Homepage / Technology / How the death of US retail could be the next big short
Amazon says this Prime Day was its biggest shopping event ever Kudlow says President Trump is 'so dissatisfied' with China trade talks that he is keeping the pressure on As stocks regain their footing, an ominous warning looms Goldman Sachs downgrades Clorox to sell, says valuation is 'unsustainably high' How Satya Nadella has spurred a tripling of Microsoft's stock price in just over four years Kudlow says economic growth could top 4% for 'a quarter or two,' more tax cuts could be coming The one chart that explains Netflix’s stunning comeback US housing starts plunge 12% in June to a nine-month low Aerospace titans Boeing and Airbus top $110 billion in orders at Farnborough Target uses Prime Day to its advantage, logging its 'biggest online shopping day' so far this year Billionaire Marc Lasry sees bitcoin reaching up to $40,000 as it becomes more mainstream and easier to trade These are the 10 US airports where you're most likely to be hacked Amazon shares slightly higher as investors await Prime Day results Wreck of Russian warship found, believed to hold gold worth $130 billion A bullish ‘phenomenon’ in bond market is weeks away from fading, top credit strategist says Stocks making the biggest moves premarket: MS, GOOGL, TXN, UAL, NFLX & more Twitter shares up 50% since late April means most upside priced in, analyst says in downgrade EU fines Google $5 billion over Android antitrust abuse Mortgage applications fall 2.5% as buyers struggle to find affordable homes America may not have the tools to counter the next financial crisis, warn Bernanke, Geithner and Paulson Investors are getting spooked as the risk of a no-deal Brexit rises EU expected to fine Google $5 billion over Android antitrust abuse Ex-FBI chief James Comey urges Americans to vote for Democrats in midterm elections Elon Musk apologizes to British cave diver following baseless 'pedo guy' claim Disney, Comcast and Fox: All you need to know about one of the biggest media battles ever Xiaomi shares notch new high after Hong Kong, mainland China stock exchanges reach agreement The trade war is complicating China's efforts to fix its economy European markets set for a strong open amid earnings; Google in focus Hedge fund billionaire Einhorn places sixth in major poker tournament The biggest spender of political ads on Facebook? President Trump Asian stocks poised to gain after Fed's Powell gives upbeat comments; dollar firmer Stocks are setting up to break to new highs Not all FAANG stocks are created equal EU ruling may be too little, too late to stop Google's mobile dominance Cramer explains how Netflix's stock managed to taper its drop after disappointing on earnings Airbnb condemns New York City's 'bellhop politics,' threatens legal retaliation Amazon sellers say they were unfairly suspended right before Prime Day, and now have two bad choices Investor explains why 'duller' tech stocks can have better returns than 'high-flying' tech names Elon Musk is 'thin-skinned and short-tempered,' says tech VC Texas Instruments CEO Brian Crutcher resigns for violating code of conduct Google Cloud Platform fixes issues that took down Spotify, Snapchat and other popular sites Uber exec: We want to become the 'one stop' transportation app 'What a dumb hearing,' says Democrat as Congress grills tech companies on conservative bias Amazon shares rebound, report says Prime Day sales jumped 89 percent in first 12 hours of the event How to put your medical history on your iPhone in less than 5 minutes Investment chief: Watch these two big events in 2018 Even with Netflix slowing, the market rally is likely not over Cramer: Netflix subscriber weakness debunks the 'sky's the limit' theory on the stock Netflix is looking at watch time as a new area of growth, but the competition is stiff Why Nobel laureate Richard Thaler follows Warren Buffett's advice to avoid bitcoin Rolls-Royce is developing tiny 'cockroach' robots to crawl in and fix airplane engines After Netflix plunge, Wall Street analysts forecast just tame returns ahead for the once high-flying FANG group Roku shares rise after analyst raises streaming video company's price target due to customer growth China is investing 9 times more into Europe than into North America, report reveals Amazon says US Prime Day sales 'so far bigger than ever' as glitch is resolved Netflix is on pace for its worst day in two years US lumber producers see huge opportunity, rush to expand San Francisco to consider tax on companies to help homeless Homebuilder sentiment, still high, stalls as tariffs, labor and land drive up costs Powell backs more rate hikes as economy growing 'considerably stronger' Netflix history is filled with big stock declines – like today – followed by bigger rebounds Intel shares get downgraded by Evercore ISI due to rising competition from Nvidia, AMD Petco aims to reinvent the pet store with something you can't buy online Genetic testing is coming of age, but for consumers it's buyer beware Tech 'FAANG' was the most-crowded trade in the world heading into the Netflix implosion, survey shows Netflix weak subscriber growth may indicate a 'maturity wall' that could whack the stock even more: Analyst This chart may be predicting the bull market's demise Wall Street says Netflix's stock plunge is a ‘compelling’ buying opportunity because the streaming giant ‘never misses twice’ Tesla sinks after Musk tweets, again Boeing announces new division devoted to flying taxis Stocks making the biggest move premarket: NFLX, UNH, GS, AMZN, WMT & more Deutsche Bank downgrades Netflix, but says big subscriber miss is not 'thesis changing' IBM is experimenting with a cryptocurrency that’s pegged to the US dollar North Korea and Zimbabwe: A friendship explained Virgin Galactic spinoff Orbit to launch rockets from the UK with space deal Artificial intelligence will create more jobs than it destroys? That’s what PwC says ‘Treasonous’ Trump and ‘Putin’s poodle:' Scathing headlines follow the Trump-Putin summit China’s fintech companies offer ‘enormous’ opportunity, investment manager says Trump's performance at summit with Putin was 'unprecedented,' experts say Walmart and Microsoft link up on cloud technology as they both battle Amazon European stocks seen mixed amid earnings; Fed’s Powell to address Congress How I knew I should quit my day job and run my start-up full-time: Viral website founder China's stocks have been trounced, but the trade war may ultimately be good news for those shares Billionaire tech investor Peter Thiel bets on crypto start-up Block.one Asian shares subdued open after mixed close on Wall Street; energy stocks under pressure Amazon cloud hits snags after Amazon Prime Day downtime Netflix isn't doomed by one quarter unless people start questioning the long-term investor thesis Tech stocks set to sink on Tuesday after rough evening for ‘FANG’ Netflix plummets after missing big on subscriber growth This wristband lets humans control machines with their minds The U.S. has a rocky history convincing Russia to extradite computer criminals Amazon suffers glitches at the start of Prime Day Jeff Bezos is now the richest man in modern history 'The United States has been foolish': Read Trump and Putin's full exchange Goldman Sachs recommends these 5 highly profitable companies — including Nvidia — to combat rising inflation Goldman Sachs releases 'tactical' stock picks for this earnings season Three red flags for Netflix ahead of its earnings report The bond market may be raising recession fears, but don't expect one anytime soon Cramer: Banks are 'making fortunes' but are still as hated as they were during the financial crisis Putin told Trump at summit: Russia never meddled in US election


How the death of US retail could be the next big short

For a small band of hedge funds that slapped down prescient bets against the tottering US housing market, the financial crisis was the biggest money-spinner in generations. Some investors think they have now found the next “big short” in the retail industry.

The reshaping of how Americans shop by the internet is accelerating. The US retail industry faces a growing headache, with 10 companies pushed into bankruptcy already in 2017, according to Standard & Poor’s. Even Sears, a once mighty department store chain founded in 1886, is now tottering.

“We think the magnitude of this short could be bigger than subprime,” says Stephen Ketchum, the head of Sound Point Capital, a hedge fund that manages more than $13bn in assets. “Go to the Amazon website and type in ‘batteries’. What you see is just the tip of the future iceberg. And retail is the Titanic.”

Receive 4 weeks of unlimited digital access to the Financial Times for just $1.

The relentless rise of online shopping is posing a huge challenge for US shopping malls, developers and investors who own shares and bonds in household names. The core problem is a dramatic overbuilding of stores, coupled with the rise of ecommerce, Richard Hayne, Urban Outfitters’ chief executive, told analysts on a conference call earlier this year. “This created a bubble, and like housing, that bubble has now burst,” Mr Hayne said. “We are seeing the results: Doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.”

The impact is far-reaching. Credit Suisse estimates that as many as 8,640 stores with 147m square feet of retailing space could close down just this year — surpassing the level of closures after the financial crisis and dotcom bust. The downturn is hitting the largely healthy US labour market — the retail industry has lost an average of 9,000 jobs a month this year, according to the Bureau of Labor Statistics, compared with average monthly job gains of 17,000 last year.

Shuttered shopping malls and struggling department stores are the most visible example of what analysts have termed “the Amazon effect”, as spending migrates from bricks-and-mortar shops to the online realm dominated by the likes of Jeff Bezos‘s internet retailing giant. But it is also likely just the first stage, with some investors predicting that every corner of commerce is about to experience a painful burst of creative destruction as shoppers migrate online.

“There’s a big shakeout in how people consume goods,” says another big hedge fund manager. “It will have a massive economic impact . . . It is already a bad year, and it feels like it has the momentum to become something bigger.”

When Amazon swooped for the Whole Foods grocery chain this summer, it sent shivers down the spines of many investors. Traditional supermarket chains like Walmart and Kroger in the US, Tesco and Sainsbury in the UK and Carrefour and Metro in Europe were long thought to be relatively insulated from the online retailing wave, but their shares all slumped as investors reappraised that assessment in the wake of Amazon’s acquisition.

“Buying patterns are permanently changing,” says Wayne Wicker, chief investment officer of ICMA-RC, a pension fund for US public sector workers. “These things creep up on you, and suddenly you realise there’s trouble. That’s when people panic and run for the exit.”

So far the S&P 500‘s retailing index has held its head above water, climbing more than 10 per cent this year. But the only reason it is not doing much worse is because Amazon makes up a third of the gauge, and its shares have climbed more than 33 per cent already this year. The online giant’s shares are now worth $477bn, more than half as much as the rest of the listed US retailing world. Without Amazon, the index’s market capitalisation has largely flatlined since early 2015.

“So far, groceries have been very resilient to digitisation, but Amazon is trying to systematically break this consumer dependence: shift staples to digital; create a network of small brick-and-mortar stores to service perishables,” says Trevor Noren, analyst at 13D Research. “If Amazon or someone else succeeds, it will eliminate one of the primary reasons people still go to shopping centres.”

Shopping malls and department stores are the biggest losers from this shift, and the pain is worsened by a flurry of construction in the decades leading up to the financial crisis. PwC estimates that there is about 24 sq ft of retailing floorspace per person in the US, compared with 11 sq ft in Australia — the only other developed country that comes close to the US — and between 2 and 5 sq ft in Europe.

Bank of America Merrill Lynch estimates that US retail floorspace is down 10 per cent since 2010, while department store sales are down 18 per cent. “The department store industry I think is largely in a death spiral,” Bill Ackman, the Pershing Square hedge fund manager, said at a conference in May.

The pace is accelerating. So far this year, the shuttering of 76m sq ft of retail space has been announced, according to CoStar, a data provider — almost as much as the eight-year high of 82.6m during the whole of 2016. PwC estimates that at least 90m sq ft will be closed this year, but Credit Suisse estimates that based on current trends it could be a record-smashing 147m sq ft.

“It’s a slower bleed than the housing crash, but that was a cyclical story. Retail is different because it’s slower, but secular,” says Nadeem Meghji, head of North American real estate at Blackstone, the world’s biggest investor in property.

The concern is that this could cause collateral damage to the broader commercial and even residential real estate market, as shuttered shops, malls and stores are redeveloped for other uses. Jay Sellick, senior managing director of 13D, predicts this will be the “next stage of this crisis”, weighing on the $4tn worth of mortgages in the commercial real estate market, which already “appears overbuilt and over-indebted”.

Yet the decline of the iconic American shopping mall is only the most visible aspect of a far broader revolution that is upending the entire world of commerce. Online-only purchases account for just over 10 per cent of all US retail sales, but the share is growing quickly, says Credit Suisse. Across the board, consumption patterns are evolving, especially among younger Americans who are much more comfortable with an online-only experience than their parents.

Even dedicated turnround investors are sitting on their hands. Private equity firms and hedge funds that specialise in corporate upheaval — so-called distressed debt investors that snap up struggling companies, taking them over in a restructuring and hopefully engineering a recovery — are largely shunning traditional retail, wary of the immense challenges, according to restructuring advisers.

Victor Khosla, founder and senior managing partner of Strategic Value Partners, a $6bn distressed debt hedge fund, says the list of troubled retailers his firm now monitors is “extraordinarily long”, but he is staying well away.

“Trying to figure out the bottom is hard. We have spent a lot of energy understanding these businesses, and have concluded that the vast majority of them are uninvestable,” he says. “Many of these were great businesses at some point in time, but the internet and changing consumer habits have destroyed them.”

Some retail chief executives who have managed to build relatively successful digital operations complain that their share prices are too low and are unfairly punished for the broader industry malaise. That may be, but “I remember hearing homebuilders say the same in 2006”, one hedge fund manager recalls, pointing out that even for traditional retailers the shift will be painful, given that people tend to make less impulsive purchases on the internet.

“A lot of incidental consumption doesn’t happen online. Most people don’t wander the digital aisles,” he says. A dollar spent in a shop in practice only translates to 80-90 cents online, even though costs are lower. Data released on Friday showed that core retail sales in June fell for a second month running for the first time since early 2015.

Some investors are unconvinced that traditional players have what it takes to compete with their online rivals, given the latter’s advantages in technology and data. “[In] whatever area they are competing for shopping dollars, it is like the old-world retailers are bringing a knife to the fight, and the tech companies are rocking a heat-seeking missile,” says another hedge fund manager.

Still, hedge fund managers stress that the “retail big short” is going to be fundamentally different from the housing downturn — far more halting and slow — which makes it hard to carry out anything other than tactical, opportunistic trades. Moreover, it will not entail the global, systemic dangers that the subprime-triggered financial crisis did.

Some of the damage is already priced into the bonds and stocks of retail companies, and the slowness of the shakeout makes it tricky and expensive to make outright bearish wagers on what some analysts are calling a “retail-mageddon”.

“Because it is such a slow bleed, it is important to get both the direction and the timing right,” Mr Ketchum says. “We are focused on shorting the companies that have reached a tipping point for one reason or another.”

Some hedge fund managers are more sceptical. David Tawil, president of Maglan Capital, says: “Although it is a good short, I don’t think that, at this point, it is the short, nor is it a big short.”

In addition, retail is not going away, and as some chains go out of business the survivors will pick up some of their customers. Most economists expect wage growth in the US labour market to pick up in the coming years, helping to support consumer spending.

“Websites cannot give you goosebumps, and that is where physical stores still have an advantage,” says Byron Carlock, head of PwC’s US real estate practice. “I don’t see consumers shying away from consuming. Good retailers will figure it out.

“But what looks like a slow-moving train wreck could speed up should American consumers — who at the moment are enjoying low interest rates and subdued unemployment — suffer another shock. For example, in the unlikely event that the Federal Reserve embarks on aggressive rate rises and pushes the economy into a recession, retailers could be hit both by higher borrowing costs and consumers tightening their belts.

The impact of the retail sector’s problems on the fabric of the US labour market is likely to be severe. Goldman Sachs estimates that ecommerce companies only require 0.9 employees per $1m of sales compared with 3.5 for a bricks-and-mortar store, and the sector is on course to lose about 100,000 jobs this year.

This may be small compared with the overall retail economy — which employs almost 16m — but it is likely only the beginning of a broad, accelerating trend as even more shopping migrates online.

“The social and economic consequences are going to be huge,” warns Mr Meghji. “It’s a massive secular change to how our economy and society operates.”

More from the Financial Times:
Blackstone warns of internet impact on US shopping malls
China’s high-speed dream hits the buffers
Venezuelans reject Maduro’s plans for new assembly

Source: Tech CNBC
How the death of US retail could be the next big short

Comments are closed.