November 17, 2017 glacierinvest

Bloomberg put this piece out last week. I think it’s really well done and quite informative. There is a lot of good information for investors in retail stocks and in retail real estate.

The term “apocalypse” feels a little excessive to me but it’s probably appropriate for what is going on in the world of retail as it appears there is going to be quite a bit of destruction of inefficient and obsolete retailers and retail real estate. However, many retailers will regroup and survive as will a lot of retail real estate. I have to believe there will be a drawn out period of reorganization and re-purposing, which is probably largely reflected in equity prices at this point. Usually outcomes in these types of scenarios aren’t as severe as the initial reactions would lead you to believe. As a former colleague of mine likes to say, in the absence of information/certainty investors automatically discount to zero.

I’m not saying it’s time to jump into any retail related stocks. I know value players have started to take sizable positions in high quality Mall REITs but that’s by no means a green light. True value investing is hard and isn’t for everyone. I think there are certain stocks where the risk-reward ratios may be decently favorable but it by no means feels like a rising tide is going to lift all boats scenario right now. Growth is probably going to be hard to come by for most companies, which means they likely won’t be too attractive relative to stocks in other sectors with more favorable growth prospects.

My take is we are looking at several years of restructuring, repurposing and downsizing. Figuring out what will work in retail will take some time but there are a lot of great minds on the product and real estate side that will likely get it figured out. I still maintain that retailer specific issues, whether business model and/or product offering, are a major factor contributing to the current situation. An excess of retail real estate in the U.S. is another major contributing factor. Combine those two factors with the continued rise of internet retail and the increased demand for experiential retail and you get what we are experiencing today.

In the end, I’m dubious that the outcome will be as bad as advertised. That said, buyer beware. It’s definitely going to be a stock-picker’s market.