Retailers are reeling — from falling sales, online competition, and slowing consumer spending. And if I’m right, the sector’s pain signifies big trouble for the economy. Ditto for Real Estate Investment Trusts, or REITs.
Start with Gap Stores (GPS). The iconic retailer has more than 3,700 stores around the world, including Gap, Banana Republic, and Old Navy. But it’s experiencing a downward spiral, warning earlier this week that its earnings would miss forecasts. Same-store sales collapsed 7% in the most recent quarter, compared with analyst expectations for a rise of 1.1%.
Debt analysts at Fitch Ratings responded by cutting GPS’ debt rating into junk territory. Stock analysts also slashed their ratings on GPS shares across the board, sending the stock down to a four-year low.
Then on Wednesday, department store chain Macy’s (M) dropped yet another bomb on Wall Street. The struggling chain said it would miss both sales and earnings targets in the current quarter and year. Same-stores sales dropped more than 6%, compared with analyst expectations for a drop of around 3.5%. That sent the stock careening to its lowest level in four years, too.
Other retailers like Fossil Group (FOSL), Kohl’s (KSS), and Nordstrom (JWN) also got dragged down by the selling, as well as their own sales concerns. Don’t forget that Aeropostale (AROPQ) just filed for bankruptcy a few days ago, joining other specialty retailers like Pac-Sun (PSUNQ) and Quiksilver (ZQK) that already did.
As a matter of fact, the chart of the diversified SPDR S&P Retail ETF (XRT) looks awfully suspect. It hit a two-and-a-half-month low today, and appears headed back to the panic lows from early 2016.
|I’ve been warning about lousy retail sales for months.|
The good news for you? This should be no surprise whatsoever, and you shouldn’t own any of these turkeys. That’s because I’ve been warning about lousy retail sales for months here in Money and Markets. In fact, I said in February that:
“The U.S. economy and U.S. consumer aren’t in very good shape … and that the trend is worsening with time. Tighter credit conditions, weaker consumer sentiment, rising costs for non-optional expenses, like healthcare, housing and more, are really starting to bite.
“So it’s not that Amazon (AMZN) is stealing a greater share of the retail pie. It’s that the overall pie is shrinking! If I’m right, it’s going to be another serious negative for the stock market to confront.”
The American growth engine is powered by consumer spending. If spending is weakening, that will put the domestic economy on increasingly shaky ground.
The retail problems should cause trouble for another group of stocks: REITs. Everyone has fallen in love with them because they feature generous dividend yields in today’s low-rate world. But unlike consumer staples or utilities, whose revenue and cash flow are more stable, REITs are much more economically sensitive. After all, they pay their dividends with income that comes in from rents.
What do you think is going to happen as more retailers go broke, close stores, and stop making their lease payments? Traditional malls and strip shopping centers will see vacancy rates rise, cash flow drop, and rental concessions increase. That will only add to the pressure on REITs already coming from the multifamily sector. Conditions in the apartment market are deteriorating fast because of massive oversupply, weakening demand, and slumping rent growth.
Bottom line: Make sure you continue to stay away from retail stocks. And take advantage of Wall Street’s willful blindness on REITs to get out of those overvalued stocks at today’s still-attractive prices.
Until next time,
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