal at Axonic Capital, a hedge fund that specializes in structured products. “If these defaults start happening soon, the short will work, but if the defaults do not occur quickly, the first guy out could drive the market meaningfully higher.” Others, such as TCW, say CMBS sold in 2012 and 2013 might fall as low as 20 cents on the dollar, however the firm isn’t betting against them because it’s hard to know when the wagers might pay off. " Plus, the contracts aren’t cheap. It costs about 3 percent a year to short BBB- rated securities and 5 percent to bet against BB notes, plus an upfront fee to put on the trade. Consequently, it’s “more speculative than it is the next big short,” according to Sorin Capital Management’s Tom Digan. Whatever the case, here’s what the endgame might look like. About two hours north of Manhattan, in Kingston, New York, stands the Hudson Valley Mall. It used to house J.C. Penney and Macy’s. But both then left, gutting the complex. In January, the mall was sold for less than 20 percent of the original $50 million loan. Mortgage-bond holders exposed to the loan were partly wiped out. “When a mall starts to falter, the end result is typically binary in nature,” said Matt Tortorello, a senior analyst at Kroll Bond Rating Agency. “It’s either the mall is going to survive or it’s going take a substantial loss." * * * Ultimately, whether or not this is indeed that next big short as we first hinted one week ago, or the skeptics will be proven right, will depend on one thing: access to capital. Ironically, it was that variable that ended up crushing OPEC's plans to wipe out shale, which despite a dramatic downturn in oil prices managed to obtain enough funding and capital from generous, yield-starved creditors, to survive the past year while technological advances caught up and pushe the breakeven point to $50, or in many cases lower. For now, banks and hedge funds have proven far less willing to be "last resort" sources of distressed funding to retailers, and malls, (perhaps with the notable exception of Sears where Eddie Lampert has expressed a desire to go down with the sinking ship) both of which continue to deteriorate as the US consumer is either tapped out, or simply resorts to online retailers like Amazon. Should that not change any time soon, and should the cash flow profile of retailers continue to deteriorate, it is virtually assured that those who are now rushing into the next "big short" will be rewarded. Finally, as we noted last week, here is a brief note from Horseman Capital's Russell Clark laying out the latest dangers inherent in the mall space: MALL RATS Shopping mall REITS have been a fantastic investment over the years. Not only have they provided investors with large capital gains, they have also typically offered above market dividend yields. My interpretation of the REIT model is that the operator collects rents from a diverse number of retailers. This is then passed on to the end investors after costs and financing. The REIT manager reduces risk by diversifying the retailers paying rent, and by also spreading the risk geographically. If the REIT manager can acquire more real estate assets at a yield higher than what it needs to pay out as dividend yield, then the REIT can issue more shares and grow indefinitely. Mall REITs have generally done well, except during the financial crisis. However, it seems to me that North America could well have too many shopping malls. On a per capita basis, the US has twice the space of Australia and 5 times that in the UK. One source of REITs revenue growth comes from acquiring more malls. Intriguingly we have started to see volumes of real estate transactions for shopping malls fall. This means that the number of transactions to buy or sell properties is beginning to decline. Last time this happened, rents began to fall a year later. Perhaps it’s a sign that buyers believe rents have some downside risk? Many people in the market are aware of the problems that the large department stores in the US are currently facing, and their resultant plans to retrench. This affects two of the largest shopping mall REITs that have the department stores as tenants. The reality is that the shopping mall REITs charge extremely low rents to the department stores. The large shopping malls use the department stores to lure traffic, and then make their money from higher rents charged to speciality retailers. Often the per square foot rent of the specialty retailer can be 30 times or higher that paid by the anchor tenant. Looking at the top 2 shopping mall operators, they disclose their top rent payers. Recent share prices performance of 8 shared tenants has been poor, and management commentary has seeming implied that they may also be looking to reduce store count. It should also be pointed out that many tenants have a clause in their lease to reduce rents should an anchor close a store. Thus, even though the loss of rent due to an anchor closing is minimal, the knock-on effect of reduced rents from the remaining tenants is a serious concern for the REITs. One of the other problems that shopping mall REITs face is that the size that the large department stores take up is more than 400 million square feet. The largest and most successfully specialty retailer is TJ Maxx which currently has 100 million square feet. It is difficult to see any single retailer quickly being able to fill the space made vacant by department store closures. Back in the lead up to the financial crisis we found that the share prices of REITs and their tenants were very closely related. Recently we have seen tenants share price weaken again, but REITS remain relatively strong. Investors are advised to exercise caution with the shopping mall REITs
Stanley Black & Decker, Inc. (SWK) reinforced its inorganic growth trajectory by acquiring Craftsman brand from Sears Holdings Corporation (SHLD), with net cash of roughly $900 million.
While many have blamed today's spike in yields for the broader underperformance of the REIT sector, which sent the Bloomberg North American REIT index down 1.4%, its biggest one-day drop since December in a widespread selloff across all property sectors with 194 of the 214 stocks in the index lower today, it's more than just the jump in rates that is slamming the rate-sensitive sector. While longs are grudgingly parting with some of the prized holdings, it is the short sellers that have emerged from hibernation and have smelled blood, first and foremost among mall REITs - the most vulnerable of the lot - and are turning their attention to the struggling chains’ retail landlords. The underlying retail story is familiar, but just in case here is a brief recap from WSJ: shares of retail-focused real-estate investment trusts, which own malls and shopping centers, have slumped since August last year, when Macy’s Inc. announced it would close 100 stores. Sears Holdings and J.C. Penney Co. later said they would close more than 100 stores each. As a result, a regional-mall REIT index plunged about 22% from late July until March 6, according to data from the National Association of Real Estate Investment Trusts. And as the retail conflagration has spread, so has the shorting: the amount of short interest on retail-focused REITs increased to $7.6 billion as of March 6 from $5.6 billion as of the end of December, according to S3 Partners, a financial analytics firm, the WSJ reports. S3 also reports that so far shorts against REITs with more class B and C malls, such as CBL & Associates Properties Inc., Pennsylvania Real Estate Investment Trust and Washington Prime Group, have been more profitable. However, increasingly shares of Class A mall REITs, which own the most productive malls in the country, have faced pressure. Short interest on mall giant Simon Property Group jumped to $1.3 billion on March 3 from $916 million at the end of 2016, near its record high. Over the same period, short interest trades in GGP Inc. increased to a record $689 million from $430 million. Quote BTIG's James Sullivan: "there has been a steady drumbeat of negative reports from anchor retailers in the mall. As a result, when we keep hearing bad news it adds to the impression that there is a problem in the malls.” Well, there is, because as we reproted yesterday "A Third Of All Shopping Malls Are Projected To Close As 'Space Available' Signs Go Up All Over America" only for years most refused to accept the changing reality of America's traditional "bricks and mortar" industry which has been decimated not only by online retailers such as Amazon but also as a result of ongoing deterioration in the US middle class whose disposable income and spending habits have not kept up with the "recovery." Other short sellers are focusing on mall debt, which as we also noted yesterday in "The Next Domino To Fall: Commercial Real Estate", is fast becoming a source of potential of distress for capital markets. As the WSJ notes, losses on securitized mortgages tied to retail property rose to $1.7 billion last year from $1.3 billion in 2015, the only property segment that showed an increase in losses, according to Moody’s Investors Service. Kin Lee, senior portfolio manager at Angel Oak Capital Advisors, said his firm, which invests in commercial mortgage-backed securities, is becoming more selective in buying CMBS backed by malls. “We don’t favor deals that have too much exposure to malls,” said Mr. Lee. “These headlines haven’t been completely new.” Furthermore, as we warned one month ago in "Are CMBS Ghosts of The Past Reviving?" spreads on BBB-rated retail-heavy CMBS deals are rapidly widening, according to Trepp. Just like 10 years ago, when the "big short" was putting on the RMBX trade, and to a smaller extent, its cousin the CMBX, so now too some are starting to short CMBS through the CMBX, a CDS index which tracks the values of bonds backed by various commercial properties. They are betting against securities backed by malls in weaker locations where stores could close in quick succession, triggering debt defaults. To be sure, some - like BTIG's Sullivan - argue the mall REITs have been oversold. Defenders note that the department-store closures haven’t hit REIT-owned malls much so far, and mall REITs have been able to backfill other vacancies with new tenants, analysts said. Chicago-based GGP, for instance, has signed new tenants such as Dick’s Sporting Goods Inc., department store Belk Inc. and gym operator Life Time Fitness Inc. to replace Macy’s stores. Only a handful of the planned J.C. Penney closures are expected to occur in REIT-owned malls. * * * However, in this particular case, the bulls may be outnumbered, especially if some of the prominent shorts jump in the water smelling the REIT blood. The best example of precisely this is happening, is the latest note from one of the world's most vocal mega-bears, Horseman Capital's Russell Clark, who this week released a note titled "Mall Rats" focusing on, you guessed it, mall REITs: “Intriguingly we have started to see volumes of real estate transactions for shopping malls fall. This means that the number of transactions to buy or sell properties is beginning to decline. Last time this happened, rents began to fall a year later. His full note is below: MALL RATS Shopping mall REITS have been a fantastic investment over the years. Not only have they provided investors with large capital gains, they have also typically offered above market dividend yields. My interpretation of the REIT model is that the operator collects rents from a diverse number of retailers. This is then passed on to the end investors after costs and financing. The REIT manager reduces risk by diversifying the retailers paying rent, and by also spreading the risk geographically. If the REIT manager can acquire more real estate assets at a yield higher than what it needs to pay out as dividend yield, then the REIT can issue more shares and grow indefinitely. Mall REITs have generally done well, except during the financial crisis. However, it seems to me that North America could well have too many shopping malls. On a per capita basis, the US has twice the space of Australia and 5 times that in the UK. One source of REITs revenue growth comes from acquiring more malls. Intriguingly we have started to see volumes of real estate transactions for shopping malls fall. This means that the number of transactions to buy or sell properties is beginning to decline. Last time this happened, rents began to fall a year later. Perhaps it’s a sign that buyers believe rents have some downside risk? Many people in the market are aware of the problems that the large department stores in the US are currently facing, and their resultant plans to retrench. This affects two of the largest shopping mall REITs that have the department stores as tenants. The reality is that the shopping mall REITs charge extremely low rents to the department stores. The large shopping malls use the department stores to lure traffic, and then make their money from higher rents charged to speciality retailers. Often the per square foot rent of the specialty retailer can be 30 times or higher that paid by the anchor tenant. Looking at the top 2 shopping mall operators, they disclose their top rent payers. Recent share prices performance of 8 shared tenants has been poor, and management commentary has seeming implied that they may also be looking to reduce store count. It should also be pointed out that many tenants have a clause in their lease to reduce rents should an anchor close a store. Thus, even though the loss of rent due to an anchor closing is minimal, the knock-on effect of reduced rents from the remaining tenants is a serious concern for the REITs. One of the other problems that shopping mall REITs face is that the size that the large department stores take up is more than 400 million square feet. The largest and most successfully specialty retailer is TJ Maxx which currently has 100 million square feet. It is difficult to see any single retailer quickly being able to fill the space made vacant by department store closures. Back in the lead up to the financial crisis we found that the share prices of REITs and their tenants were very closely related. Recently we have seen tenants share price weaken again, but REITS remain relatively strong. Investors are advised to exercise caution with the shopping mall REITs
В четверг, 2 марта, в Соединенных Штатах Америки ожидается публикация одного отслеживаемого нами показателя. Так, в 16:30 МСК выйдут еженедельные данные по рынку труда. Ожидается, что количество первичных обращений за пособиями по безработице снизилось за неделю с 244 тыс до 243 тыс. Из второстепенных показателей можно отметить индекс деловой активности в Нью-Йорке за февраль и недельное изменение запасов природного газа. В календаре корпоративных отчетностей на сегодня значатся: Abercrombie & Fitch, Barnes & Noble, Joy Global, Kroger, Sears Holdings (до открытия); Autodesk, Costco Wholesale (после закрытия). После закрытия состоится выступление главы ФРБ Кливленда Лоретты Местер. К 14:30 МСК фьючерсы на индекс S&P 500 торгуются с понижением на 0,17%.