The Retail Apocalypse Arriveth

Well, well… The S&P 500 is down about half a percent as we write this morning. Which isn’t much in the scheme of things… but it’s the biggest daily drop in a month.

The “retail apocalypse” of which we’ve been saying much this month kicked into high gear this morning. Macy’s (M) delivered its quarterly numbers… and they deposited many feces on the bed.

Earnings were 24 cents a share… way off the “expert consensus” calling for 35 cents a share. Revenue also missed. And same-store sales are down 4.6%, compared with the typical Wall Street analyst’s guess of 2.7%.

At last check, Macy’s shares are down 14% on the day.

But wait! There’s more!

Kohl’s (KSS) delivered an earnings “beat”… but missed on revenue. And same-store sales dropped 2.7%, compared with expectations of 1.2%.

Gone are the days when Kohl’s could thrive in all economic conditions: In good times, working-class shoppers feeling flush could step up from K-Mart to Kohl’s. In bad times, higher-end shoppers feeling strapped would step down from fancy department stores and go slumming at Kohl’s.

But no more. KSS shares are down 6.5% at last check.

Meanwhile on the luxury side of things, Nordstrom (JWN) reports after the close today. But in light of the other retail numbers, traders aren’t waiting to hit the sell button: Nordstrom shares are down more than 6.5%.

The news from Macy’s bodes very ill for the rest of the “Big Six” chain department stores.

These are the ones that historically have served as “anchor stores” at the malls. They’re the ones most vulnerable to the phenomenon our David Stockman’s been describing here in recent days — the overbuilding of retail space in America, fueled by decades of EZ money from the Federal Reserve. As with the housing crisis a decade ago, it’s all coming home to roost now.

A revealing metric in this regard is “sales productivity” — or sales per square foot. In 2007, J.C. Penney’s sales productivity was $250 per square foot. By 2014, that had fallen to $150… and that was before JCP really hit the skids.

“One recent analysis,” says David, “showed that the Big Six anchors would have to close more than 800 stores just to get back to the sales productivity levels of 2006. In fact, J.C. Penney, Sears and Macy’s have announced nearly that many closings during the last few months.

Retail Big Six Stores Closing in 2017

“Mall anchors are challenged by an oversupply of retail space as customers migrate toward online shopping,” David continues — “a trend that has been compounded by loss of business to fast-fashion retailers like H&M and off-price stores such as T.J. Maxx.

“As a result, one leading expert believes that about 400 of the country’s 1,100 enclosed malls will fail in the upcoming years. Of those that remain, he predicts that about 250 — or 20% — will thrive and the rest will continue to struggle with shrinking traffic and sales volumes.”

David Stockman, the former Reagan Budget Director, says that there will be more nasty earnings surprises to come.

“Retail Train Wreck Continues as Sales Plunge at Macy’s, Kohl’s,” says a headline from CNN.

Meanwhile, Reuters says, “Wall Street on Track to Record Worst Day in One Month.”

David Stockman says the story’s just getting started.

Best regards,

Dave Gonigam
for The Daily Reckoning

The Daily Reckoning