Is Retail Dead ?
Let’s put it this way – Don’t bother going out and buying a suit for the funeral !
Many retail stocks have been hit hard lately and there is no doubt that many retailers have been struggling lately. But dead? No, far from it. I believe we are witnessing a shift in the way retailers will do business in the future. Business as usual what not be the way to go and those retailers that cannot adjust will of course disappear. But just because some retailers will not be able to transition and and adapt does not mean all retailers will go under.
In the past few decades retailers have overbuilt. They have too many physical retail locations and shopping centers as a result have become cookie cutter factories. You can go to many fair sized city in the United States and see what looks like carbon copy shopping centers. In fact, I often wonder why bother at all when traveling because the shopping experience is the same every where I go – so why shop when traveling because its not like I will find anything new. And this brings me to another point – They all seem to carry the exact same merchandise and products! What is the point?
The fact is the physical retail experience has become very boring ! This is part of the reason people are choosing to shop online – major retailers have managed to push out the mom and pop shops but they have at the same time made the shopping experience mundane. I get so frustrated now with shopping in stores. As an example I recently took my two teenage children to a Nike shoe store to buy them shoes. We could not find any shoes they liked in both of their sizes and the store seemed to have a very limited selection for their age group. We ended up leaving the store frustrated at the whole experience. Where did they end up buying shoes ? Online of course!
So retail stores have become “cookie cutters” of each other and carry limited stocked items. The retail rental space has become very high on a per square foot basis, Insurance costs have sky rocketed, Employee wages and benefits have also increased and let’s don’t forget the governments hand in their pockets. Add all this to the competition from other retailers , and the online retail communities , which are not only U.S. based any longer but international retailers are now competing as well , and we have one tough environment for retailers.
Many retailers will adapt and overcome these obstacles. In addition many more will thrive. A large retailer closing stores or going out of business will create opportunities for many more. As a result the Shopping Centers and Malls will continue to thrive and service their local communities. That is why I believe that the REITs that service the retail communities are trading at bargain prices right now. As typical with investors, they tend to over react to most situations and sell off stocks with a herd mentality.
Personally I intend to stay away from the direct retailer stocks like Macys , Kohls, JC Penny, Walmart, and all the others as I believe the environment will be risky for the foreseeable future. What I do like is the REITs that own and operate the shopping centers and malls. Most of them operate as triple net plays allowing them to pass on expenses directly to the retailers and one stores demise can open up opportunity for the REITs as they increase the rents for the replacement tenants.
In my opinion now is the time to buy these stocks on sale. I personally have added shares of Whitestone REIT (WSR) to my holdings and have others in consideration.
Just a few that might be worth taking a look at are :
- Kimco Realty Corporation (KIM) – 5.71% Yield
- Whitestone REIT (WSR) – 9.47%
- Federal Realty Investment Trust (FRT) – 3.13%
- Tanger Factory Outlet Centers (SKT) – 5.16%
- Simon Property Group (SPG) – 4.45%
The time to consider stocks is not at the point when the most people are buying but when large numbers of people are panicking and selling.
As always these are not recommendations to purchase stocks. Always do your own due diligence before making investments.
UPDATE: As of this morning (May 16, 2017) the retail REITs index has dropped another one and a half percent making these stocks even more attractive. It’s these type of sell offs that as an investor I really like because it presents even higher yields and even great upside on the equity price.
Your thoughts and comments are welcome !