Holds the stocks of companies involved with malls, shopping centers, and free standing stores. Some of the top holdings in this fund include Simon Property Group, General Growth Properties, and Kimco RealtyCorporation.
Earlier this month, we24-15 gave readers a snapshot of the US auto market on the way to explaining why it was that car sales hit a 10-year high in May. To recap:
Average loan term for new cars is now 67 months — a record.
Average loan term for used cars is now 62 months — a record.
Loans with terms from 74 to 84 months made up 30% of all new vehicle financing — a record.
Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
The average amount financed for a new vehicle was $28,711 — a record.
The average payment for new vehicles was $488 — a record.
The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.
We went on to note that despite the worrying statistics shown above, optimists (like Experian) will likely point to the fact that the average FICO score for borrowers financing new cars fell only slighty from 714 to 713 Y/Y while the same Y/Y scores for those financing used vehicles actually rose from 641 in Q1 2014 to 643 in Q1 2015. While that's all well and good, there's every indication that those figures are likely to deteriorate significantly going forward. Why? Because Wall Street's securitization machine is involved. in the consumer ABS space (which encompasses paper backed by student loans, credit cards, equipment, auto loans, and other, more esoteric types of consumer credit), auto loan-backed issuance accounts for half of the market and a quarter of auto ABS is backed by loans to subprime borrowers. Put simply, those subprime borrowers are getting subprimey-er.
In other words, the same dynamic that prevailed in the US housing market prior to the collapse is at play in the auto loan market. Lenders are competing for borrowers as lucrative securitization fees beckon, and this competition is directly responsible for loose underwriting standards. Bloomberg has more on the interplay between auto ABS issuance and “stretched” auto loan terms:
Demand for automobile debt in the U.S. is enabling lenders to make longer loans to people with spotty credit, stoking concern that car shoppers are being lulled into debt loads they won’t be able to sustain.
Of the subprime vehicle loans bundled into securities, 73 percent now exceed five years, up from 64 percent during the first three months of 2014, according to data from Citigroup Inc.
Loans as long as seven years are increasingly being put into more bonds as auto-finance companies and Wall Street banks sell the securities at the fastest pace since 2007.
The longer loans make it easier for consumers to afford rising new and used car prices by spreading out and lowering payments. While the securities are attracting plenty of buyers with high loss buffers and AAA ratings, some investors are beginning to question the wisdom of lending at terms that have never before extended beyond five years.
“Everyone has used the argument that borrowers pay car loans because they have to get to work,” said Anup Agarwal, a money manager who oversees $65 billion at Western Asset Management Co. and hasn’t bought a subprime auto bond in a year and a half. “But borrowers only pay loans if the car is working. We have not seen this cycle come through yet.”
A debt offering recently marketed by American Credit Acceptance LLC demonstrates some of the risks. About one-third of the 14,628 loans in the deal are tied to borrowers with credit ratings under 500 according to the Fair Issac Corp. grading system known as FICO -- or with no score at all, according to a prospectus obtained by Bloomberg. The company is charging interest rates of between 27 and 28 percent for almost one-third of the borrowers, and more than half of its loans exceed five years.
While cars are lasting longer than in the past, regulators are concerned that the value of the vehicles will fall faster than borrowers can pay off the debt.
“Because cars depreciate quickly, a borrower is typically upside down or underwater toward the end of a long loan term,” Date said. “If times are tough you might have to sell your car, but you’re still going to owe more than you can get through the sale.”
The riskiest auto bonds offer compensation of up to four times the coupon of comparably dated Treasuries, Bloomberg data show.
History is also on the side of investors. Since 2004, S&P has upgraded 371 classes of subprime auto deals and downgraded none, data from the company show.
Even with the built-in protections, some market participants are starting to caution that buyers may be letting down their guard for the sake of higher yields.
Auto securities sold in 2014 have registered the highest loss rate of any period since 2008, according to data from JPMorgan Chase & Co.
Some finance companies are avoiding the longer terms. Exeter Finance Corp., a Blackstone Group-backed subprime lending firm based in Irving, Texas, isn’t offering them because the risk is too high, said the firm’s treasurer, Andrew Kang.
“At this time we have no intention of going longer than 72 months,” he said. “The risk is that you extend a loan that a borrower cannot afford over its term schedule. Inching out to 75 and 84 months, I don’t think that has been tested yet.”
Here's a visual overview of the auto loan-backed ABS market (note the resurrgence of subprime as a percentage of total issuance post-2009 and the rising net loss rates):
* * *
The takeaway here is simple: under pressure to keep the US auto sales miracle alive and feed Wall Street's securitization machine (which is itself driven by demand from yield-starved investors) along the way, lenders are lowering their underwriting standards and extending loans to underqualified borrowers.
Particularly alarming is the fact that even as average loan terms hit record highs, average monthly payments are not only not falling, but are in fact also sitting at all-time highs.
Either the winter that is coming will knock the socks right out of the pre-quadruple seasonally adjusted GDP and the Gap knows all about this, or the much-hyped economic recovery, of which the US is supposedly in the 6th year now, has been nothing but a myth and a lie.
Moments ago, one of the biggest clothing retailers in the US confirmed the worst nightmares about the state of US consumer spending, when it reported that it would shut down over 25% of all of its specialty stores in the US, or about 175 (of which 140 will be shut in the current year), leaving the firm just 500 specialty locations and 300 outlet stores. And, in addition to the thousands of job terminations these closures would entail, the company will further fire another 250 in its headquarters.
Why? As the company admits: "To Increase Productivity and Profitability", to "deliver more consistent and compelling product collections and engage customers across all channels", because “Our customers and employees want Gap to win."
Well, maybe not the employees, and certainly not those that are not only about to get a modest severance package, but will make the BLS's role of painting the mass terminations "recovery" that much harder.
Oh well, that's what double, triple, quadruple and so on seasonal adjustments are for.
From the press release:
Gap Inc. Announces Strategic Initiatives to Increase Productivity and Profitability of Namesake Brand
Gap today announced a series of strategic actions to position Gap brand for improved business performance and build for the future. Following a thorough evaluation of its business and operations, Gap plans to right-size its specialty store fleet and streamline its headquarter workforce, primarily in North America, as part of the comprehensive effort to deliver more consistent and compelling product collections and engage customers across all channels.
“Returning Gap brand to growth has been the top priority since my appointment four months ago – and Jeff and his team bring a sense of urgency to this work,” said Art Peck, Gap Inc. chief executive officer. “Customers are rapidly changing how they shop today, and these moves will help get Gap back to where we know it deserves to be in the eyes of consumers.”
In order to drive productivity improvements and showcase the brand in the most successful locations, Gap will close about 175 specialty stores in North America over the next few years, with about 140 closures occurring this fiscal year. These changes will not impact Gap Outlet and Gap Factory Stores. In parallel with these moves, the brand will close a limited number of European stores during this period.
Following the fleet optimization effort, the brand will continue to serve North American customers through about 800 Gap stores – comprised of 500 Gap specialty locations and 300 Gap outlet stores – as well as its dynamic online channels, better reflecting the way today’s customers shop across specialty, outlet and online. The brand will continue to have a robust global presence in more than 50 countries and with about 1,600 company-operated and franchise locations globally.
“Our customers and employees want Gap to win,” said Jeff Kirwan, global president for Gap. “We’re focused on offering consistent, on-brand product collections and enhancing the customer experience across all of our channels, including a smaller, more vibrant fleet of stores."
Since Kirwan was appointed to lead Gap in December 2014, he’s rebuilt the leadership team and implemented an aggressive agenda designed to strengthen the brand and successfully compete on the global stage. The team is driving towards a clear, on-brand product aesthetic framework focused on optimistic and elevated American style, while also rebuilding the brand’s product operating model to increase speed, predictability and responsiveness, and enable greater competitiveness.
To speed decision making and responsiveness, Kirwan also announced decisions meant to align Gap’s organization in support of its new product operating model. This will result in the reduction of the brand’s headquarter workforce, primarily in North America, by approximately 250 roles during fiscal year 2015.
Kirwan added, “These decisions are very difficult, knowing they will affect a number of our valued employees, but we are confident they are necessary to help create a winning future for our employees, our customers and our shareholders.”
The company estimates an annualized sales loss of approximately $300 million associated with the store closures. Additionally, the company estimates one-time costs primarily associated with these actions to be in the range of approximately $140 million to $160 million, of which about $55 million to $75 million is non-cash. These costs are expected to be recognized primarily in the second quarter of fiscal year 2015 and include lease buyouts, asset impairments primarily related to the Gap fleet, inventory and fabric write-offs, and employee related costs associated with organizational changes.
The company estimates annualized savings from these actions to be approximately $25 million, beginning in 2016.
Excluding the estimated pre-tax costs of $140 million to $160 million referenced above, or approximately $0.21 to $0.24 per diluted share, the company is reaffirming its guidance for fiscal year 2015 to be in the range of $2.75 to $2.80. This guidance is provided to enhance visibility into the company’s expectations regarding its ongoing business excluding the Gap brand optimization effort.
Last week the government reported personal income and spending for April. After months of blaming non-existent consumer spending on cold weather, shockingly occurring during the Winter, the captured mainstream media pundits, Ivy League educated Wall Street economist lackeys, and Keynesian loving money printers at the Fed have run out of propaganda to explain why Americans are not spending money they don’t have. The corporate mainstream media is now visibly angry with the American people for not doing what the Ivy League propagated Keynesian academic models say they should be doing.
The ultimate mouthpiece for the banking cabal, Jon Hilsenrath, who does the bidding of the Federal Reserve at the Rupert Murdoch owned Wall Street Journal, wrote an arrogant, condescending, putrid diatribe, directed at the middle class victims of Wall Street banker criminality and Federal Reserve acquiescence to the vested corporate interests that run this country. Here are the more disgusting portions of his denunciation of the formerly middle class working people of America.
We know you experienced a terrible shock when Lehman Brothers collapsed in 2008 and your employer responded by firing you.
We also know you shouldn’t have taken out that large second mortgage during the housing boom to fix up your kitchen with granite counter-tops.
You should feel lucky you’re not a Greek consumer.
Fed officials want to start raising the cost of your borrowing because they worry they’ve been giving you a free ride for too long with zero interest rates.
We listen to Fed officials all of the time here at The Wall Street Journal, and they just can’t figure you out.
Please let us know the problem.
The Wall Street Journal was swamped with thousands of angry responses from irate real people living in the real world, not the elite, QE enriched, oligarchs living in Manhattan penthouses, mansions on the Hamptons, or luxury condos in Washington, D.C. Hilsenrath presumes to know how the average American has been impacted by the criminal actions of sycophantic Ivy League educated central bankers and their avaricious Wall Street owners.
He thinks millions of Americans losing their jobs and their homes due to the largest control fraud in financial history is fodder for a tongue in cheek harangue, blaming the victims for the crime. Hilsenrath reveals he is nothing but a Fed flunky who is fed whatever message they want the plebs to hear. His job is to obscure, obfuscate, spread disinformation, and launch Fed trial balloons to see whether the ignorant masses are still asleep. The Fed and their owners can’t understand why their propaganda hasn’t convinced the peasantry to follow orders.
A system built upon an exponential increase in debt, cannot be sustained if the masses stop buying Range Rovers, McMansions, stainless steel appliances, 72 inch HDTVs, iGadgets, bling, and boob jobs on credit. His letter to America reeks of desperation. The Fed and their minions have used every play in their Keynesian monetary playbook, and are losing the game in a blowout. With a deflationary depression beginning to accelerate, they have no game.
Despairing mothers, unemployed fathers, impoverished grandmothers, and indebted young people are supposed to feel lucky because they aren’t starving to death like the wretched Greeks. We do have one thing in common with the Greeks. We’ve both been screwed over by bankers and corrupt politicians. Did you know you’ve been given a free ride by your friends at the Federal Reserve? Did you know that zero interest rates and $3.5 trillion of Quantitative Easing (aka money printing) were implemented to benefit you? According to Hilsenrath, the Fed lending money at 0.25% to their Wall Street bank owners, who then allow you to borrow from them at 15% on your credit card, represents a free ride for you. Are the subprime auto loan borrowers, who account for 30% of all auto sales, paying 13% interest getting a free ride?
Hilsenrath is purposefully lying. Bernanke and Yellen have been saying they want to start raising interest rates for the last four years. Remember the 6.5% unemployment rate bogey set by Bernanke in January 2013? Unemployment dropped below 6.5% in early 2014 on its way to 5.5% today. Did they raise rates? In 2013 we had two consecutive quarters of 4% GDP growth, with no Fed rate increase. In 2014 we had two consecutive quarters of 4.8% GDP growth, with no Fed rate increase. We have added ten million jobs and the stock market has tripled since 2009, with no Fed rate increase.
We are supposedly in the sixth year of an economic recovery and the Fed is still keeping the discount rate at a Lehman “world is ending” emergency level of .25%. Six years after the last recession the discount rate was 5.25%. The last time the unemployment rate was this low the discount rate was 4%. The only ones getting a free ride from the Fed’s zero interest rate policy and QE to infinity have been Wall Street banks, the .1% who live off the carcasses of the dying middle class, zombie corporations who should have gone bankrupt, and politicians who keep running up the national debt with no consequences – YET. The Federal Reserve is a blood sucking leech on the ass of America. Their cure has been far worse than the original illness – Wall Street criminality. In fact, their cure has been to reward the Wall Street criminals while spreading cancer to the working class and euthanizing senior citizens.
Hisenrath and his puppet masters at the Fed can’t figure you out. For decades you have followed their orders and bought Chinese produced shit with one of your 13 credit cards. The Bernays’ propaganda playbook has produced wins for the ruling class since the early 1980’s. Their record is 864 – 0 versus the working class. Our entire warped economic system since the 1980’s has been dependent upon an exponential increase in debt peddled by Wall Street to citizens, government and corporations to give the appearance of a growing, healthy economy.
An economy built upon the consumption of iGadgets, Cheetos, meat lovers stuffed crust pizza, and slave labor produced Chinese baubles, along with the production of enough arms to blow up the world ten times over, and the doling out of trillions to the non-productive class, is doomed to fail. Maybe I can explain the situation in such a way that even an Ivy League educated central banker or a Wall Street Journal faux journalist will understand.
Maybe Jon and his Fed cronies could be enlightened by a look at the American consumer before the bubble boys (Greenspan, Bernanke) and gals (Yellen) at the Fed, along with the corporate fascist takeover of our political system, and the propaganda spewing corporate media monopolies, combined to deform our financial and economic system for their sole enrichment. The lack of spending by consumers might just be due to some of the following factors:
Back in 1980 income meant money earned through working, investing, and saving. The amount of personal income made up of wages totaled 60% in 1980. Today it totals 51%. Interest earned on savings accounted for 14% in 1980. Today it accounts for 8%, as the Fed has punished seniors and savers with negative real interest rates. Since 2009 the Fed has robbed over $1 trillion in interest income from seniors and savers with their zero interest rate policy and handed it to the Wall Street banking cabal. Bernanke didn’t just throw seniors under the bus, he ran them over, backed up over them, and ran them over again.
In a shocking development, government welfare transfers accounted for 11% of total personal income in 1980 and have risen to 17% today. Only the government could classify money which has been absconded at gunpoint from working Americans in the form of taxes and redistributed back to other Americans as welfare payments, as personal income. If you take money from your left pocket and put it in your right pocket, is that income? The replacement of wages and interest by welfare redistribution payments has not benefited society whatsoever.
In 1980 consumer credit outstanding as a percentage of personal income totaled 15%. Today it totals 22%, an all-time high. It is higher than the bubble peak in 2007-2008. Real per capita disposable income has only risen by 88% over the last 35 years. Meanwhile, real per capita consumer debt has risen by 288%. Wages and earnings from saving have been replaced by debt. The propagandists for consumerism have convinced the ignorant masses to spend money they don’t have, while pretending to be wealthier and successful. Consumer debt currently stands at a towering all-time high of $3.4 trillion, almost ten times the $350 billion level in 1980. Hilsenrath and the Fed are upset with you because credit card debt still lingers $122 billion, or 12% below 2008 levels. It has forced them to dole out $900 billion of government controlled subprime debt to University of Phoenix wannabes and any deadbeat that can scratch an X on an auto loan application. The U.S. economic system is like a Great White Shark that must keep swimming or it will die. The Federal Reserve run U.S. economic system must keep generating debt or it will die. They are growing desperate and you are not following orders.
Before the grand debt delusion overtook the populace, they were saving 11% of their disposable personal income. In 1980, Depression era adults still believed in saving for large purchases such as a house, car, appliance or home improvement. The young adult Boomers didn’t have the same experiential deterrent. They were convinced by the Wall Street debt peddlers, Madison Avenue maggots, and corrupt politicians that saving was for suckers. Live for today, for tomorrow may never come. Well tomorrow did come. Boomers are entering their retirement years with $12,000 in retirement savings, while still in debt up to their eyeballs. There have been 10,000 Boomers turning 65 every day since 2010. This will continue unabated through 2029. This demographic certainty was already depressing consumer spending, as this age demographic spends far less than 25 to 54 year olds. Factor in the pitiful amount of savings and you have an ongoing spending implosion.
The propaganda machine was so well oiled, the savings rate actually reached 1.9% in 2005, as the masses all believed they would live luxurious retirements off their home equity windfall. How’d that delusion work out? The current level of 5.6% is seen as troublesome by the powers that be. They cannot accept the crazy concept of saving and investment when their entire warped paradigm is built upon borrowing and consumption. Banks don’t make money when you save and they despise when you use cash. They can’t sustain their opulent lifestyles without their 3% VIG on every electronic transaction, 15% compounded interest on the $5,000 average credit card balance, billions in late fees for being one day late with your payment, $4 on every ATM transaction, and the myriad of other fees and surcharges designed to bilk you and keep you from saving. The saving rate will continue to climb as people have no choice to make up for years of living beyond their means.
Hilsenrath is willfully ignorant as he pretends to not understand why the American people will not or cannot accelerate their spending. It is really quite simple. Even a PhD should be able to understand. Real median household income was $52,300 in 1989. Real median household income today is $51,939. The median household has made no economic advancement in the last quarter of a century. And this is using the manipulated lower CPI figure. Using a true inflation rate would show a dramatic decline over the last 25 years. There has been virtually no wage growth during this supposed six year recovery. The industrial base of the country has been gutted, except for the production of arms to blow up brown people in the Middle East. Young people have $1.3 trillion of student loan debt weighing them like an anchor, and those Ruby Tuesday waitress jobs and Home Depot cashier jobs aren’t going to cut it.
So we have the demographic dilemma of aging, under-saved, over-indebted Boomers who are being forced to spend less. We have an over-indebted, under-employed youth who don’t have anything to spend. And lastly we have the 25 to 54 year old age bracket who should be in their prime earning and spending years who are still 4 million jobs short of where they were in 2007 before the Fed induced financial collapse. The only age bracket to gain jobs since the crisis has been 55 to 69, as they have been forced to work to make up for their lost interest income. The only people making job gains are those least likely to spend.
The spending crescendo in 2004 through 2007 was fueled by the Greenspan housing bubble and the $3 trillion of mortgage equity withdrawal used to buy BMWs, in-ground Olympic size pools, Jacuzzis, vacations to Tahiti, home theaters, granite countertops, stainless steel appliances, and boob jobs, by delusional, apparently brain dead Americans who fell for the Bernaysian propaganda spewed by the Wall Street criminal class, hook line and sinker. The majority of shell shocked underwater home owners have been unable to sell since the housing crash. A 35% price decline will do that. The Fed has created $3.5 trillion out of thin air, more than quadrupled their balance sheet with toxic mortgages from Wall Street, artificially suppressed interest rates to bring mortgage rates to record lows, and was a co-conspirator along with Fannie, Freddie, FHA, and Wall Street hedge funds (Blackrock) to delay foreclosure sales and pump home prices with their buy and rent scheme. The result has been unaffordably high prices, mortgage applications at 1997 levels (60% below 2005 levels), first time buyers at a record low, and a non-existent housing recovery – despite the MSM propaganda saying otherwise.
The last data point which might help the math challenged Hilsenrath understand why you aren’t spending is total U.S. vehicle miles driven. The chart below shows a relentless climb from 1982 through to the 2008 collapse. It coincides with the debt fueled consumption orgy over this same time frame. The unrelenting expansion of retail outlets and importing of cheap Chinese crap required a lot of trucks to haul the crap. It required a lot of trips to the mall in the minivans and SUVs by soccer moms living in our suburban sprawl paradise. In case you hadn’t noticed, the fastest growing retailer in the U.S. since 2008 has been Space Available. The well run retailers like Home Depot and Wal-Mart saw the writing on the wall and stopped expanding. The badly run retailers like Sears and JC Penney have been closing hundreds of stores. And the really badly run retailers like Radio Shack have gone bankrupt. Vehicle miles have essentially flat-lined for the last six years as retailers are closing more stores than they are opening, job growth has been non-existent and commerce within the U.S. is stagnant. If we were experiencing a real economic recovery, vehicle miles would be surging.
So this concludes my little tutorial for the Ivy League educated central bankers at the Fed and the Wall Street Journal Fed mouthpiece – Jon “I don’t understand” Hilsenrath. I know it is difficult for people to understand something when their paycheck depends upon them not understanding it, but this is pretty simple stuff. Pompous, arrogant, egocentric assholes who write for the Wall Street Journal, run JP Morgan, or control monetary policy for the world, know exactly what they have done, what they are doing, and who is benefiting. We all know the benefits of ZIRP and QE have gone only to the .1% who run the show. We know income inequality is at all-time highs. We know TPP will be passed, because the corporate fascists control the purse strings of our political class. We know the status quo will be maintained at all costs by the Deep State.
We know mega-corporations continue to ship jobs overseas and replace us with cheap foreign labor. We know the current administration actively encourages illegals to pour over our borders, swamp our social safety net, increase crime, and take jobs from Americans. We know the government has us under mass surveillance and will not hesitate to use all of that military equipment in the hands of local police against us. The will of the people is nothing but an irritant to those in power. They might not have us figured out, but a growing number of critical thinking, increasingly pissed off people, have them figured out. The debt expansion days are numbered. A deflationary depression is in the offing. The coming civil strife, financial panic, war, and overthrow of the existing social order will rival the three previous tumultuous upheavals in U.S. history – American Revolution, Civil War, Great Depression/World War II. Fourth Turnings are a bitch.
Hopefully I’ve explained the situation to the satisfaction of Jon and Janet.The mood in this country is darkening by the day. There is no going back to the good old days of yesteryear. They are long gone. No amount of debt issuance and propaganda is going to work. The system is overloaded. The people are angry. The politicians are captured. The banking elite are ransacking the nation for every last dime they can get their grubby little hands on. The military industrial complex is itching for war with Russia and China. The world hates us. If you can’t see it coming, you are either blind, dumb, or an Ivy League educated economist. So go out and spend to make your slave owners happy.
There was some confusion why following yesterday's stronger than expected retail sales, which broke a 4-month series of disappointing data and which according to most economists were good enough to bring forward the Fed's first rate hike in a trader generation, bond yields tumbled.
Well, in the aftermath of the whole "double seasonal-adjustment" travesty, in which even the BEA admitted any bad economic data (read Q1 GDP) will be "massaged" enough until it becomes good under the "scientific" pretext of "residual seasonality", and following the suggestion of Dynamika Capital's Alexander Giryavets, we decided to take a look at not seasonally adjusted retail sales.
We found something interesting.
The thing about retail sales is that while they are supposed to smooth out month-to-month changes in any given data series, they should be virtually identical on a annual, year-over-year basis. After all the same "seasonal" adjustment that was applicable this May, was applicable last May, the May before it, and so on, unless of course, there was some massive, climatic or otherwise shift to the underlying reality.
To the best of our knowledge there wasn't.
And indeed, when looking at the annual change in headline retail sales data we find that, as expected, the seasonally-adjusted (blue) and unadjusted (red)retail sales series are almost identical...
... but not quite.
If one zooms in on the most recent data, one finds something surprising: a substantial rebound in SA retail sales, which according to the Dept. of Commerce rose 2.7% while unadjusted retail sales rose by just 1.0%,the worst montly print in over two years and hardly inspiring confidence that the economy is strong enough for the Fed to engage in a rate hike.
To isolate the problem we decided to look at only the annual (YoY) change in May data. The chart below shows the surprising finding: while every year for the past 4 years the Unadjusted May data was equal to or stronger than the Adjusted retail sales print, in May of 2015 this was reversed, and quite substantially.
To show just how much of an outlier May 2015 was compared to May in prior years, here is the seasonal "adjustment ratio" for the month of May for every year from 2008 to 2015, by which we define the ratio of "seasonally adjusted" to "unadjusted" retail sales. Spotting the outlier should be easy enough.
So, our question: while we know that the US Department of Truth, err. Commerce, will soon adjust GDP data for all weak quarters higher just so the narrative of a rebounding economy isn't lost when one looks at the actual fact, has this "residual seasonality" adjustment already been applied to retail sales? Because we fail to understand just why the seasonal adjustment to May retail data should be as profound as shown above.
Ten days ago we reported with much amusement that the "turnaround story" that is McDonalds has decided to pull the oldest trick in the collapsing business book, and would stop reporting its monthly comparable sales starting with the month of June.
Moments ago MCD reported its May comp store sales which confirmed what we cynically noted is the reason for the data halt, namely that no matter what it does, MCD simply can not "turnaround" its foundering business, and after a drop of -0.6% in April, May global comp sales dropped once again, this time by -0.3%. This was the 12th consecutive month of global comparable store declines. Next month will be the 13th. There won't be a 14th.
The good news for Europe is that with a jump of 2.3% in May comp store sales, the European recovery is clearly taking hold and the tens of millions of unemployed youths can finally afford a 99 cent meal.
But perhaps the biggest irony is that the drop was driven not by Europe or Asia, where one would expect the strong dollar to be wreaking havoc on US-denominated sales, but in the US, where same store sales dropped -2.2%, more than the -1.7% expected.
We wonder if the decline in USD-denominated US sales will also gain be blamed on the strength of the US currency?
Finally, as we have said all along, it really is time for MCD's new boss Steve Easterbrook to start wearing many more pieces of flair or he will join his predecessor Don Thompson in "retiring" prematurely any month now.
06-13-15
SII
US IND
CONS
RETAIL - May Consumer Spending Has Biggest Annual Drop Since Great Financial Crisis
It may not have the clout of the official monthly Dept of Commerce Retail Sales report not due out for two more weeks, but in retrospect considering how many credibility issues with seasonal adjustments government data has had in recent months, the Gallup Consumer Spending report may have become far more realistic than official government data.
In which case all hope of a Q2 GDP rebound abandon, ye who read this: after a strong April, in which the average consumer reported a daily spend of $91, $3 higher than a year prior, and the highest spending month since before the great financial crisis...
... in May things quickly deteriorated, with average daily spending in April and May unchanged at $91, despite a consistent jump the just concluded month of May in recent years, and despite the substantial jump in gas prices, which in May 2008 led to a $28 jump in average spending, and $10 in 2014.
Worse, on an apples to apples, year-over-year basis, average spending in May of 2015 was $7 less than 2014, and nearly identical to 2013, when the US unemployment rate was nearly 3% higher, and the economy was supposedly sputtering badly enough for the Fed to launch QE3.
Finally, as the chart below shows, this was the biggest month of May consumer spending drop in nominal dollar terms since the 2008 financial crisis.
This is what Gallup does to calculate average spending:
Gallup's daily spending measure asks Americans to estimate
the total amount they spent "yesterday" in restaurants, gas stations,
stores or online -- not counting home, vehicle or other major purchases,
or normal monthly bills -- to provide an indication of Americans'
discretionary spending. The May 2015 average is based on Gallup Daily
tracking interviews with more than 15,000 U.S. adults.
What it found is that last May's spending level has largely gone unmatched since, except in
December 2014, when spending also averaged $98. However, Americans
typically spend more in December because of holiday shopping. Still, the
latest monthly figure is higher than what Americans spent each May from
2009 through 2013. By contrast, Americans spent an average of $114 in
May 2008 -- prior to the global financial meltdown later that year that
both deepened and prolonged the U.S. recession that started in late
2007.
But the punchline is that while the long awaited, and now long forgotten "gas savings" from the drop in crude, which in california is rapidly approaching an unchanged Y/Y print, never materialized in a jump in actual spending as today's latest disappointing consumer spending data confirms, now that gas prices are rising consumer are retrenching even more!
Quote Gallup:
The stagnation in Americans' spending may be related to gas prices, which continued to rise last month -- though they are expected to plateau and eventually dip as the year progresses. Confidence in the economy also dipped, with lower weekly measures in May than in April. Gallup has found that Americans' perceptions of the economy are related to gas prices, and what they pay at the pump certainly influences how much they spend overall and how much they have left for discretionary purchases after they take care of the basics. If gas prices do stabilize, this may enable Americans to spend more on other things.
While Gallup's historical spending averages have generally been higher in the spring and summer months than in the winter, spending usually dips or stays flat in June compared with May. With consumer spending the major driver of U.S. economic growth, healthier spending in June could help keep the economy on a strong track toward recovery after a disappointing first quarter that saw the economy shrink.
Or, should May's weaker than expected trend persist into June, then one can forget all about a second quarter GDP rebound. In fact, while Q1 GDP was saved to the tune of 2% from a surge of inventory accumulation, in Q2 this won't repeat, and in the meantime, personal spending is starting off quite poorly and on the wrong foot. Should there be a comparable Y/Y decline in spending in June as well, it is virtually assured that Q2 GDP will also be negative.
Which would mean that the US has officially entered recession just as the Fed is timing its first rate hike in one trading generation.
06-06-15
SII
US IND
CONS
RETAIL - Factory Orders Contract
06-06-15
SII
US IND
CONS
RETAIL - McDonalds
What do you do when month after month you have nothing but bad data to report, such as in this case McDonalds with its weekly comparable store sales shown on the ugly charts below?
Simple: you have two choice - you either seasonally adjust the data (or in the case of US GDP, double-seasonally adjust it), or if that is not possible since unlike US GDP, your numbers are at least somewhat indicative of underlying reality, you stop reporting them altogether.
That's what McDonalds just did.
MCDONALD'S LAST REPORTING OF MONTHLY COMPS WILL BE FOR JUNE
MCDONALD'S SAYS JUNE SAME-STORE SALES WILL BE REPORTED WITH 2Q
From Bloomberg:
McDonald’s Corp. plans to stop reporting monthly same-store sales results. The company will provide same-store sales for June with its second-quarter earnings report, then cease providing the data, Heidi Barker, a spokeswoman, said in an e-mail.
And to think the new boss - who we hope did not promise the board anything about "transparency and accountability" - could have avoided all of this if, as we suggested, he had worn at least 37 piece of flair.
Last month, courtesy of Andrew Zatlin’s Vice Index, we flagged the disturbing Q1 rise in traveling hookers. We call the trend disturbing not because we have a prima facie inclination to look with disdain upon all things escort-related but because, as Zatlin notes, when escorts are forced to take their show on the road it means the phones have stopped ringing locally, and if you’re inclined to believe that trends in all-cash businesses are a good leading indicator for trends in consumer spending in general, depressed spending on gambling, alcohol, and other “fun” things does not bode well for economic growth going forward. As you can see from the graph below, The Vice Index hit its lowest level in more than a year in March:
Given this — and given the fact that whatever discretionary income Americans do have is apparently being chanelled into TD Ameritrade accounts — it should perhaps come as no surprise that gaming revenue on the Las Vegas strip fell nearly 10% in March after sliding 4.4% in February.
Meanwhile, the situation in Macau continues to deteriorate at a rather remarkable pace, as gaming revenue fell 39% last month, the eleventh consecutive monthly decline which looks good only in comparison to March’s 39.4% decline and February’s 49% drop. Of course in the deluded minds of China’s millions of newly-minted day traders, a 39% decline represents “stabilization” and so, as Bloomberg reports, casino shares rose in Hong Kong on the news:
Wynn Macau Ltd. rose 4.8 percent to HK$16.54 by the close of trading, the biggest gain since April 9. Sands China Ltd. gained 3.3 percent and Galaxy Entertainment Group Ltd. advanced 3.1 percent, while the Hang Seng Index was little changed.
Gross gaming revenue in the world’s largest gambling hub fell 39 percent to 19.2 billion patacas ($2.4 billion) last month, meeting a median estimate of a 39 percent decline from eight analysts surveyed by Bloomberg. The drop has slowed for a second consecutive month.
“Investors are really just focused on trying to find stabilization or a bottoming,” said Vitaly Umansky, an analyst at Sanford Bernstein. “As long as things aren’t deteriorating, things seemed to be fairly consistent, that’s probably a decent sign from an investor’s perspective.”
Right. As long as things “aren’t deteriorating” and revenues are only falling by 40% that’s a “decent sign.” Unfortunately, some industry heavyweights don’t seem to share the view that the market is set to turn the corner any time soon. Take Steve Wynn for instance who, on the way to slashing WYNN’s dividend by nearly 70%, had the following to say about the company’s outlook for Vegas and Macau and about the so-called "recovery" in the US economy:
Well, the numbers in the first quarter are out. I think the trends in Macau were beginning to be very visible in the fourth quarter, but our hopes for an improvement in the Chinese New Year turned out to be incorrect. And the repositioning of the market and the degradation of the volumes in VIP, have continued even into April. Most of my remarks now are going to include what we’ve seen in the first four months, not just the first three months, because the trends that were clear in January, February and March have continued into April and as we look at the whole year in Las Vegas and Macau, certain simple truths emerge.
It is no secret that there’s been a change in mainland China in attitudes towards a number of things that have impacted Macau. That has not – nothing has changed since this all began last October. And the depression of the VIP market continues…
So as we look backwards for the fourth quarter and especially during the last four months, and understand what’s happening, both in Las Vegas because of the Asian impact on Baccarat, and we look back and then we extrapolate and try predict the future, or at least understand what most likely will be the future, it is foolhardily and immature and unsophisticated to issue dividends on borrowed money. We only distribute money that’s free cash flow based upon our earnings that trail…
If you were to ask me, since we’re making forward-looking statements, what will the second quarter look like in Las Vegas? Weak. Do you hear me? Weak. So I’m trying to lower expectations here. This notion of a big recovery is a complete dream. I don’t think Las Vegas is experiencing a great recovery. I think it’s still very patchy and I think that that’s probably our non-casino revenue in the first quarter was flat. I’d be thrilled if it was flat in the second quarter.
Besides being a stinging indictment of the pitiable state of the US economy, that’s a fairly unambiguous message from someone who knows a thing or two about this industry and even as the likes of Deutsche Bank called the Las Vegas commentary “overdone”, the bank had the following to say about the outlook for the gaming industry:
[With] market trends showing very limited signs of improving, and more headwinds than tail winds on the horizon (potential visitor traffic curbs, a full smoking ban, and uncertainty around table allocations), visibility is worse than ever in our view.
Despite the malaise and despite the fact that, as we noted earlier this year, Beijing’s corruption crackdown has likely motivated China's habitual (and filthy rich) gamblers to move permanently away from the dark-lit Macau gambling parlors to multiple-monitor lit trading desks, there will always, always be BTFDers — especially when you’re talking about Hong Kong-listed shares. With that in mind, we'll close with this quote provided to Reuters by Matthew Ossolinski, chairman of Ossolinski Holdings:
"What is the worst that could happen? [Gaming] stocks go down before they go up. But they will go up. We are preparing for a 100 percent increase in shares within the next three years."
In what may be the most cryptic press release from Walmart yet, the company just issued an 8-K which consisted all of 5 bullet points, a few charts, and precious little else. Perhaps the reason for the pithy transmission is that WMT had nothing good to say: Revenue declined from $115 billion to $114.8 billion, missing expectations of a jump to $116.2 billion, EPS also missed at $1.03, vs $1.05 expected, operating income tumbled 8.3% from $6.2 billion to $5.7 billion, and finally comp store sales also missed at 1.0%, below the 1.5% expected. With these results, anyone would be short and to the point.
After previously providing extensive explanations for why the massive Apple Sachs Industrial Member member missed, this quarter the firm almost didn't even bother to scapegoat. This is what it said:
"Consolidated operating income declined 8.3%, due to impacts from currency fluctuations and investments in associate wages & training and e-commerce."
As if it didn't even bother to put in the effort to find a reason for the 8.3% plunge in operating income.
Finally, even the company's guidance was berely there. From Charles Holley, Executive Vice President and CFO, Wal-Mart Stores, Inc.
"Based on our views of the global macro-economic environment, and assuming currency exchange rates remain at current levels, we expect second quarter fiscal 2016 earnings per share to range between $1.06 and $1.18. Our second quarter guidance includes the impact of approximately $0.04 per share from our previously announced investments in both U.S. associate wages and training, as well as $0.04 per share from currency."
Wall Street currently expects a Q2 EPS print of $1.17.
And with this latest bellwether miss, expect the S&P to close at a recorder high today.
If March was supposed to herald at least the beginning of the anticipated yearly rebound, April put that idea to rest. In terms of retail sales, one of the most important and largest segments of “demand”, April’s figures were mostly the worst of the recovery and some of the worst in the entire series – “beating” out February in every category. Even including autos, total retail sales gained just 0.72% in April more than suggesting there really is a major economic problem brewing.
Among the other segments, the figures are getting truly dire (all numbers are year-over-year not-adjusted): retail & food sales ex autos -0.35%; retail trade incl. autos –0.26%; just retail ex food ex autos -1.80%; general merchandise stores -1.52%. While these numbers are severe on their own, this is a contractionary environment that now stretches at least four months and in some cases five. Recessions are not spontaneous events but rather the accumulation of negative pressures and results. There can be no doubt that consumers in the US right at this moment are acting out of recessionary impulses.
The accumulation of the past four months is indistinguishable from results of the past two recessions (apart from the collapse after Lehman):
The negative Y/Y changes, which are actually quite rare, place April 2015 among the very worst economic months of the entire series dating back to 1992.
In addition to registering these atrocious results, the trajectory continues on in the “wrong” direction. In other words, not only is the US economy accumulating contraction the outlook isn’t indicative of that changing anytime soon. Households are pulling back, staying back and doing so rather quickly.
We have pushed way past last year’s “aberration” in the polar vortices and way past even the immediate aftermath of the 2012 slowdown (which hit in the also-snowy winter of 2013). You can make the argument that the full US economy is not in recession but it is now exceedingly difficult to sustain any position that doesn’t put the consumer already there. With capital goods spending equally unstable and sinking, as well as the “dollar” yet having companies cut back in all major costs, it is very troubling that these highly negative estimates have occurred without the much larger and heavier recessionary forces that are still likely as downstream events; those would include the as-yet oil sector retrenchment.
Furthermore, there is still the massive inventory overhang that has been accumulated in the last year or so likely upon the word of economists that what has already occurred was impossible. That places even further emphasis on the downsides still coming up as that inventory will slow the entire supply chain liquidations first. In other words, if this is a consumer recession taking shape then the full economy is just now seeing the leading edge with the worst, potentially, yet to come. The world that Janet Yellen was talking about late last year is completely gone and there isn’t much left of even hope to salvage it; though I suspect they will keep trying to the last inappropriate data point.
I wondered a few months back what it might look like if a recession were to form without ever having gained a recovery from the last one – consumers already in the bunker. The initial results of that are not encouraging as the economy has been serially overstated anyway and the real recession hammer has yet to strike. Maybe the bond market is correct and that another QE is coming, but at this point all that may do is as the last few did, namely put off the inevitable without any real economic upside; and that is the best case. While that may be great for stocks (though it may not be) I suspect the expiration date on QE and monetary magic may be rapidly approaching. It already has for “demand.”
05-23-15
SII
US IND
CONS
Death of the American middle class and its insatiable consumption levels.
Is a 70% Consumption Economy the Peak?
Households are borrowing in attempt to maintain consumption
Insufficent as 6K store closing announced @LanceRoberts
I want to hone in on the category of consumer spending that is first to go away so that we may capture the first signals of a consumer spending pull back. A good proxy for this is the Johnson Redbook Chain Store yoy sales. This captures the consumer spending taking place at large department stores (Macy’s, Kohls, Walmart, Kmart, etc). This is going to be where the real discretionary retail spending takes place, as in do I have enough space on my credit card for that sassy blue dress and groceries or just groceries? And don’t think that is just a theatrical example. I remember the days of asking myself those very same questions (ok maybe not the blue dress but you get the idea). That is just real life here in the US (and Canada for that matter).
So this category does well to target the true discretionary spending. Now if the chart trend appears strong or even flat then we can be confident consumers have not yet pulled back on even the most discretionary of items and so any variations in the overall spending patterns are likely not worrisome. However, if we see a sharp pull back here it is indicative that a downturn in the overall spending trend is likely substantive rather than nuance. Let’s have a look.
What we find is that over the past 6 months we had a tremendous drop in true discretionary consumer spending. Within the overall downtrend we do see a bit of a rally in February but quite ominously that rally failed and the bottom absolutely fell out. Again the importance is it confirms the fundamental theory that consumer spending is showing the initial signs of a severe pull back. A worrying signal to be certain as we would expect this pull back to begin impacting other areas of consumer spending. The reason is that American consumers typically do not voluntarily pull back like that on spending but do so because they have run out of credit. And if credit is running thin it will surely be felt in all spending.
But one chart doesn’t a story tell, and so we must continue in our quest to determine whether or not we are on the precipice of another crisis. Another early indicator I like to look at is wholesale trade. If any sector has its finger on the pulse of the consumer it’s the wholesale/distribution sector. These guys are constantly talking to retailers to gauge where the consumer is at any given time. So let’s have a look to see if wholesale trade is giving out any clues.
Currently we find ourselves on the bottom of the latest peak to trough draw down which has given up more than $100B in wholesale trade. Interestingly we should note that the last time we saw a $100B peak to trough draw down was between June 2008 and January 2009. However, while it took 7 months to give up $100B in wholesale trade during the Credit Crisis, we’ve just done it in only 4 months. What this means is that the wholesale trade sector has recognized what the chain store yoy sales chart above depicts, namely that the US consumer has begun to max out. This is further supported by the inventory levels as per the latest GDP print, which made up 1.24% of the .2% print (wait doesn’t that mean then…. yes you get it).
Over the last 5 years, over 20% of the initial gains in Retail Sales have been 'removed' by serial downward revisions in later months.
For over 65% of the time, a 'good' number prints, stocks rally, the everything-is-awesome meme is confirmed, and then a month later (or more) retail sales data is downwardly revised.
35 downward revisions and 19 upward (and 8 of last 9 downward) for an aggregate spread between initial data and revised of over 5 percentage points (of a 25% gain).
It is all too easy to point the finger at China's 'manufactured' data, but perhaps some reflection on the home truths in America is worthwhile.
If the U.S. economy really is improving, then why are big U.S. retailers permanently shutting down thousands of stores? The “retail apocalypse” that I have written about so frequently appears to be accelerating. As you will see below, major U.S. retailers have announced that they are closing more than 6,000 locations, but economic conditions in this country are still fairly stable. So if this is happening already, what are things going to look like once the next recession strikes? For a long time, I have been pointing to 2015 as a major “turning point” for the U.S. economy, and I still feel that way. And since I started The Economic Collapse Blog at the end of 2009, I have never seen as many indications that we are headed into another major economic downturn as I do right now. If retailers are closing this many stores already, what are our malls and shopping centers going to look like a few years from now?
The list below comes from information compiled by About.com, but I have only included major retailers that have announced plans to close at least 10 stores. Most of these closures will take place this year, but in some instances the closures are scheduled to be phased in over a number of years. As you can see, the number of stores that are being permanently shut down is absolutely staggering…
180 Abercrombie & Fitch (by 2015)
75 Aeropostale (through January 2015)
150 American Eagle Outfitters (through 2017)
223 Barnes & Noble (through 2023)
265 Body Central / Body Shop
66 Bottom Dollar Food
25 Build-A-Bear (through 2015)
32 C. Wonder
21 Cache
120 Chico’s (through 2017)
200 Children’s Place (through 2017)
17 Christopher & Banks
70 Coach (fiscal 2015)
70 Coco’s /Carrows
300 Deb Shops
92 Delia’s
340 Dollar Tree/Family Dollar
39 Einstein Bros. Bagels
50 Express (through 2015)
31 Frederick’s of Hollywood
50 Fresh & Easy Grocey Stores
14 Friendly’s
65 Future Shop (Best Buy Canada)
54 Golf Galaxy (by 2016)
50 Guess (through 2015)
26 Gymboree
40 JCPenney
127 Jones New York Outlet
10 Just Baked
28 Kate Spade Saturday & Jack Spade
14 Macy’s
400 Office Depot/Office Max (by 2016)
63 Pep Boys (“in the coming years”)
100 Pier One (by 2017)
20 Pick ’n Save (by 2017)
1,784 Radio Shack
13 Ruby Tuesday
77 Sears
10 SpartanNash Grocery Stores
55 Staples (2015)
133 Target, Canada (bankruptcy)
31 Tiger Direct
200 Walgreens (by 2017)
10 West Marine
338 Wet Seal
80 Wolverine World Wide (2015 – Stride Rite & Keds)
So why is this happening?
Without a doubt, Internet retailing is taking a huge toll on brick and mortar stores, and this is a trend that is not going to end any time soon.
But as Thad Beversdorf has pointed out, we have also seen a stunning decline in true discretionary consumer spending over the past six months…
What we find is that over the past 6 months we had a tremendous drop in true discretionary consumer spending. Within the overall downtrend we do see a bit of a rally in February but quite ominously that rally failed and the bottom absolutely fell out. Again the importance is it confirms the fundamental theory that consumer spending is showing the initial signs of a severe pull back. A worrying signal to be certain as we would expect this pull back to begin impacting other areas of consumer spending. The reason is that American consumers typically do not voluntarily pull back like that on spending but do so because they have run out of credit. And if credit is running thin it will surely be felt in all spending.
The truth is that middle class U.S. consumers are tapped out. Most families are just scraping by financially from month to month. For most Americans, there simply is not a whole lot of extra money left over to go shopping with these days.
In fact, at this point approximately one out of every four Americans spend at least half of their incomes just on rent…
More than one in four Americans are spending at least half of their family income on rent – leaving little money left to purchase groceries, buy clothing or put gas in the car, new figures have revealed.
A staggering 11.25 million households consume 50 percent or more of their income on housing and utilities, according to an analysis of Census data by nonprofit firm, Enterprise Community Partners.
And 1.8 million of these households spend at least 70 percent of their paychecks on rent.
The surging cost of rental housing has affected a rising number of families since the Great Recession hit in 2007. Officials define housing costs in excess of 30 percent of income as burdensome.
For decades, the U.S. economy was powered by a free spending middle class that had plenty of discretionary income to throw around. But now that the middle class is being systematically destroyed, that paradigm is changing. Americans families simply do not have the same resources that they once did, and that spells big trouble for retailers.
As you read this article, the United States still has more retail space per person than any other nation on the planet. But as stores close by the thousands, “space available” signs are going to be popping up everywhere. This is especially going to be true in poor and lower middle class neighborhoods. Especially after what we just witnessed in Baltimore, many retailers are not going to hesitate to shut down underperforming locations in impoverished areas.
And remember, the next major economic crisis has not even arrived yet. Once it does, the business environment in this country is going to change dramatically, and a few years from now America is going to look far different than it does right now.
Both Keynesians and monetarists are almost entirely focused on demand, aiming squarely at spending as the means to economic growth. Since 2008, and really 2007, the amount of “stimulus” recorded in that attempt to beckon “aggregate demand” is unlike anything ever seen before. Trillions and trillions of QE-drawn magic have been unleashed as well as government deficits as large as anything in our history (combined) year after year. And for it all there is a shocking lack of “demand” left in their wake.
I looked at final sales earlier today as one measure of private demand, but it really is consumers that seem to bearing the brunt of “whatever” adjustment is forcing retrenchment. While services spending (if the huge imputations could be called that) was lackluster, spending on total goods declined Q/Q for the first time since 2011, and was barely positive Y/Y at the lowest (by far) advance of the cycle.
Both durable and nondurable subcomponents were negative Q/Q, as auto spending subtracted from GDP in Q1, but Y/Y spending on durables was much the same weak level as has been the case since 2012. The much larger nondurable segment, however, simply collapsed as there is clearly something very wrong here. I’m sure there will be attempts to dismiss this as gasoline and such, but even if that were the case the “gas savings” should be offset by at least some spending elsewhere (as we have heard ad nauseam since that 5% GDP was first threatened).
To really grasp the scale here,
Q1 2015 was the second worst quarter in the entire data series dating back to the 1940’s!
Only the collapse during the height of financial panic in Q4 2008 was worse.
That means consumer spending on non-durable goods, accounting for a fifth of total PCE (and a much greater proportion ex-BEA imputations of phantom activity), was weaker in Q1 2015 than even Q1 2009. There is no way to explain that and maintain that the state of consumers in America is anything other than defeated, out of options and spending sources.
Consumers in America are defeated, out of options and spending sources.
I think we are starting to see the contours of Japan here, as I described yesterday how QE and its cousins do have “wealth effects”, namely redistribution that benefits only a narrow proportion of the population at the expense of everyone else. The spending figures here in America seem to suggest “at the expense of everyone else” may be reaching its point of full exhaustion. It certainly doesn’t argue for the “best jobs market in decades.”
INVENTORIES
The problem for future growth is obvious in that alone, but there is the inventory problem that has transferred to the GDP figures from monthly data points elsewhere. GDP inventory is tricky, not just for the total second derivative nature of it but also because of the volatile revisions that take place just between the updates for the same quarter. As it stands now, the amount of inventory added was the highest ever recorded, besting, barely, Q2 2010. The same has been said, however, of several of the past few quarters, so it is at this point wholly unclear just how bad the inventory mal-adjustment has been.
If there are similar revisions, downward, then Q1 GDP overall will not remain a positive figure. What is truly concerning regardless of the ultimate quarterly level is that inventory has been building for several years now without a major correction. I think that is the same interpretation as you get from analyzing the wholesale and retail inventory figures, especially in relation to the sharp declines in sales activity. The overhang here is enormous on its own scale, but that much worse as consumers are more and more appearing to have gone back “in the bunker.”
That has left GDP outside of inventory highly unstable, again confirming the view from Final Sales estimates.
INVESTMENT
Apart from inventories, US businesses don’t appear to be in a rush to invest anywhere else (aside from financial re-containment). Going back to Q1 of last year, capex in equipment has clearly tailed off or at least matched the overall instability of the wider economy. And that is all before US companies are reacting to the “dollar”, having announced future rollbacks to beneficial, productive investment as revenues and earnings turn negative for the first time since 2009.
The short version of this GDP report was that there was absolutely nothing good about it.
At least last year in Q1 economists could hold Obamacare’s introduction to the data series as something to suggest “aberration” or that it was all weather (or now that there is a bias against Q1 GDP), but this time negative focus is squarely upon consumers and the primary expression of “demand.”
For all the major policy initiatives, historic in their form and scope, they seem to have had no effect on demand apart from arguably depressing it.
McDonalds reported its latest MARCH sales numbers which were basically atrocious, worse than usual, and missed across the board.
From BBG:
MCD MARCH TOTAL COMP SALES DOWN 3.3%, EST. DOWN 2.1%
MCD MARCH US COMP SALES DOWN 3.9%, EST. DOWN 3.0%
MCD MARCH EUROPE COMP SALES DOWN 2.9%, EST. DOWN 1.6%
MCD MARCH APMEA COMP SALES DOWN 7.3%, EST. DOWN 4.5%
APRIL GLOBAL COMPARABLE SALES ARE EXPECTED TO BE NEGATIVE
At this point the operational challenges facing the company are clearly unfixable in its current iteration which is broken beyond merely a CEO switch, and not even a "buy 1 Big Mac, get 3 Big Macs (and Joseph A Banc suits) free" strategy will fix the ailing fastfood maker, whose secular collapse is best captured by the charts below.
So what does the stock do? The algos are "luvin' it."
Why? Because with the company clearly facing an operating dead end it will have no choice but to "grow" earnings through even more buybacks.
After 3 months of missed expectations and the first consecutive drop in retail sales since Lehman, retail sales rose 0.9% in March (missing expectations of +1.1%), following a revised 0.5% drop in February. While the 0.9% rise is the biggest since March last year, this is now the worst streak of missed expectations in retail sales since 2008/9. Ex-Autos, retail sales also mised expectations (rising just 0.4% vs 0.7% exp).
This is the worst March YoY growth in retail sales (control group) since 2009...
The breakdown shows what we already know: courtesy of soaring non-revolving loans, auto sales spiked in March...
... however offset by modest increases in other category, with electronics, food and online sales posting a decline. Too warm outside to spend money on Amazon.com?
And another quick look at the control group: while rising at 0.3% in March, this was below the 0.5% expected, meaning another cut to Q1 GDP, while the annual increase of 2.4% was the lowest since last February.
It's going to be harder to find a Walgreens – the drugstore chain is closing hundreds of stores in the U.S. You'll also have to look harder to find office supply sellers and some apparel sellers, too.
Walgreens Boots Alliance, the parent of the Walgreens drugstore, is just one of 14 major publicly traded companies that are reducing their store counts the quickest (even as the economy is growing?), according to a USA TODAY analysis of data from S&P Capital IQ. The closures show just how some bricks-and-mortar retailers are contracting as online shopping grows and consumers tastes shift.
Department store Sears Holdings, office supply seller Office Depot and teen apparel retailer Aeropostale reported the largest percentage declines in the number of stores in their most recently reported annual counts compared with a year ago. The analysis is limited to the stores that report annual store counts, which is most, but not all.
So far, investors don't seem to mind the strategy of cutting stores. A custom equal-weighted index of the 14 retailers closing stores the fastest is up 18% over the past year, topping the 11% gain by the entire Russell 3000 index during the same time period. Much of the outperformance has occurred this year.
Companies in the Russell 3000 closing stores the fastest
* Latest fiscal year compared with previous fiscal year, only includes retailers that reported valid store counts
Company
Symbol
% ch. # of stores *
Ch. # of stores
% ch. stock past 12 mo. *
Abercrombie & Fitch
ANF
-3.7
-37
-41
Aeropostale
ARO
-8.1
-97
-30.1
Build-A-Bear Workshop
BBW
-3.4
-14
82.5
Christopher & Banks
CBK
-8
-45
-11.8
Fred’s
FRED
-6.1
-43
-8.7
J.C. Penney
JCP
-3.8
-42
4.3
Land’s End
LE
-13.8
-40
26.4
Office Depot
ODP
-11.3
-255
118.1
Rent-A-Center
RCII
-4.6
-152
0
Roundy’s
RNDY
-9.2
-15
-16
Sears Holdings
SHLD
-29
-704
20.7
SpartanNash
SPTN
-5.8
-10
40.8
Staples
SPLS
-8.6
-186
33
Walgreens Boots Alliance
WBA
-3.2
-273
41.4
Part of the run in the shares of retailers closing stores, though, is part of what's been a surprising retail stock rally. The index of retailers closing stores is actually underperforming the 27.7% gain of the S&P 500 Retailing index. It's the smaller retailers, measured by the S&P 600 Retailing index, that are underperforming as the smaller players struggle.
Sears Holdings, the retailer that's been trying to fix itself for years, is the U.S. retailer shrinking the most. The company reported 1,725 total stores of during its fiscal year ended January 2015. That's down 29% from the 2,429 stores it reported in fiscal 2013.
Reducing stores is part of the company's strategy to regain its footing as consumers shift more spending online and prefer more specialized or larger retailers. It's the third straight year Sears reported a smaller number of stores. Sears now has less than half the number of stores it had in 2011. Unfortunately, the company's losses are only expanding.
The company reported a net loss of $1.7 billion during the fiscal year ended in January. It hasn't made money since 2011. But hey, the stock is up 21% over the past year. Maybe it should close even more stores?
Office supply stores have also been rapidly closing locations – urging customers to move their business online. Office Depot reported 255 fewer stores this past fiscal year, down 11% from the same period a year ago. Interestingly, the company's revenue rose in fiscal 2014 by 43% to $16.1 billion despite the fewer number of locations.
But its losses widened, too, hitting $354 million during the fiscal year. The company is being bought by rival Staples, which reduced its number of stores by nearly 9%.
Walgreens is the latest retailer to turn to store closings this year. But it was already reducing store counts last fiscal year ended in August 2014. The company reported 273 fewer stores in fiscal 2014, which was a reduction of 3.2%. But the stock? That's up 41% over the past year.
In a statement, McDonald's said it was "diligently working to enhance its market, simplify the menu, and implement a more locally driven organizational structure to increase relevance with consumers."
The disappointing numbers from McDonald's come as the chain faces increasing competition from restaurants like Chipotle. Last week we noted that even the Federal Reserve's fieldwork on the US economy showed the consumer shift toward outlets like Chipotle and away from chains like McDonald's.
Business Insider's Ashley Lutz reported that McDonald's CEO Don Thompson noted the shift in consumer attitudes that have plagued the company, and almost exactly described what it's like to eat at Chipotle.
"Customers want to personalize their meals with locally relevant ingredients," Thompson said. "They also want to enjoy eating in a contemporary, inviting atmosphere. And they want choices — choices in how they order, choices in what they order, and how they’re served."
When it comes to the fair value of assets, especially cash-flow generating real estate, few are as qualified to opine as the man dubbed “World’s Richest Restaurateur”, billionaire Tilman Fertitta, chairman of Landry's Restaurants which counts among its properties such brand names as Morton’s, Rainforest Cafe, Bubba Gump Shrimp Co., McCormick & Schmick’s, Saltgrass Steak House, Claim Jumper, Chart House, The Oceanaire, Mastro’s Restaurants, Vic & Anthony’s Steakhouse and many more.
Which is why his dire warning about the state of the "crazy" US real estate market, which he believes set for an imminent crash, are likely worth keeping in mind as all the panglossian permabulls see nothing but a 4th dead housing cat rebound ahead. That, and his take on inflation: "There is huge inflation going on right now."
From his interview on Bloomberg TV yesterday:
Fertitta: You are seeing crazy numbers from real estate. You are seeing it New York probably more than anywhere else; you are seeing it in Texas; you are seeing it in California. History always repeats itself, but I think it's going to repeat a little sooner this time. You see it coming.
Q. You smell a crash in the real estate market?
Fertitta: Absolutely I do. I can see it in Houston right now.
Q. It's going to be 1986 all over again?
Fertitta: Absolutely. It didn't come back in Texas until 1996, it took 10 years for it to happen in Texas.
For all those who see nothing but blue skies from falling crude prices, here is Fertitta's contrarian view: "Oil needs to hit $50/barrell for it to cause a total crash."
Oops.
Finally, for the deflation truthers, here is what Fertitta had to say about inflation:
Ben Bernanke was at Rich Handler's house and he says "there' no inflation." Well go buy something, whether at the grocery store, the drug store, the broom and mop store, and there is inflation everywhere. I have so many types of businesses so I buy everything from labor, to mops, to food, to shrimp, to stake and everything is more expensive. We are raising prices: that's why right now you pay more for an airline ticket, you pay more for a hotel room, you pay more for a pot of coffee. There is huge inflation going on right now.
Somehow we doubt he will appear on CNBC any time soon
STRATEGY - WAIT FOR THE REIT PLAY TO UNFOLD
=> SPIN-OFF
=> GOOSE STOCK + CASH
=> CASH FOR BUYBACKS
McDonald's shares are rallying on a rumor that Bill Ackman is taking a stake in the company, and pushing for the fast food giant to spin properties off into a tax-efficient real estate investment trust. The stock is up 3 percent in two days on the chatter.
The rumor revolves around the idea that Ackman would push McDonald's to create a REIT with all the property it holds. However, given that it rents out many of those properties to franchisees, performing such a maneuver could prove untenable.
NOTE: 80% of Stores Are Owned by Franchisees NOT McDonalds
3 days ago - An unconfirmed rumor is sending McDonald's shares and options soaring. ... food giant to spin properties off into a tax-efficient real estate investment trust. ... to franchisees, performing such a maneuver could prove untenable.
Dec 1, 2021 - There is however a private real estate investment trust (REIT) owned by a group of McDonald's suppliers. Originally it was six of the larger ..
Late last month, McDonald's Corp. said it has no plans to undertake a large-scale restructuring, either through a spinoff or a real estate investment trust. ... all of its profits from being a landlord and licensing its brand in return for franchise fees.
Jul 18, 2021 - Under the franchising umbrella, McDonalds has a conventional ..... Suggestions include setting up a real estate investment trust (or REIT)
Jul 23, 2021 - Oak Brook, Illinois- McDonald's Corp. leads a double life. ... company more control over its store base and franchisees than its competitors have. ... off its property holdings into a real estate investment trust (REIT) and using the ...
Morningstar Analyst On McDonald's: Activist Investor Could Push For Management ... Says A McDonald's REIT Spinoff Could Cause Disruption For Franchisees ... Equity real estate investment trust (REIT) exchange traded funds (ETFs) are an ...
Apr 28, 2021 - Real estate holdings more than side dish for fast-food giant ... off its property holdings into a real estate investment trust (REIT) and ... So, McDonald's began leasing restaurant sites and letting franchisees own the buildings.
Real Estate News - McDonald's franchise owner 'buys ...
Sep 4, 2021 - McDonald's franchise owner 'buys' Nepean Sea Road building for Rs 175 crore. Source: The ... Realty FDI players push for tax breaks in REITs
12-13-14
RETAIL CRE
RETAIL CRE - U.S. Department Stores a Wider Economic Threat
Stressed U.S. Department Stores a Wider Economic Threat 12-08-14 Bloomberg Brief
The growing popularity of
Online shopping,
The dominance of Amazon.com as a driver of retail Internet activity, and
A move to smaller brick-and-mortar stores by establishments
.. are wreaking havoc on traditional shopping patterns, collectively implying there will not be a return to the heyday of the traditional department store. This shift in consumer behavior has resulted in some profound changes in the macroeconomic landscape, particularly spending and employment.
During the Sears Holdings quarterly earnings conference call, Chief Executive Officer Ed Lampert had pretty much nothing but negative things to say. For starters, he said:
“[W]e have closed 129 stores and for the full year, we currently expect to close a total of about 235 stores. Closing a store is never an easy decision. The associates, members and partners that are the backbone of our company are the people most affected.”
Department Store Employment Bleeding More Than a Decade
Employment at department stores fell by 4,400 in November to 1.33 million — the lowest level since data on this sector was first reported in 1990. The steadfast decline supports the notion of more challenging times to come, since online retailers don’t require nearly as many employees as their physical store counterparts. Keep in mind that the single most important economic statistic is employment.
Adding further insult, retail sales at department stores (excluding leased stores) have plunged to $13.79 billion — well below the levels of more than 22 years ago when data were first compiled on this category.
Ever Lower Department Store Sales Mean Ever Fewer Jobs
This may not be as unnerving as the associated employment situation, since shoppers will find alternative outlets to purchase goods and services. If people are not shopping at department stores, though, there is a lesser need to have a physical presence. In other words, even fewer employees.
Retailer, Which Could Lose $630 Million Last Quarter, Mulls Move to Spin Off 300 Stores
When Eddie Lampert merged Sears and Kmart nine years ago, the move was heralded less for its retail prospects than as a shrewd real-estate play. Now, the hedge-fund manager has signaled he’s ready to make his move.
Sears Holdings Corp. on Friday said it was weighing whether to spin off up to 300 of its 712 company-owned stores into a separate entity in which Sears shareholders would be entitled to buy stakes. The move would raise much-needed cash for the struggling retailer, which warned it lost as much as $630 million in its most recent quarter.
It also would be a big step toward one possible endgame for the company: somehow tapping the value of its vast property holdings. Sears’s shares jumped 31% on the news to $42.81, as investors welcomed the idea of getting their hands on those assets.
“By playing the REIT card, Sears is using what the bulls on the stock have long argued is the real value in the company, its real estate,” Credit Suisse analyst Gary Balter wrote Friday in a note to clients.
Mr. Lampert, Sears’s chairman and chief executive, has been slowly dismantling the company over the past three years, spinning off business lines like Lands’ End and assets like a big stake in Sears Canada to the company’s shareholders. That has meant spinning much of the assets off to himself and his hedge fund, ESL Investments Inc. Mr. Lampert controls about 48.5% of Sears’s stock. Another 24% is controlled by investment manager Bruce Berkowitz.
Sears has long said it would look for ways to boost value for its shareholders as it works to turn around its retail operations. The company’s retail plans include a membership program called Shop Your Way and experiments like letting customers buy online and have their purchases brought out to them in their cars. A number of companies are splitting off business lines to better focus on their core operations.
Sears said Friday it expects its debt load to decline this year. The spinoffs, however, could reduce the margin of safety for creditors in an extreme, hypothetical event in which the company is liquidated to pay its debts.
Friday’s filing shows how tight things got for Sears in the quarter that ended Nov. 1 before a spate of financing moves that leaned heavily on Mr. Lampert’s hedge fund. Sears said it ended the quarter with $564 million in cash and available credit. That’s after having raised $568 million primarily from Mr. Lampert’s hedge fund in the same period, via a loan and the sale of some of the company’s stake in Sears Canada. The company also brought in another $90 million in cash during October by selling its full-line store in Cupertino, Calif.
Sears said it has as much as $212 million more coming in from the sale of its Sears Canada shares and is planning to raise another $625 million in a debt offering that will largely be covered by Mr. Lampert and his fund. All told, the company said it has moved to raise as much as $2.2 billion this year and has plenty of financial firepower and assets to cover its obligations to its creditors and vendors.
“We believe we have financial flexibility, particularly as we enter the holiday season, and we expect it will provide confidence to our vendors and other constituents that we can generate the liquidity needed to invest in our business,” spokesman Chris Brathwaite said.
Many of the assets Sears could use to raise cash are tied up in its real estate. In a securities filing Friday, the company said it is actively exploring a plan to sell 200 to 300 properties to a real-estate investment trust. Sears’s shareholders would have the right to buy stock in the REIT, giving them a direct stake in an asset that many analysts believe holds most of the company’s value.
Analysts at Credit Suisse said the company would likely put its best-performing stores into the REIT, which would need to be strong enough to stand on its own. Sears said it would lease the stores back from the REIT and continue to operate them.
Sears said the deal would produce a substantial infusion of cash. Analysts, however, are skeptical that the company can continue to raise the funds it needs unless its operations turn around. Fitch Ratings concluded in an analysis earlier this year that the company could likely only raise enough money to last through 2016 if it doesn’t stop bleeding cash.
So far, that isn’t happening. Sears said in the filing that its earnings before interest, taxes, depreciation and amortization—a rough proxy for its cash flow—would come in at a loss of at least $275 million for the quarter that just ended, better than a year earlier but still deep in the red. The company said its sales for the period, excluding newly opened or closed stores, were flat and that it would book a net loss of $590 million to $630 million.
The results would add to the $6.4 billion in red ink Sears has piled up since early 2011. The company reports earnings for the period on Dec. 4.
Sears has been working to reassure vendors that have been rattled by its financial performance ahead of the holidays, when retailers typically spend heavily securing inventory for the key selling season. Euler Hermès Group SA, which insures suppliers against nonpayment from retailers, told policyholders that it would cancel coverage on Sears last month, and vendor finance providers have tightened terms, vendors have said.
Sears’s real-estate portfolio has been a key asset for the company, which has sold stores over the years, including some of its most profitable. Sears has about 1,870 full-line and specialty stores in the U.S. operating under the Kmart and Sears names. The company said in its annual report filed in March that it owns 712 of its stores, excluding Sears Canada. Mr. Brathwaite, the spokesman, didn’t provide an updated figure.
The company said in October that it would lease space in seven stores to European fashion retailer Primark.
REITs were created by Congress decades ago as a way to let ordinary Americans buy shares in skyscrapers or shopping malls just as they could buy stock in a company or mutual fund. The basic rules are simple: REITs have to have most of their assets and income tied to real estate, and they pay no tax on income distributed to their shareholders as long as they pay out at least 90% as dividends.
KEY STATISITICS
1,870 full-line and specialty stores in the U.S. operating under the Kmart and Sears names,
Owns 712 of its stores, excluding Sears Canada,
Weighing whether to spin off up to 300 of its 712 company-owned stores into a separate entity,
11-08-14
RETIAL CRE
RETAIL CRE - Chain Store Sales Growth Worst Since 2010
If you wondered why "The Fed turned the market around" last week, acting so sensitively aggressive to act with stocks only down modestly from record highs, one glance at the following chart might answer the question. During last week's turbulence, ICSC-Goldman Chain Store Sales growth plunged to a mere 2.1% YoY - the weakest in 5 months and worst for this time of year since 2010.
Does this seem like a nation of consumers willing to take up the animal spirits, confident-about-the-future, torch of escape velocity spending from The Fed?
Charts: Bloomberg
10-25-14
RETAIL CRE
RETAIL CRE - Retail Ex-Debt Fueled Autos—-2nd Weakest Year This Century
The orthodox notion of monetary policy, following its Keynesian root, is that spending for the sake of spending will lead to a healthy economy. It does not matter, to this philosophy, how or why that spending takes place; only that it does. If, for example, the Federal Reserve can “stimulate” the interest rate sensitive sectors of the economy, like automobiles, they would fully expect that doing so will create a virtuous circle by which the economy is “pushed” thereby to bigger and better things (to its potential and even above, in the orthodox vernacular).
The funny thing about analyzing the economy in the past few years is that auto sales are indeed about the only place where monetarism is actually stamping its intended imprint. In September, according to this morning’s retail sales figures, auto sales were an astounding 13.8% above September 2013, continuing a pattern of sales that extends back for quite some time (whether or not these actual vehicles are being sold or leased).
There are, of course, a few factors included in that sales growth but there can be no doubt about the monetary effect of financialism. If economic theory is then correct, and auto sales are not some small and unimportant facet of the economy, then that robust spending should be creating widespread downstream benefits.
If the Fed has been “successful” at triggering the spending impulse, particularly with credit at the center of it, then such “pump priming” will be inarguably visible in more than just that one sector. Of course, that is not the case as we are still talking about a “recovery” almost five and a half years into one. Clearly orthodox theory about spending for the sake of spending is deficient in a great many ways, but none so clear as in retail sales.
Even with autos forming an increasing proportion of spending, overall retail sales have failed to return to anything resembling “potential”; in fact retail sales are actually moving in the “wrong” direction despite the credit injection of monetarism through that channel. This becomes very clear once you remove autos from the historical track of retail sales.
Year-to-date in 2014, despite all the promises of a rebound, overall activity is pacing less than last year, putting the economy on track for the second worst year of this millennium (a rather dubious distinction).
That YTD sales are quite far behind even 2008 shows both that auto sales were actually a primary catalyst in the Great Recession and that prices also play a significant part. That leaves the economy in 2014 as being recessionary in everything but autos, totally upending the idea that spending for the sake of spending leads to anything like a full recovery and sustainable growth.
Rather, such redistribution typically comes at the expense of something else, which is worse than it sounds (a zero sum game would be an improvement). Some of the highest growth areas, such as online shopping, have suddenly become far less so.
With no ready weather explanation to impact shopping from home, there isn’t any good excuse for seeing nonstore retail growth at about the same pace as 2008, far less than 2013. In truth, however, that is actually quite typical as the pace of spending and activity, as I said above, continues to be deficient in everything but autos.
That spending has not picked up through the entire “back to school” season is once again alarming.
Recall last year that such “unexpected” weakness led to the worst retail shopping season since 2009, and then the disaster in Q1. Apart from whatever anyone ultimately thinks about last winter, the last six months of this year are pretty similar to the same six months in 2013 heading into that holiday period.
On a nominal basis, the growth rates are almost identical but the price environment is not (this is not to say that the orthodox idea of “inflation” is present, only that price changes are likely more stinging this year than last). So where this economy in this year is supposed to be in a rebound, it isn’t even doing so at a rate that would match last year’s setup to begin with. And since the figures above include auto sales, it would be more than fair to say that both orthodox ideas about prices and generic spending holding some sort of beneficial driver in them is flat out false.
Ex autos, retail sales are barely growing at all taking into account at least some measure of price increases.
In that respect, the precipitous decline in oil and energy might provide some actual relief, as such “deflation” would be very welcome if it didn’t presage worse economic conditions. To that end, it is wages and earned income, the building blocks of actual wealth, that is conspicuously absent from all of this.
Given that the mainstream view on jobs and labor, which colors almost all commentary about the economy, does not align with what we see here, that presents a bit of a problem. It was only yesterday where San Francisco Fed President John Williams asserted a need for both more inflation and wages in order to prevent (my words) still more QE deterioration (my words), only to see oil prices tumble significantly and now retail sales generally disappoint.
That means the economy is already failing his “standards” on both accounts, as we can assume that spending and wages are closely related – deficiency in spending would reasonably suggest continued, ongoing and unsolved deficiency in wages.
Some of the reason for that is, again, the effect of redistribution which covers and misdirects a lot of economic function. What looks like growth is actually not, instead offering erosion that is not always immediately recognized. Simply deflating retail sales by the CPI (an ill-suited measurement, so make of it what you will, but there isn’t anything better) shows this in better regard.
And it is here where the trend is most concerning, particularly as it relates to the prior “cycle” peak. Despite all the monetary efforts toward “inflation” and spending via auto debt accumulation, consumer activity continues to move in the wrong direction. Maybe the middle of 2014 was better than its initial months, but that says nothing about where this is all headed; just another minor gyration on a trajectory eroded by constant appeals to redistribution.
10-25-14
RETIAL CRE
RETAIL CRE - Wal-Mart Cuts Sales Forecast by Nearly 50%
cut its sales forecast by nearly half, to just 2-3% from the prior forecast of 3-5%. From Bloomberg:
WAL-MART SEES NEXT 3 YRS PROFITS GROWTH 'SOMEWHAT SLOWER'
WAL-MART SEES FY16 SALES GORWTH 2-4%
WAL-MART SEES NEXT 3 YRS SALES TO GROW 2.5%-3.5%
Also per Bloomberg, Wal-Mart Stores Inc. plans to dramatically scale back expansion of its U.S. supercenters, while investing more in e-commerce in an effort to pursue customers where they are shopping.
So instead of growth, what will WMT spend its money on? Why making its shareholders as rich as possible, while firing thousands and converting full-time workers to part-time status:
WAL-MART SEES USING CASH ON DIVS, SHARE BUYBACKS
It's days like today when we wish Tim Geithner's hadn't "welcomed the recovery" back in August 2010.
and so... WMT stock tumbles to the lows...
10-18-14
RETAIL CRE
RETAIL CRE - Wal-Mart Cuts Sales Forecast by Nearly 50%
September retail sales were arguably the worst of the year excluding the "abortion" that was the Polar Vortex. The simple reason: after the US consumer loaded up on debt in the spring and the summer, the payback hangover has finally hit with the payment due in the mail resulting in a collapse in revolving credit as reported previously, and as the September retail sales just confirmed:
Headline retail sales: -0.3% missing expectations of a -0.1% decline, and down from the 0.6% in August
Retail sales ex-Autos -0.2%, missing expectations of a +0.2% increase, and down from +0.3%.
Retail sales ex-Autos and gas: -0.1%, missing expectations of a solid 0.4% rebound and down from 0.5%
And not just that: clothing stores dropped -1.2%, sporting goods dropped -0.1%, furniture was down -0.8%, miscellaneous retailers -0.2%, and, sorry Jeff Bezos, online "non-store retailers" such as Amazon declined -1.1%.
Because nothing screams recovery like the US consumer slamming the spending breaks just as the holiday season begins to unwind.
Finally, the all important Retail Sales Control posted its first sequential decline since unprecedented "snow in the winter" January.
And there goes the latest recovery dead cat bounce.
10-18-14
RETAIL CRE
RETAIL CRE - Capture market share and get the most out of the consumers that are in our stores
Terry Lundgren says things aren't getting any better for his customers.
Macy's CEO Terry Lundgren said he was expecting a rebound this year. It didn't happen.
"The consumer has not bounced back with the confidence that we were all looking for," Lundgren said at the Goldman Sachs Annual Retail Conference earlier this month, weeks after the company reported sluggish second-quarter sales. Lundgren also said he doesn't expect things to get better in time for the holiday season.
"The performance I think we had in the second quarter, and we expect to have in the second half, is going to be a continuation of what we’ve been able to do over the last several years — and that is to capture market share and get the most out of the consumers that are in our stores," he said.
Macy's has relied on promotions to keep customers in stores.
Lundgren's insight doesn't bode well for retailers, industry expert Robin Lewis writes on his blog.
"Forget about all of the holiday projections soon to be bandied about by the legions of economists, analysts, pundits, experts and faux experts," Lewis says. "There will be no overall market growth this holiday season."
Despite recent gains in employment, consumers don't have the spending power that they used to. Every group surveyed by the Federal Reserve Board had a lower mean income in 2013 than they did in 2007.
Mean wealth also declined for all the groups. Mean income for all groups surveyed by the Federal Reserve Board has declined since 2007.
Brands ranging from Wal-Mart to Family Dollar have seen declines in business this year.
The company blames economic strife in the middle class for the disappointing results.
But Lewis offers an interesting alternative theory — perhaps consumers won't pay full price because they've become addicted to promotions.
"With coupons, discounts, loyalty points and gifts-with-purchase more the rule than the exception today, consumers are spending less because they can," he writes.
09-27-14
RETAIL CRE
RETAIL CRE - McDonalds Has Worst Month In A Decade
The company which was once the bellwether of the US commodity eater, McDonalds, just reported global comp store sales which saw a decline of -3.7% from a year ago, its worst monthly print in a decade!
This was driven in big part by the US where comparable sales declined by 2.8% in August and have not posted a positive monthly print since December, but mostly due to Asia where as a result of the ongoing fast-food scare, comp store sales cratered by a record 14.5%.
Part of a secular shift away from made in the US fast food?
A result of an Edwards Snowden-predicated backlash against all that is US.
09-27-14
RETAIL CRE
RETAIL CRE - August Retail Sales: Post-Winter Bounce Fading Fast
The retail sales release for August was actually quite alarming. The track of sales pretty much confirms the end of the spring “bounce” that showed up in Gallup’s figures, but the real concern is that the “bounce” itself was never more than a minor adjustment; an absence of further erosion as it were. That is nothing like what is being presented widely as the economics profession still clings to the notion that growth is accelerating and the recovery is right around the corner.
If this is acceleration enough to qualify for a full recovery then definitions need as serious revisions as have been taken to GDP:
The great recovery idea in 2014 was in comparison tiny and miniature to that of even 2008, a dubious place to start. Much has been made of revisions to auto sales in the past few months, but absent the overwhelming need to lease (rather than sell) cars consumer spending shows nothing but trouble (still).
It appears that the peak of this “rebound” occurred in June, which is about the same point as established in the Gallup poll. Whatever the view of 2014’s ultimate path, August’s retail sales were among the worst of the recovery period, which is not something that should occur during unquestionable growth – to reiterate once more, a recovery or sustainable growth would see at least 6-9% Y/Y, with 6% as a floor. Instead, several of the retail figures were actually below 3% in August (and retail sales without food and ex autos was up only 1.96%, meaning negative when adjusting for prices) having not seen that 6% minimum since early 2012.
Part of the attempt to disavow the unbiased weakness in same store sales was the proposition that consumers are shopping more and more online. And that is certainly true, but not even close to the extent being labeled as an offset to what are clear deficiencies. The August estimate for retail sales among nonstore retailers was the third lowest Y/Y growth since 2009. It is dreadfully clear in wider context that even online shopping is faltering not bolstering. The linkage is obviously consumers themselves absent actual income growth, and not shifting preferences.
The wide similarities between what occurred after the housing bubble burst in 2006 and forward and the pattern of sales 2012 and forward is as compelling as it is worrisome. If you saw the results of 2006 until September 2008 you might be convinced that the economy, as represented by consumer spending, had undertaken a course of “muddle” growth – as it clearly downshifted but then entered a state of curious stasis whereby it seemed stuck without being able to enter a full upswing, but yet staying conspicuously out of contraction at the same time.
That the same pattern is being repeated is the opposite of reassuring, as what took place after 2006 was that slow erosion of the elongated business cycle, undoubtedly a direct corruption of monetarism and financialism. The elongation looks minor in comparison now only because the depth of the Great Recession has skewed our view of the entire cycle looking backward.
But there is no mistaking the similarities, especially when factoring price changes. What happened in late 2007 and early 2008 was that consumers were spending more and getting less, a form of erosion that does not fit within the comfortable confines of these kinds of results. Even deflating with the ill-suited and deficient CPI-U, however, shows very clearly this same type of slow erosion taking place in both the years immediately following 2006 and once again in the years immediately following 2012.
When factoring employment “growth”, particularly the narrative about such robust expansion in 2014 during this “rebound” period, it clearly is absent from retail sales. Even taking into consideration any lags in spending behavior, economists have been talking about better employment for well over a year, with Ben Bernanke speaking directly about employment gains in justifying tapering QE as early as May 2013. If there were actual payroll gains, there should at least be some trickle of the “pay” part rather than simple focus on the “rolls.”
If you adjust nominal retail sales by the number of payrolls estimated by the Establishment Survey, clearly there is something very wrong. Either consumers are not spending as much as they once were after obtaining a job, instead saving all this robust income generated by a strong jobs market, or the actual pay of these jobs is nothing like what it has been in “cycles” past. I find the latter far more compelling than the former, but there is also the very real possibility that such payroll expansion is simply a figment of statistical fancy and thus does not exist in the real economy.
Again, this is not a trend that suddenly appeared in 2014. Whatever lags to spending via new jobs would have been made up by now, and accelerating payrolls should show up in accelerating spending – it has decidedly not. The chart above could not be clearer on that point. As with the rest of retail sales, and the other hard dollar figures like those of Target (which are pretty much confirmed by these retail sales numbers), the most meaningful interpretation is that of the comparison with 2006-08. The economy may be seeing some positive numbers in some places, but it is certainly heading in the wrong direction albeit perhaps imperceptibly to those not conditioned to think outside rigid sensitivities of what a cycle “should” look like.
If we have learned anything in the age of activist central banks, it is that the business cycle itself has been transformed, but not to anything good or positive. Slow attrition is still attrition, and since compounding is the most powerful force in the universe, a la Einstein, the time component of this pattern is perhaps the most destructive feature of this elongation. It would be far better to undertake a short but even very sharp downturn than to exist perpetually in alternation between shallow contraction and nothing more than its absence.
09-13-14
RETAIL CRE
RETAIL CRE - Weakness reported in restaurants, food service and processors and some retailers
BLOOMBERG'S 242 PAGE ORANGE BOOK - CEO ECONOMIC COMMENTS
The tone of the economic performance was uneven, with weakness reported in restaurants, food service and processors and some retailers. A heavily promotional environment continued to keep a lid on household inflation, which has reportedly crimped margins at most consumer - sensitive companies. The bifurcation between the haves and the have - nots was prevalent in many company commentaries, notably in housing and retail.
The CEO Economic Comments Sentiment Index for the week ended Sept. 5 was 49.80, a slight decrease from the Aug. 29 reading of 50.24 . Sub - 50 readings traditionally s uggest contractionary conditions, while above - 50 is indicative of expansion.
Mindless consumers simply won’t consume as much as you used to, even with 7 year 0% interest subprime auto loans, $1 trillion of government loans to generate consumption disguised as student loans, and five credit card offers per week from the Too Big To Trust Wall Street cabal. WTF is wrong with you?
You’ve ruined the storyline used for months about horrific winter weather being the cause of non-spending in the 1st quarter. Once it stopped being cold you were supposed to spend like drunken sailors again. Just like the old days. How could you spend less in July than you did in June? You’ve only increased your spending by a mere 1.8% so far this year. With real inflation on stuff you need to live running above 5%, you’re actually spending far less than last year. No wonder confidence is skyrocketing.
A little examination into the facts behind the Commerce Department report might shed a little light on the truth about the good old American consumer:
25% of all personal income in the country is either a transfer from the government to someone or from a government job. That is $3.7 trillion taken from producers and given to takers. In 2000 this figure was 21%. The relentless increase in Social Security, Medicare, Medicaid, Veterans Benefits and Other will drive this percentage to 30% by 2020.
Real personal income (excluding government transfers) has gone up 2.6% over the last year and this is using the false CPI figure of 1.6% to reach that pitiful number. Using a true inflation figure of 5% yields lower real personal income than last year.
These numbers also fail to recognize the 2.2 million increase in population. On a per capita basis, real personal income is up 1.9% in the last year.
Senior citizens and conservative savers are earning $120 billion less today than they did seven years ago. All the grandmothers eating cat food thank you Ben and Janet. If interest rates were allowed to adjust to market levels consistent with inflation, savers would be generating $500 billion to $700 billion more interest income that could be used to propel economic growth. Per capita real disposable income was $37,582 in May of 2008. It is currently $37,553. Again, this is using the fake BLS inflation numbers, so it is even far worse.
Is it really a shocker that Americans are spending less? The MSM is so captured by the organizations providing their advertising revenue that their faux journalists don’t even attempt to examine the facts and reach logical conclusions. Their job is to cheer lead and make excuses for why their storyline of improvement never plays out. The snow storyline is history. The surge in consumer confidence storyline has been proven false by the actual spending data. Now we move onto the surge in jobs storyline that is proven false by the personal income data. I’m sure back to school season will be a resounding success. Just wait until the holidays. The consumer will surely be back this year. And the beat goes on.
The chart below tells you all you need to know about why this recovery is false. The people who are supposed to be in their peak earnings and spending years have seen their real household incomes decline dramatically since the END of the recession in June 2009. Think about that for a moment. The only people who’ve seen their real incomes rise are those who no longer spend. I wonder if it is a coincidence that government transfers since June 2009 are up 18% and the grey hairs have seen their incomes rise?
The consumer is not back. They are not coming back. The decades long debt fueled orgy of consumption has long since peaked and we are on the long road to perdition. Confidence can’t cure our disease. More debt to cure a disease caused by too much debt will not save the patient. Our disease is terminal.
09-06-14
THEME
RETAIL CRE
RETAIL CRE - Retail Sales Have not Recovered to the 2007 Pre-Recession Level
Earlier this month, Retail Sales missed expectations for the 3rd month in a row, essentially flat on the month. As Doug Short rhetorically asks 'how much insight into the US economy does the nominal retail sales report offer?' With the release of the CPI data, we can judge this in 'real' terms (adjusted for inflation and against the backdrop of our growing population)... and the picture is anything but healthy.
Via Advisor Perspectives,
The "Real" Retail Story: The Consumer Economy Remains at a Recessionary Level
How much insight into the US economy does the nominal retail sales report offer? The next chart gives us a perspective on the extent to which this indicator is skewed by inflation and population growth. The nominal sales number shows a cumulative growth of 168.0% since the beginning of this series. Adjust for population growth and the cumulative number drops to 114.7%. And when we adjust for both population growth and inflation, retail sales are up only 24.8% over the past two-plus decades. With this adjustment, we're now at a level we first reached in September 2004.
Click for a larger image
Let's continue in the same vein. The charts below give us a rather different view of the U.S. retail economy and the long-term behavior of the consumer. The sales numbers are adjusted for population growth and inflation. For the population data I've used the Bureau of Economic Analysis mid-month series available from the St. Louis FRED with a linear extrapolation for the latest month. Inflation is based on the latest Consumer Price Index. I've used the seasonally adjusted CPI as a best match for the seasonally adjusted retail sales data. The latest retail sales with the dual adjustment declined 0.1% month-over-month, and the adjusted data is only up 0.9% year-over-year.
Click for a larger image
Consider: Since January 1992, the U.S. population has grown about 25% while the dollar has lost about 42% of its purchasing power to inflation. Retail sales have been recovering since the trough in 2009. But the "real" consumer economy, adjusted for population growth is 3.9% below its all-time high in January 2006.
As I mentioned at the outset, nominal month-over-month retail sales were up 0.04%. Let's now examine Core Retail Sales, a version that excludes auto purchases.
Click for a larger image
By this analysis, adjusted Core Retail Sales were down 0.1% in July from the previous month, up only 0.4% year-over-year and down 1.9% from its record high in November 2007.
The Great Recession of the Financial Crisis is behind us, a close analysis of the adjusted data suggests that the recovery has been frustratingly slow. The reality is that, in "real" terms — adjusted for population growth and inflation — consumer sales remain below the level we saw at the peak before the last recession.
08-30-14
RETAIL CRE
RETAIL CRE - Why Retail Sales Are Faltering - 60% Of Households Have No Real Income Gains
The largest retailers in the US are struggling to get their sales up. Walmart’s US comparable-store sales were flat for the quarter ended August 1. Macy’s reported disappointing sales and cut its forecast for the year. Other retailers have chimed in, some with better results (Home Depot, for example), some with fiascos (Elizabeth Arden, with a 28% plunge in sales).
It has been tough out there. Retail sales, which make up about a third of consumer spending, were supposed to increase 0.2% in July, according to the inveterate optimists that economists have become. But that didn’t happen.
Instead, they stagnated, not adjusted for inflation, after a measly growth of 0.2% in June. But on Tuesday, the Bureau of Labor Statistics tossed the Consumer Price Index for July into the mix. With official inflation up 0.1% for the month and 2.0% for the year, it was considered “tame” by those who clamor for more inflation because it suits their own purposes, like repressing real wages. Tame or not, inflation knocked real retail sales into contraction.
And not only for July, but also for June. Doug Short of Advisor Perspectives has been tracking retail sales on an inflation-adjusted basis for years. They’ve been recovering unevenly from the Great Recession. But then something happened in November and they stalled. They dropped in December, plummeted in January – the weather was blamed liberally – then recovered some in February and March. But since April they’ve stagnated, and actually lost ground in June (-0.02%) and July (0.05%).
This chart, with sales data chained in constant July 2014 dollars, shows the recent retail reality of stagnation:
With inflation picking up earlier this year, consumers, already at their limit, got pinched, or at least the vast majority of them – those who haven’t benefited from the asset bubbles the Fed has engineered so relentlessly, those who don’t have enough money to invest in stocks or bonds, including those 60% who don’t have enough money in a bank account to pay for an “emergency expense” of $400, as the Fed itself admitted.
As if to drive home the point, the Bureau of Labor Statistics coincidentally released a study to confirm what has become the biggest economic problem in the US: those at the lower-income levels, those who’ve gotten ripped off by inflation and wages, have become terrible consumers in an economy dependent on consumer spending.
The report found that the average income of households in the top 20% grew by $8,358 per year from 2008 through 2012. But the lowest 20% saw their already minimal incomes get whittled down by $275 per year. The earnings of the second and third quintiles increased only $143 and $69 per year. So for the bottom 60% combined, there really wasn’t any improvement.
And their spending patterns? The lowest quintile cut their spending by $150 per year in total. They cut where they could: in seven categories, totaling $490 per year, mostly on apparel, entertainment, housing, and personal care. And they increased spending where they had to: in seven other categories totaling $340, topped by “cash contributions” such as alimony, “miscellaneous,” and healthcare.
This principle of cutting back where they can and spending more where they have to, in order to make their shrinking ends meet, has been dissected by Gallup, which found that consumers are “straining against rising prices on daily essentials” and are cutting back on things they want to buy [read... Gallup Slams Lid On Hopes For US Economy].
But not everyone has this problem. The top two quintiles raised their expenditures by $1,348 and $2,365 respectively. And that’s where the entire increase in consumer spending since 2008 has come from. But over the long run – and that’s now - the math just doesn’t work out.
This is the picture of that distortion, the one that is dragging down the American economy:
That was during the years when consumer spending actually increased. But for 2014, the jury is still out.
There’s no room for doubt, however. Not in the Wall Street hype machine. “We expect this slowdown to be short-lived and we look for consumer spending to rebound strongly in the coming months,” said Millan Mulraine, deputy chief economist at TD Securities.
And on the other hand, predictably: “It will provide Fed Chair Janet Yellen with some of the rationale she needs to justify why the Fed should move gradually and keep interest rates low for longer than hawks within the Fed would like,” said Diane Swonk, chief economist at Mesirow Financial.
This is the Wall Street hype machine, as reported in one breath by Reuters. Out of one side of its mouth, it propagates the myth that the crummy retails sales will “rebound strongly” to lead to that ever elusive escape velocity so that stocks could continue to soar; out of the other side of its mouth, it propagates the hope that the Fed now has an excuse to keep the Wall Street punchbowl spiked with ZIRP so that stocks could continue to soar.
You’d think the housing market is in fine shape, based on the sizzling optimism of our home builders. But now comes the bailed-out mortgage giant with a belated dose of reality. Read….. Fannie Mae Sledgehammers Housing Forecasts
08-23-14
RETAIL CRE
RETAIL CRE - WalMart Reduces Guidance - Again!
08-16-14
RETAIL CRE
RETAIL CRE - 35,000Franchise Operators in Trouble
08-16-14
RETAIL CRE
RETAIL CRE - Retail Furniture Sales Collapse
Retailers’ Results Pressured by Two-Tiered Recovery 07-18-14 Bloomberg Brief
Economic conditions may be on stable ground, but company performances aren’t exactly re- flective of that stability. Manufacturers in the ba - sic materials industry continue to register solid production activity amid increased demand. The apparel, household, and restaurant indus- tries are challenged, and some retailers voiced concern about the mid-to-lower income class and their struggles with higher-priced energy, reduced government assistance and uncom- fortably high unemployment levels. o nce again, there were an insufficient number of companies in this week’s o range Book CE o Sentiment Index to generate a meaningful reading.
LEVI STRAUSS Earnings Call 7/8/1 4: “The overall retail environment got increasingly more promotional in the second quarter of the year. This was particularly true online. Several other retailers were running 50 percent and 60 percent off events site-wide. And we were trying to manage the equity of the brand and manage our promotional cadence. And at the end of the day, we were uncompetitive.”
ALCOA [AA] Earnings Call 7/8/14: “In North America, we are believing that we would see a growth of 2 to 5 percent. This is pretty much unchanged to what we had believed before in the first quarter, now also the start of the year. We see sales are up pretty substantially, in June 1.4 million units. This is up 1 percent year-on-year and 4 percent year-to-date. There is still good pent-up demand sitting there, and that’s really important to note and reflecting how is this is already all we would see. The average fleet age is now at 11.4 years here in north America, compared to 9.4 years as a historic average.”
BOB EVANS FARMS[B o BE] Earnings Call 7/9/14: “Fiscal 2014 financial that Bob Evans Farms Inc. was adversely impacted by a number of issues, most notably, historically high sausage material costs, abnormally severe and sustained weather across the Midwest where we have the heaviest concentration of Bob Evans Restaurants; a supplier dispute that restricted sales of Bob Evans Farms Foods’ high growth refrigerated side dish product line and also complicated the segment’s plant expansion projects. And finally, cost associated with supplemental tax and internal audit staff resources, strengthening the company’s internal processes and controls over financial reporting, as well as cost related to activist stockholder responses.”
WD -40 [WDFC] Earnings Call 7/9/14: “Homecare and cleaning product sales in the U.S. increased 4 percent in the third quarter, driven by increased sales of 2000 Flushes and Spot Shot, which each increased by 5 percent. Year-to-date homecare and cleaning product sales declined 8 percent.”
FAMILY DOLLAR STORES [FD] Earnings Call 7/10/14: “While our long-term positioning and growth prospects remain strong, our results continue to be pressured by difficult competitive economic environment. o ur core low-income customers continue to deal with elevated unemployment levels, cuts to government benefits, and volatility in energy prices, and they are tightly managing their spending as a result. As expected, the environment remains very competitive as retailers look for ways to drive traffic as customers consolidate their shopping trips.”
06-26-14
RETAIL CRE
RETAIL CRE - Lower Prices & Discounting Taking a Toll
06-26-14
RETAIL CRE
RETAIL CRE -Retail Sales Weaken on Price Discounting
U.S. Retail Sales Weaken on Price Effect 07-16-14 Bloomberg Brief
Total retail sales were softer than expected, in large part because of a lower prices environment, not necessarily volumes.
Total retail sales inched up 0.2 percent in June, following a 0.3 percent increase in May. Since the retail report isn’t adjusted for inflation, it is easy to see that the price-sensitive categories had the greatest influence on the report. The 12-month trend in the headline and ex-auto sales component continues to weaken toward post-recession lows.
What we did know heading into the report was that prices were somewhat softer in June; the average daily price of retail gasoline was essentially unchanged in June at $3.667 per gallon, while the previous month averaged $3.657 per gallon – according to AAA .
Used car prices fell 0.6 percent in June, according to the Manheim used vehicles price index. The prices paid index of the ISM non-manufacturing survey was essentially unchanged at 61.2 in June from 61.4 in May.
Economists like to adjust the sales data with some measure of inflation. One way is to “deflate” the nominally-based total retail sales data using the CPI. When this year-over-year pace falls below zero it is traditionally a recession signal – the U.S. narrowly missed this in January as the pace registered a 0.21 percent increase, largely a function of the inclement weather. While there has been some recovery, the longer-term trend remains toward weaker levels.
Sales at food services and drinking places, a barometer of discretionary spending, fell 0.3 percent in June. This may also be credited to the heavy discounting and promotion amid a challenging time for this industry. Increased competition for a dwindling U.S. consumer dollar has created the most promotional environment in years. Again, this is probably a function of a weaker ability to capture pricing than a poor spending performance.
GAFO sales, an acronym for General, apparel, Furniture, and Other, (this series is delayed a month in the advance report) was running at a weak 1.7 percent in May. This closely parallels trends in the level of per capita disposable personal income. In other words, if you want to know if people are spending on major store categories, follow the money.
To be sure, the retail environment remains tenuous.
Last week, two retail establishments in the Bloomberg Orange Book of CEO Economic Comments mentioned the challenging conditions.
Family Dollar Stores CEO Howard Levine said the company’s results continue to be pressured by a difficult competitive eco- nomic environment. “Our core low-income customers continue to deal with elevated unemployment levels, cuts to government benefits, and volatility in energy prices, and they are tightly managing their spend ing as a result.”
Similarly, The Container Store Group, Inc. CEO William a . “Kip” Tindell said: “Consistent with so many of our fellow retailers, we’re experiencing a retail funk.”
06-14-14
RETAIL CRE
RETAIL CRE -Wal-Mart Looks to Grow by Embracing Smaller Stores
Retailer Tries New Business Models as Its Superstores Fall Out of Favor
Wal-Mart is in need of reinvention, as consumer habits shift and the chain's giant supercenters fall out of favor. Now the company's CEO is busy tweaking the retailer's formulas.
Just weeks after being named chief executive of the world's biggest retailer, Wal-Mart's Doug McMillon held a meeting with his top executives and gave them a homework assignment: Read "The Everything Store," the tell-all book about Amazon.com Inc. founder Jeff Bezos.
It was a surprising order from the top of a company that long ago devised one of retail's most successful formulas and milked it for nearly half a trillion dollars in sales last year. According to the book, Mr. Bezos himself studied Wal-Mart as he built Amazon, internalizing its credo of acting fast and experimenting often.
But now, with the price gap shrinking between Wal-Mart Stores Inc.and its competitors, the retailing giant faces the double sorrow of sluggish sales and traffic.
In May, the company reported its fifth straight quarter of negative U.S. sales, excluding newly opened or closed stores, and its sixth straight quarter of dwindling traffic. Wal-Mart's return on investment dropped to 17% in the year ended Jan. 31, down from 20% seven years ago. The weak results led to the lowest levels of bonuses to executives in several years.
The discounter is also dogged by allegations of bribery overseas, and continues to face regulatory challenges from its non-unionized workforce. It has stumbled in country after country in its attempts to expand overseas, even as it remains a dominant retailing force in countries like Mexico and Canada.
For Mr. McMillon, who at 47 years-old is the youngest CEO to lead the company since founder Sam Walton, the problems of the past are forcing him headlong into the future. Since taking the helm in February, Wal-Mart executives say he has doled out urgent instructions to accelerate new store concepts and online strategies in an attempt to gain back market share from encroaching rivals like Amazon and fast-expanding dollar store chains.
Wal-Mart is testing smaller stores such as this 'Walmart To Go' in its hometown of Bentonville, Ark. Wesley Hitt for The Wall Street Journal
It's a tall order. "We need to move fast," the CEO said at the company's June shareholders meeting. "That's why we're piloting so many new ideas."
Even speed and imagination may not be enough to move the dial meaningfully for the country's largest company as measured by revenues. To achieve 1% sales growth in any given year, the retail behemoth must pull in nearly $5 billion in additional sales.
The U.S. recession had brought some relief, as battered shoppers sought rock-bottom prices. But Wal-Mart's low-income customers—who spend 18% of all food- stamp money at the chain—have been slow to recover.
Some of the retailer's initiatives—from new store formats to a shift in some pricing models—don't much resemble the old Wal-Mart, where bigger stores were touted as better, and prices were "always low."
This year, for the first time in its history, Wal-Mart will open more smaller grocery and convenience-type stores than supercenters. At 10,000 to 40,000 square feet, its Wal-Mart Express and Neighborhood Market concepts are a fraction of the size of a 200,000-square-foot superstore. Stores now double as pickup stations for shoppers to collect televisions, bicycles and other items purchased online.
Taking a page from Costco Wholesale Corp., the big-box king of booze, Wal-Mart has said that it aims to double its alcohol sales by 2016. The chain is weighing plans to build free-standing liquor stores in states like Florida which prohibit retailers from selling booze inside grocery stores, according to Wal-Mart employees.
Unlike some of his predecessors Mr. McMillon embraced e-commerce early on. As such, some of the more sweeping changes are evident online, where Wal-Mart has been particularly stung by Amazon's product breadth and pricing models.
At its website, Wal-Mart has quietly scrapped the "everyday low prices" model that underpins its stores. Instead, it is using a "dynamic pricing" system, similar to Amazon's, which frequently changes prices based on fluctuating data and competitive offerings.
The online assortments also now include upscale items like $146 Nike sunglasses and wine refrigerators costing more than $2,500—things that might appeal to customers who never set foot in a Wal-Mart.
Another Amazon-like feature touts a "value of the day" and a "value of the hour" complete with countdown clock. At Amazon, shoppers troll for "today's deals."
Last year, Wal-Mart pulled ahead of Amazon in terms of its web sales growth rate. According to data from Internet Retailer, the chain's online sales in the year ended January 31 rose 30% to $10 billion. Amazon, by comparison, posted a 20% gain on $68 billion in revenues from sales of electronics, media and other products during the year ended Dec. 31.
Wal-Mart's e-commerce war chest illustrates Mr. McMillon's desire to get clicking faster. In the year ended Jan. 31, Wal-Mart plowed roughly $500 million into e-commerce investments, including three new online fulfillment centers and 1,000 employees in Silicon Valley. In February, Wal-Mart told investors it planned to spend an additional $150 million on e-commerce investments this year.
Mr. McMillon's forward march unsettles some investors, who worry about whether the smaller formats and online sales will cannibalize business at its traditional stores and dent profits.
"You're basically saying thousands of supercenters are going the way of the horse and buggy," says Wolfe Research analyst Scott Mushkin. "It's a scary thing."
While he predicts that the new initiatives are apt to make a negative impact over the next few quarters, Mr. Mushkin believes that management is looking beyond short-term results.
"Doug isn't there to make next quarter or next year's earnings," says Mr. Mushkin. "He's there to try to bring Wal-Mart into the 21st century."
To glimpse a part of Wal-Mart's future, head a few miles south from the company's corporate headquarters in Bentonville, Ark. There, at a test store called Walmart To Go, shoppers grab pulled pork sandwiches, slurp 30-ounce Cherry Cokes and fill up their cars with gas. The setup looks like a cross between a 7-Eleven and a 1950s drive-in. It's part of the company's big push into gasoline—one commodity that can't be bought online—that is expected to add filling stations to some 2,000 new Wal-Mart stores in the coming years.
In April, Mr. McMillon asked a handful of executives to clear their schedules and report to the company plane first thing one morning. It wasn't until they were aloft, say trip participants, that he told them they were headed to Denver to tour a Wal-Mart test store where shoppers order their groceries online then stop by a drive through to pick them up.
As he steers the retailing behemoth, Mr. McMillon must stay focused amid pre-existing complications, including an expensive probe into alleged bribery in Mexico and persistent complaints that the company underpays its 1.4 million-strong U.S. workforce. Earlier this year, the National Labor Relations Board accused the retailer of unlawfully retaliating against workers who took part in protests over working conditions. Wal-Mart has denied wrongdoing in the NLRB case. It says its average hourly wage of $11.81 is in line with, or above, its peers. Separately, the company says it is cooperating with ongoing federal investigations into bribery allegations and is conducting its own international probes.
Despite these issues, Wal-Mart remains a formidable financial force with enormous resources to throw at its reinvention. While sales growth has been slow, the company added about $70 billion in revenue in the past five years—roughly the sales of a company the size of Johnson & Johnson or PepsiCo Inc.
Mr. McMillon is a Wal-Mart lifer, an unlikely candidate to rethink the company. Growing up in Jonesboro, Ark., his family moved to Bentonville when he was 16 years old. He started working at the company about a year later, unpacking boxes in a distribution center.
Wal-Mart is planning a big push into gasoline, adding filling stations to many of its stores. Wesley Hitt
He rose quickly. Co-workers say he forged a wide network of top executives via Sunday services at the Fellowship Bible Church—sometimes referred to as the "Wal-Mart church" due to the stable of executives and suppliers who regularly attend. He also holds board positions at favorite Walton charities like the Crystal Bridges Museum of American Art and student entrepreneurship group Enactus.
By the age of 38, he was named chief executive of Sam's Club and put in charge of the warehouse division's $37 billion in revenue.
Four years later he was appointed chief of Wal-Mart's international unit and would go on to attend A-list confabs like the World Economic Forum in Davos, Switzerland and the Aspen Ideas Festival.
"There's a short list of major decisions one has to make in life," Mr. McMillon once told a trade publication. "Things like who you will marry and what company you will work for. I think I made the right decision in terms of where I would spend my career."
The same goes for his wife Shelley of more than 20 years.
Wal-Mart declined to make Mr. McMillon available for this article.
Mr. McMillon made a name for himself as a buyer, zeroing in on products that set Wal-Mart apart from competitors, say co-workers. He pioneered the creation of private-label diapers that attracted low-income mothers and boosted sales. At Sam's Club, he restored the warehouse chain's focus on small business customers and introduced higher-end items like wine vacations.
More recently, he overhauled Wal-Mart's flagging overseas operations, hiring new management in nearly every international outpost where Wal-Mart does business and shifting away from short-term discounts in favor of everyday low prices in countries like Brazil and China.
To figure out how to get back to a nimbler Wal-Mart, Mr. McMillon has been seeking advice from former executives. Shortly after taking the helm, for example, he asked David Glass, Wal-Mart's chief executive from 1988 to 2000, to spend the day with him in San Antonio.
"Doug isn't like most CEOs that say 'I want to do it my way," says Mr. Glass, who is now CEO of the Kansas City Royals, in an interview. "He furiously takes down notes and wants to learn everything he can from others' experiences."
The two walked the aisles at a Wal-Mart store quizzing employees on what was selling, what items were out of stock and asking if they would choose different products to display in the prime end-of-aisle spots. In the lawn and garden department, the manager said he particularly worried about product shortages during the key spring selling season.
Wal-Mart is weighing plans to build free-standing liquor stores in some states. Wesley Hitt
The observation highlighted a two-pronged problem at Wal-Mart.
While the chain needs to update and evolve certain aspects of its business,
It must also operate its stores better—simply by picking the right items and keeping them in stock.
Amid all the tests and trials and rollouts, Mr. McMillon has sent the message to employees not to let the small stuff slide.
At Wal-Mart's annual meeting of store managers in Orlando, Fla., in March, Wal-Mart U.S. Chief Operating Officer Gisel Ruiz interrupted a day of cheering, employee promotions and product debuts with a stark admonition to managers to take ownership of their stores and clean up their operations, according to employees that attended the meeting.
Ms. Ruiz told the story of a customer named Sherry who had complained about shoddy customer service and a dirty store in Troy, Ala. The criticisms echoed those of other shoppers who had posted negative comments about Wal-Mart on Facebook.
"She could easily get what she needs somewhere else," said Ms. Ruiz. "She could have walked away."
The store didn't lose Sherry. But it did replace its manager and got its service act together. According to a transcript of the meeting, the store's sales at the time were running 2.4% higher than the same period a year before, up from negative 3.3% before the revamp.
During a May global executives' meeting, Mr. McMillon demanded that his executives similarly bear down on the basics to achieve quantifiable results. He said that even simple fixes, like cleaning up messy stores and making sure products are in stock could boost sales by 1%—turning U.S. sales positive for the next quarter, according to people familiar with the discussion.
While he assured listeners that he was focused on future strategy, he said, "What I need you to do now is to figure out how we perform better today
06-14-14
RETAIL CRE
INEQUALITY leads to Economic Adjustments - Especially in a 70% Consumption Economy driven by a weakening middle class
Over a three-week span starting Monday, 72% of the S&P 500's members will report earnings, but some of the early indications about this earnings season, especially from companies highly exposed to the U.S. consumer, have not been encouraging.
On Tuesday afternoon, two companies that are all about consumer spending, Bob Evans and The Container Store, reported earnings that were disappointing.
But even more discouraging were the comments from company executives.
BOB EVANS
Bob Evans, which wrapped up its fiscal year 2014 in its most recent quarter, said its results were impacted by severe weather (an oft heard refrain during the first quarter), as well as high food costs. In the upcoming year, the company's CFO, Mark Hood, said, "consumer confidence continues to be adversely impacted by ongoing macroeconomic headwinds, including health care costs and unemployment which disproportionately affects lower- and middle- income consumers."
CONTAINER STORE
Also on Tuesday afternoon, Container Store CEO Kip Tindell said in the company's earnings release that, "Consistent with so many of our fellow retailers, we are experiencing a retail 'funk.'"
LUMER LIQUIDATORS
Wednesday evening, Lumber Liquidators, a specialty hardwood flooring retailer, said that the consumer demand it experienced following the tough winter didn't carry into May and June. CEO Robert Lynch said, "The improvement in customer demand we experienced beginning in mid-March did not carry into May, and June weakened further. Our reduced customer traffic has coincided with certain weak macroeconomic trends related to residential remodeling, including existing home sales, which have generally been lower in 2014 than the corresponding periods in 2013."
FAMILY DOLLAR
Thursday morning saw more downbeat commentary from a retailer, this time Family Dollar. Following the company's report, which saw that same store sales fell 1.8% during the quarter, CEO Howard Levine said, "Our results continue to reflect the economic challenges facing our core customer and an intense competitive environment."
THE GAP
And then yesterday afternoon, Gap topped off the week of discouraging retail commentary by reporting June same-store sales that fell 2% year-over-year. According to data from Bloomberg, sales were expected increase 0.8%. Gap's management, however, was light on additional color.
This rash of discouraging retail data, however, makes the broader U.S. economic picture seem murky.
The first week of earnings has certainly given us some mixed, if not downright disappointing, signals about the U.S. consumer.
07-12-14
RETAIL CRE
RETAIL CRE - Gallup Highlights Consumers are “straining against rising prices"
Consumers are “straining against rising prices on daily essentials to afford summer travel, dining out, and discretionary household purchases – the kinds of purchases that ordinarily keep an economy humming.” That’s what Gallup found when it used a new survey to dive deeper into consumer spending.
Its regular monthly survey has been mixed. The average dollar amount consumers spent in June swooned to $91 per day from $98 in May, after a crummy January-April period ranging from $78 to $88 per day. The May spurt seems to have been an outlier that had given rise to a lot of speculation consumers would finally hit “escape velocity,” now obviated by events. But from 2012 until late last year, the averages had been rising.
So Gallup dove deeper into the issue with its new survey conducted in mid-June to sort through what consumers are spending more or less money on. And what it found was that
"They’re buying a little more – just not the things they want.
They’re spending more on things they have to buy"
... and in many instances they’re spending more in these categories because prices have jumped. At the top of the list: groceries.
Groceries: 59% spent more, 10% spent less.
Gasoline: 58% spent more, 12% spent less
Utilities: 45% spent more, 10% spent less
Healthcare: 42% spent, 8% spent less
Toilet paper and other household goods: 32% spent more, 5% spent less
Rent, the biggie: 32% spent more, 9% spent less.
These categories are household essentials. They’re on top of the priority list. And in order to meet the requirements of these items, consumers are cutting back where they can. Gallup found that “the increasing cost of essential items is further constraining family budgets already hit hard by the Great Recession and still reeling from a stagnant economy.” Hence, the less essential the expense, the more it got cut. Here is the bottom of the list, which explains part of the recent retail woes:
Leisure activities: 28% spent more, 31% spent less
Clothing: 25% spent more, 30% spent less
Consumer electronics: 20% spent more, 31% spent less
Travel: 26% spent more, 38% spent less
Dining out: 26% spent more, 38% spent less
Then there are summer travel plans, so future spending. They show just how bifurcated the economy has become. On the positive side of the ledger, 69% of American plan to travel this summer, the highest since 2006, and far more than the 52% in 2009 during the depth of the Great Recession. And those travelers intend to spend more on transportation, food, lodging, and entertainment than last year, as Gallup put it, “further pressuring their already-strained budgets.”
But about one-third plan to spend only one night or less away from home. So not exactly a long vacation. And 36% are planning to travel less than last year, even worse than in the terrible year of 2010, when 33% were cutting back from the already terrible year 2009.
And what about “escape velocity” in consumer spending? Despite what Wall Street economists and other hype mongers have been predicting for five years in a row, Gallop soberly puts slams the lid on those speculations:
If there was any doubt that the U.S. economy is still struggling to get back on its feet, the results of this poll reinforce that reality. Because consumer spending is the lifeblood of a healthy economy, these findings suggest that discretionary spending still has a ways to go before it will fuel the kind of economic growth Americans have been hoping for.
Americans who are struggling to make ends meet, and who cut discretionary spending in order to pay for essentials, form a large part of the middle class. But there are others who don’t have these problems, who are doing well. A dichotomy that shows up in “dining out.”
“Dining out” made the bottom of the list: 38% of the people cut back, while only 26% spent more on it. The restaurant industry should be groaning in pain.
But someone must be eating out. The Restaurant Performance Index (RPI) for May, released on June 30, rose again, “driven by stronger sales and traffic levels and an increasingly optimistic outlook among restaurant operators.” May was the third month in a row that the Current Situation Index was above 100, and therefore in expansion mode.
Smell of conundrum? Nope. But a sign of America’s dual-track society. The 26% of consumer who spent more on dining out might well belong to that group whose median household income exceeds $50k a year. They feel flush and their confidence has soared to post-recession highs. But the confidence of consumers making less than $50k a year has barely moved up from the recession bottom. And the gap between the two is at a record high.
Consumer confidence is one of the data points that are used, most often unsuccessfully, to predict what consumers might do, specifically how much money they’re going to spend – because a wallet with legs is what you get boiled down to in our economic system once you’re a “consumer.”
The assumption is that consumers who are feeling good about their present condition and who expect nice things such as pay raises to come their way are more likely to spend more money. Once they pull out their digital form of payment, they’d set off a chain reaction, which would give the government and the Fed something to brag about.
Thing is most Americans are already spending every dime they’re making, and those who have access to credit are spending way beyond what they’re making, and they’re maxing out their credit cards, and they’re getting new credit cards to make minimum payments on their existing but maxed out credit cards, not because they have confidence but because subprime is once again hot, and banks are eager to charge 21% or more in interest though their actual cost of money, thanks to the Fed, is near 0%.
And it isn’t confidence that is going to increase their speeding but even more credit – which they will never be able to pay off, and they know that too [for some additional amusement, read.... Last Time Lenders Did This, They Triggered The Financial Crisis].
However, wage increases, including a minimum wage increase – not confidence – would get them to spend more the minute the extra moolah shows up in their paychecks. And they’d spend all of it. Yet giving the lower 80% or so of the workers a pay raise that exceeds inflation is the most frowned-upon activity in corporate spending these days. Better to buy back a few million shares.
But at the upper echelons of the American consumer pyramid where people have savings and investments, more confidence could actually trigger more spending.
So consumer confidence has been rising. Things are good in the US economy. That relentless message is finally getting through to us boneheads. The most recent reading of the Conference Board’s Consumer Confidence Index rose to 85.2, the highest level since January 2008!
So there!
But look who is feeling confident and who is not. The chart (via OtterWood Capital Management) divides us hapless consumers into two groups – households making more than $50,000 per year, and households making less than that. So we’re not comparing the top 1% to the bottom 20%. We’re cutting a line straight across the American middle class and comparing what is on either side. And the an ugly reality crops up.
Those below $50,000: their confidence dropped to just above 60, a 12-week low. And those lucky ones making over $50,000 were feeling flush, and their confidence level rose to a new post-recession high exceeding 115. That’s nearly twice as high as that of the lower income group. And the gap is at an all-time.
But it’s not by accident. This has been the strategy of the Fed’s monetary policy all along. Fed Chair Janet Yellen and her ilk are glad that these high-income folks – which include Yellen herself – are feeling good. It’s a point of professional pride. These folks are responsible for about two-thirds of consumer spending. If they’re handed in various ways a few trillion dollars in printed money, mainly through asset bubbles, they’ll feel even more confident and smart, and they might sense an urge to splurge and buy things they don’t need, and it temporarily gooses GDP.
But those below, those who already spend every dime they make and can borrow? Fed policymakers don’t care about them. They won’t ever spend more anyway because they don’t earn enough. Though they make up a big part of the population, they can’t contribute much to consumer spending. Their role is to be the low-cost labor force that corporate America wants beyond all else.
Banks are again taking the same risks that triggered the financial crisis, and they’re understating these risks. It wasn’t an edgy blogger that issued this warning but the Office of the Comptroller of the Currency. And it blamed the Fed’s monetary policy.
Some Serve Smaller Burgers and Steaks; Others Feature Cheaper Cuts of Meat, New Recipes
Steaks are displayed at the entrance of the Texas Roadhouse in northwest San Antonio. Customers can choose their cut from the display. Julia Robinson for The Wall Street Journal
Faced with soaring beef prices, many restaurants and food retailers are shifting strategies to woo consumers and protect profit margins.
The record costs are forcing beef purveyors from Ruth's Chris Steak House to Carl's Jr. to choose between asking customers to pay more for steaks and burgers and eating the costs themselves. Many are passing along the higher prices while embellishing their menus with new items, smaller-portion cuts and more sauces, toppings and side dishes. Others are seeking to control costs by locking in beef purchases at current prices as they envision further inflation to come.
The scramble shows how a prolonged drought in the southern U.S. Great Plains that has shrunk the nation's cattle supply to six-decade lows is rippling from slaughterhouses to drive-ins and high-end steakhouses.
"There are people out there that are panicked," said Gregory Schulson, chief executive of Burrito Beach Mexican Grill, a Chicago-area burrito chain with six locations. "Restaurants have a philosophical choice to make. Are you going to maintain your current products and eat the margin, charge your customers more, or adjust your product to meet the consumer at their price point?"
Burrito Beach recently introduced specialty accouterments like pickled onions and homemade coleslaw, which servers add to burrito or taco orders at no charge. The move came after it raised prices on beef items by about 4%.
"If you can add something that's not particularly expensive but that people think is special, it helps justify the price increase," Mr. Schulson said.
Wholesale prices for choice-grade beef—the main variety consumed in the U.S.—surged 11% over the 12 months through May as cattle prices reached all-time highs, according to the U.S. Department of Agriculture. The gains come as supermarkets gear up for the week of Fourth of July—typically the year's busiest period for beef sales.
In many cases, companies are sticking consumers with that higher tab. Average retail fresh beef prices rose 12% to $5.45 a pound in May from a year earlier, according to the USDA, and were just shy of the all-time high reached in April. The government forecasts that consumer beef prices will increase as much as 6.5% for all of 2014, compared with gains of up to 4% for both pork and chicken.
Some consumers are balking at the higher beef prices in favor of lower-priced chicken, creating challenges for restaurants and retailers that emphasize red meat. Rich Brashear, a 23-year-old accountant in Chicago, said he has cut back on burgers and buys more chicken at the grocery store. "I eat a lot less beef," he said while munching on a hot dog at a sports bar one recent afternoon. "You don't have much choice. It's either spend more or eat less."
DIFFERENT CUTS: Like all restaurants, Texas Roadhouse, a steakhouse chain, is weighing higher beef prices against margins.
In the first four months of this year, U.S. beef sales volume fell 0.6% from a year earlier after rising in the last two quarters of 2013 at 18,000 grocery stores, supermarkets and other retail outlets tracked by market-research firm Nielsen Co. In contrast, sales volumes for chicken rose 1.9%.
"We're preparing ourselves that it's going to be a long journey on beef," Arne G. Haak, chief financial officer of Ruth's Hospitality Group Inc., RUTH -0.01% said of the tight U.S. cattle supplies at an investor conference earlier this month.
The company, which operates 120 Ruth's Chris Steak House restaurants and other steakhouse and seafood outlets, said its operating expenses rose by 3.3% in the first quarter, in part because of higher beef costs. The company responded by locking in nearly half its beef needs from May through the end of the year at a price about 5% above last year's, executives said at the conference. A spokeswoman declined to comment further on its purchasing strategies.
Ruth's Chris also has added a 12-ounce rib-eye steak to its menu, smaller than its traditional 16-ounce version, to give consumers more options, executives said.
Some burger chains are making similar moves. Hardee's and Carl's Jr., which are operated by closely held CKE Restaurants Inc., have in recent years introduced smaller-size burgers and more burger alternatives. Those include a $3.99 five-ounce chicken sandwich launched in May, comparable in size and price to the company's signature black angus burger.
"It turned out that this was a smart time to do chicken because beef prices are so much higher," said Chief Executive Andy Puzder.
Smaller package sizes and less pricey cuts of beef are showing up in grocers' meat cases as well.
"We're seeing customers purchase more cube steaks instead of T-bones…and burgers instead of steaks," said Keith Dailey, a spokesman for Kroger Co. KR 0.00% , the largest conventional U.S. grocery chain. The company this month launched a Mexican-themed event in stores nationwide featuring thinner, marinated slices of beef for fajitas.
Theo Weening, global meat buyer for Whole Foods Market Inc., WFM 0.00% said the upscale retailer is promoting cheaper cuts of beef like boneless short rib.
"We knew we wouldn't have many promotions that feature deep discounts on beef this summer" due to high prices, Mr. Weening said. "It used to be we'd have a sale on New York strip steak every week. That's not happening right now."
Others are asking consumers to shoulder the burden of higher costs. Some, like burrito chain Chipotle Mexican Grill Inc., CMG 0.00% are raising menu prices to more closely reflect actual costs. Chipotle in May raised prices for beef-based entrees by 8% compared to 4% to 6% increases for chicken, pork and vegetarian options, according to William Blair & Co.
"Steak prices are rising faster," said Chipotle spokesman Chris Arnold.
"Rather than bringing everything up proportionately, We decided to let steak prices carry more of the load and let customers decide if they wanted to pay the premium for steak."
Texas Roadhouse Inc., TXRH -0.01% a steakhouse chain with about 420 outlets, boosted its prices by 1.5% in December, President Scott Colosis said in an interview. The company also added a beef specialist to its purchasing team last year to help negotiate better deals with meatpackers.
"It's always a battle to protect your margins," Mr. Colosis said. "You have the option of raising prices to a level that offsets inflation or betting that you can drive store traffic, which is a hard thing to do."
Low Vacancy Rates at Malls, Strip Centers Give Landlords Leasing Leverage
Shopping-center owners continued to increase rents in the second quarter as a host of retailers in expansion mode jockeyed for dwindling available space in existing high-quality centers.
Vacancy rates at U.S. malls and strip centers remained minimal in the second quarter such that retailers seeking to move into the best centers often must wait for another tenant to leave. Landlords and analysts generally don't expect a significant pickup in retail construction for at least a year or two.
Vacancies at strip centers declined to 10.3% in the second quarter, down 0.10 percentage point from the first quarter and now nearly a percentage point lower than a postrecession high set in the third quarter of 2011, according to data from Reis Inc. At malls, vacancy remained at 7.9% for the third consecutive quarter, down from a high of 9.4% set in the third quarter of 2011.
Meanwhile, the shrinking vacancies allowed retail landlords to raise rents at malls for the 13th consecutive quarter and at strip centers for the 11th. Rents at malls rose 0.4% in the second quarter to $40.32 a square foot a year, while rents at strip centers rose 0.5% to $19.51. Strip centers are rows of small shops often sharing a common parking lot.
"This is the continuation of a slow, but decidedly upward trend in quarterly rent growth over the last few years," said Ryan Severino, a senior economist at Reis, which compiles its data from 77 U.S. metropolitan areas.
Vacancy rates are even tighter in the highest-quality shopping centers, which typically are owned by real-estate investment trusts rather than individual, private investors. Cedrik Lachance, a managing director at Green Street Advisors, which tracks REITs, estimates the vacancy rate in top-quality, REIT-owned strip centers to be roughly 5%.
"We're over 95%-leased in our total portfolio," said John Kite, chief executive of Kite RealtyKRG +2.40% Group, an Indianapolis-based firm that owns more than 130 centers across the U.S. "That's as good as it's been in the past 10-plus years. The retailers that are expanding have limited choices, which is why we're driving rents up."
The short supply of shopping-center space stems from several factors. While retailers such as specialty grocers and discount merchandisers are expanding, there isn't enough expansion overall for lenders to justify financing many new projects. Meanwhile, retail sales have been sluggish this year; sales growth, excluding auto sales, increased by 0.1% in May from April, according to the Commerce Department.
Retail landlords say that plenty of retailers are expanding, led by
specialty grocers such as Whole Foods Market Inc. and Trader Joe's,
sports and outdoors stores,
discount apparel sellers,
dollar stores and
medical offices.
The roster of shrinking retailers is the same that has been whittling store counts for the past two years:
electronics retailers,
booksellers,
office-supply
chains and
toy sellers.
"We don't see the new-supply dynamic changing anytime soon," said Shane Garrison, chief operating officer and chief investment officer of Retail Properties of America Inc., RPAI +0.06% which owns roughly 230 properties across more than 70 U.S. markets. "So it's definitely a landlord's market again."
As an example of the changing U.S. retail landscape, Kite Realty accommodated Staples Inc. SPLS +0.45% by reducing its square footage at Kite's International Speedway Square shopping center in Daytona Beach, Fla. Kite halved Staples' square footage there to 12,000 and moved a new tenant, Total Wine & More, into Staples' vacated space in the second quarter.
In the Henry Town Center near Atlanta, Retail Properties of America replaced a 115,000-square-foot wholesale-club retailer with three tenants this year: Gander Mountain Co., Gap Inc.'s Old Navy and a TJX Cos. Home Goods store soon to open.
CoStar Group, a real-estate research firm, predicts that builders will complete 45.2 million square feet of retail space this year and 71.5 million square feet in 2015 in 63 U.S. markets. That is well shy of the 210 million square feet delivered in 2007.
"We'll see a moderate increase in the coming quarters in construction," said Suzanne Mulvee, a director of retail research at CoStar. "But it's going to be a couple of years before we see construction getting back to even half the pace of what it was in 2007."
These tablets, as The Verge notes, aren't the high-end Apple and Samsung devices we've become accustomed to seeing, but rather less expensive computers that are cheaper to replace or repair (theft isn't uncommon).
As tablets in restaurants go, Chili's has become a standard bearer. They just announced the introduction of 45,000 Ziosk tablets in 800 locations.
"By this fall, guests at nearly every Chili's in the country can place orders, play games and pay their checks from our tabletop tablets," said Ziosk CEO Austen Mulinder in a statement.
Ziosk's tablets run Android OS and incorporate a camera as well as an optional receipt printer. Save bringing your meal out to you, they effectively replace servers.
“Let’s face it, everyone who has ever been to a restaurant has been frustrated by waiting for their check,” said Applebee’s President Mike Archer in a press release.
Archer is definitely right. But this influx of technology raises the question: Are tablets poised to replace waiter and waitress jobs at larger chain restaurants?
Such a shift would require companies like Olive Garden, Red Lobster, and TGI Fridays to bet that computers are easier to interact with than humans.
Some major chains have already made the bet. Buffalo Wild Wings announced a big tablet push in March, promising to have them in all North American stores by the end of 2015.
E la Carte cofounder and CEO Rajat Suri argued that tablets are designed to work alongside human employees, not replace them.
"If someone does not want to spend time with a server, they’re going to ignore the server anyways," he told Business Insider. "The truth is, today even the best servers are not going to be at your table every second. The tablet plugs those gaps."
Servers seem enthusiastic about the devices.
"They're our little sidekicks, they help us do our jobs," said Tuesday, a server at Applebee's in San Francisco where they already use tablets. "A lot of customers don’t like handing over their credit card to server, so it allows them to [pay] by themselves.”
Just how much restaurants have invested into tablet technology is unclear, but if a chain like Chili's is paying $100 a pop for these (the iPad Mini starts at $299), it's still a significant investment when you're ordering 75,000 or 100,000.
Ziosk, who works with Chili's, told Business Insider that the restaurants pay a monthly fee for use of the tablets "but the revenue they generate via guests' purchases of premium content more than offsets the cost."
Applebee's has hinted toward adding functionality down the road, suggesting that tablets are more than just an industry fad.
"During the next 18 months, enhanced functionality, such as video streaming, music, additional games, social media interaction with Applebee’s active Facebook community and personal pages, sharing, gift card sales and more, will be added," said their press release.
These enhancements are geared toward increasing customer satisfaction and driving up revenue. Patrons are far more like to buy a restaurant gift card or buy dessert if they're pleased with their dinning experience at the end of the meal.
"The machines automatically suggest a tip of 20 percent; you can go lower than that (or higher), but you'll need to actively decide to make that change," reports The Atlantic. "Chili's is finding the same thing that New York City taxis have: Default settings are, behavioral economics-wise, powerful."
This tablet tsunami suggests waiters might not be getting the job done.
06-28-14
RETAIL CRE
RETAIL CRE - Weakness in RETAIL Broadens
Weakness in RETAIL Broadens
Although consumer confidence figures remain high, reaching their highest level in six years, and consumer sentiment continues to improve, performance for most retailers has not been very strong. Consumer discretionary stocks in general have not been a vibrant sector.
Retail stocks that had been delivering strong numbers (in previous years) such as
TJ Maxx (TJX),
Ross Stores (ROST) and
Tractor Supply (TSCO)
... have been very poor performers since wem made our SII call.
And in the restaurant group, casual dining stocks Darden Restaurants (DRI), the owner of Olive Garden, and Panera Bread (PNRA) have also demonstrated poor sales.
06-28-14
RETAIL CRE
RETAIL CRE - Credit Spending Marginally Increasing - But Now on More Expensive Non-Discretionary
MarketWatch published an article on June 19, 2021 claiming that "Americans are getting into debt to afford food, gas." This is hardly the behavior of consumers trying to clean up their balance sheets. The author, Peter Atwater, explains that for "have-nots" "the continued absence of wage growth has resulted in an unprecedented boom of non-discretionary credit."
These "needs, not wants" include education and cars; the latter are now often bought with seven-year leases. For average Americans, the non-core inflation of food and energy does not leave much cash for other essentials.
06-28-14
RETAIL CRE
RETAIL CRE - Darden Results Disappoint as Olive Garden Sales Keep Declining & Sells Red Lobster
Restaurant Operator Plans to Unload its Struggling Red Lobster Chain
Darden Restaurants Inc. DRI -2.63% posted another period of declining sales at its Olive Garden and Red Lobster chains, while its quarterly earnings slid 35% thanks to higher costs and expenses.
The casual-dining restaurant operator's profit fell far short of market expectations. Darden said write-downs and the cost savings plan it unveiled in December hurt results by about 19 cents a share.
Darden also issued an earnings outlook for the recently started fiscal year that falls below the current consensus view. It expects a profit of $2.22 to $2.30 a share, while analysts polled by Thomson Reuters are looking for $2.79.
Darden plans to sell its Red Lobster chain for $2.1 billion to private-equity firm Golden Gate Capital. Bloomberg News
The company's Olive Garden and Red Lobster chains have struggled amid declining sales and traffic recently. In May, Darden said it would sell its Red Lobster chain for $2.1 billion to private-equity firm Golden Gate Capital. The company had previously disclosed its intent to separate the lagging chain, and its results were classified as discontinued operations in the most recent quarter.
Sales, excluding newly opened or closed locations, declined 3.5% at Olive Garden—the company's biggest chain by revenue— and 5.6% at Red Lobster for the period ended May 25. LongHorn Steakhouse posted 2.4% higher sales. For the new year, Darden projected flat to 1% sales growth at Olive Garden, while LongHorn is expected to see sales grow 1% to 2%.
Now that Red Lobster is being sold, Darden is focusing on improving operations at Olive Garden. The company is in the early stages of a major brand overhaul for the casual Italian chain of more than 800 restaurants. The chain has been introducing lower-priced items and smaller plates to appeal to younger and budget-conscious customers.
Olive Garden also is trying to speed up lunch service for time-pressed customers. It is testing online ordering for take-out customers that it plans to roll that out nationally by August. It also plans to begin testing table-top tablets guests can use to pay their bills.
Darden also has focused on its specialty-restaurant group, which includes higher-end chains such as Capital Grille and Bahama Breeze, to help it expand. Sales at the segment edged up 2% in the latest period, and Darden expects an increase of about 2% in the current year.
Two activist investors—Starboard Value LP and Barington Capital Group LP—had been calling for Darden to undergo a much more significant breakup, suggesting that the company separate its smaller chains from Olive Garden, Red Lobster and LongHorn, and place its real estate holdings in a new company.
Overall, Darden reported a quarterly profit of $86.5 million, or 65 cents a share, down from $133.2 million, or $1.01 a share, a year earlier. Analysts polled by Thomson Reuters recently expected per-share earnings of 94 cents.
Revenue rose 3.6% to $1.65 billion.
Profit down from $133.2M to 86.5M
Food and beverage costs rose 8.5%,
Labor costs edged up 2.6%.
Total costs and expenses increased 7.1% to $1.62 billion during the quarter.
06-21-14
RETAIL CRE
RETAIL CRE - More Loans Come With Few Strings Attached
The junk-rated company got a $400 million term loan requiring no regular financial targets.
Companies with junk ratings, ranging from designer fashion house Kate Spade KATE & Co. to nut specialist Diamond Foods Inc., DMND have been borrowing cash with few strings attached.
Lending to weaker companies on easy terms is becoming more and more common as investors' appetite for higher-yielding debt grows stronger and the Federal Reserve keeps money flowing at ultralow rates. Since the financial crisis, companies have been able to borrow more without offering investors what were once considered standard protections against possible losses.
More than half of the loans in the $747 billion U.S. market for loans made to junk-rated companies don't have financial "covenants," triggers that could cause a borrower to shore up its health, including periodic tests of overall debt levels and cash flow to cover scheduled interest payments.
Thus far this year through Thursday, 62% of leveraged loans lacked these regular requirements, up from 57% for all of 2013, according to S&P Capital IQ LCD.
The shift recalls a boom era for loan deals that led up to the 2008 financial crisis. Easy lending terms are once again appearing as part of an expansion of credit to riskier borrowers, including companies often being bought out or financed by private-equity firms.
Even with weaker loan contracts, corporate defaults have been held down and troubled companies have been able to refinance their debts at much lower rates due in part to Fed-provided liquidity.
Some investors are worried.
"Things started to get silly in 2013, and now they're getting even sillier,"
David Sherman, President of Cohanzick Management LLC, which oversees $1.7 billion in assets
He has reduced his ownership of leveraged loans and generally doesn't buy so-called "covenant lite" deals. "We have seen this film before."
Leveraged loans, including loans with and without financial covenants, now yield 5.03% as of Wednesday, compared with 3.81% for investment-grade corporate bonds, according to J.P. Morgan Chase & Co. data, and about 2.59% on the 10-year Treasury note.
Leland Hart, head of the bank-loan team at BlackRock Inc., BLK overseeing more than $10 billion in leveraged loans, said covenant-lite loans had fewer defaults than standard loans in many of the years after the financial crisis. Most companies that can do those deals are healthy enough to repay their debts, he said.
A Kate Spade bag. Lending on easy terms is becoming more common. Getty Images
Still, by having fewer strings attached to their loans, borrowers are once again able to build flexibility to take on more debt or to pay dividends to owners such as private-equity firms.
Outdoor clothier Eddie Bauer arranged $225 million of loans in April to make a dividend payment to its private-equity owner, Golden Gate Capital. A spokeswoman declined to comment.
Kate Spade borrowed to refinance debt in April, and its $400 million term loan required the New York-based company to maintain no regular financial targets, according to Xtract Research LLC. A representative for Kate Spade declined to comment.
Ray Silcock, chief financial officer at Diamond Foods in San Francisco, said the company's February $415 million covenant-lite loan "allowed us to have a larger proportion of debt than we might otherwise have had." Those extra borrowings helped the company repay rescue financing that Oaktree Capital Management provided in 2012, when Diamond had no access to the debt markets, he said. "We were able to take advantage of a window of opportunity that's not there all the time."
David Hillmeyer, senior portfolio manager at Delaware Investments, DDF said he was planning to buy into a covenant-lite loan being marketed currently for drug company Akorn Inc., AKRX which will help finance its purchase of VPI Holdings Corp., the parent of VersaPharm Inc.
But Mr. Hillmeyer said he plans to avoid a separate covenant-lite loan for snack maker Shearer's Foods LLC because he is concerned the company may be expanding too much and too fast.
Federal Reserve Governor Daniel Tarullo said in February that there was "greater investor appetite for risky corporate credits, while underwriting standards have deteriorated."
Covenant-lite loans comprise 54% of loans in a leveraged-loan index run by J.P. Morgan Chase. That is the highest in the bank's index data going back to 2007, and it is up from 46% at the end of last year.
The share of Securities and Exchange Commission-registered covenant-bearing loans that feature just one is at its highest point ever, around 35%, according to Thomson Reuters' unit Loan Pricing Corp. That is up from 31.5% in 2012 and 21% in 2007.
Issuance of leveraged loans in the U.S. has reached $531 billion so far this year, compared with $549 billion to this point last year, which was the busiest pace since 1987, said Thomson Reuters' LPC unit.
Demand for loans is brisk among many institutions, in part because their payments float, or are regularly reset using a fixed spread to a benchmark, protecting investors if rates go higher. Fixed-rate bonds' prices tend to fall when interest rates rise.
Issuance of loan pools known as collateralized-loan obligations, which buy up leveraged loans, is soaring. About $5.4 billion of CLOs were created last week, the biggest week since January 2013.
Buying by CLOs has helped offset eight recent weeks where retail investors took their cash out of loan funds, according to Lipper. Their pullback followed 95 weeks of inflows.
So far, rate fears haven't been realized. The yield on the benchmark U.S. Treasury note has fallen to about 2.59% from 3% at the end of 2013, signifying a rise in bond prices.
06-14-14
RETAIL CRE
RETAIL CRE - May Retail Sales Miss, Core Retail Sales Unchanged, Control Group Declines
Another swing and a miss for the so-called Q2 GDP surge.
After April data was revised higher, with headline retail sales pushed from 0.1% to 0.5%, and core retail sales ex-autos and gas boosted from -0.1% to 0.3%, May showed a big drop in whatever momentum may have resulted from the March spending spree. As a result May headline retail sales missed expectations of a 0.6% increase, printing at 0.3%, with the entire positive print due to auto and gas sales. Indeed, when looking at core retail sales excluding autos and gas, these were unchanged from April, printing at 0.0%, far below the 0.4% expected.
As the table below shows, segments that saw a decline in May were Electronics stores (again), as well as food and beverage stores, health and personal care, clothing stores, sporting goods stores, restaurants, as well as general merchandise stores. In other words a decline across the board.
As usual, the biggest wildcard is just how accurate and relevant the seasonal adjustment is: the headline change from April to May was a substantial $26 billion, which however was neutered to just $1.5 billion when applying seasonal adjustment factors, which however as the ISM data recently showed, are nothing but a farce.
Finally, and what's worst for GDP calculations, the retail sales control group which goes into GDP calculations showed the first sequential decline since January when the full brunt of the "harsh weather" which is now said to have subtracted 2.0% from Q1 GDP hit. Clearly, US consumers are still delaying all those purchases they would have otherwise made in January.
Just blame it on the blamy balmy May weather.
06-14-14
RETAIL CRE
RETAIL CRE - McDonalds Has Longest Stretch Without Rising US Sales In History
Back in April when McDonalds reported its fifth consecutive decline in US comp store sales, the longest in decades, maybe ever, the excuses came fast and furious: 'The U.S. has been difficult for them,” Jack Russo, an analyst at Edward Jones & Co. in St. Louis, said in an interview. "The weather has played a role, and I think the competition is a little bit sharper. We’ve seen better results out of Burger King and Wendy’s." "Harsh winter weather and “challenging industry dynamics” weighed on U.S. results, McDonald’s added. So only MCD was impacted by weather, not the comps? Mmmk. But more importantly, there was hope so one could just ignore the present and past:“The month of April is going to be slightly improved so there are some positives out there" according to Russo.
Then April came and went, and the much awaited rebounds failed to materialize as McDonalds US sales posted an unchanged month. Perhaps it was the weather's fault too?
However, what McDonalds will have a tough time explaining is why after almost hitting 'escape velocity' and nearly posting positive annual comps in the US, McDonalds just reported that May US comps once again dipped, declining by 1.0%, on expectations of a tiny 0.1% increase, thus cementing the longest period in our records database, a total of 7 months, in which McDonalds has gone without posting a single month of increasing US sales! We can't wait for the company to blame the blamy balmy, spring weather as the reason why nobody could afford a 99 cent meal.
RadioShack shares were down as much as 21% in premarket trading after the electronics retailer reported a wider than expected quarterly loss.
The company posted a net loss of $98.3 million, or $0.97 a share. Analysts were looking for a loss of $0.52 per share.
Revenue fell 13% from a year ago to $736.7 million and on a same-store basis, sales fell 14%, which the company said was driven by traffic declines and poor sales in its mobile business. Analysts were expecting revenue of $767.5 million.
The electronics retailer said it ended the quarter with total liquidity of $423.7 million, including $61.8 million in cash and cash equivalents and $361.9 million available under a credit agreement.
"Overall, our first quarter performance was challenged by an industry-wide decline in consumer electronics and a soft mobility market which impacted traffic trends throughout the quarter," chief executive Joseph Magnacca said in a statement.
Magnacca added that the company has taken steps to cut costs, including lowering its corporate head count and reducing discretionary expenses.
These charts show RadioShack's performance over the last year and the last decade.
When nearly two years ago everyone jumped with joy after the US housing market posted its latest uptick, the fourth since Lehman, with all previous three promptly fading as dead cat bounces always do, the permabulls were quick to bet that "this was the recovery we've all been waiting for", ignoring such simple concepts as QE3, the record scramble by foreign oligarchs to use US real estate as a dirty money laundry, the Fed's housing subsidy with REO-to-Rent (which promptly made Blackstone into America's largest landlord), and the fact that banks then (and now) still refuse to dump millions of foreclosed homes back on the market over fears what the supply surge would do to prices. We noted all of this at the time, and said it was only a matter of time before this 4th consecutive dead housing bounce fizzles.
Now, that we have seen nearly a year of declining existing home property prices, a collapse in transaction volumes, and a new home market that is catering solely to the rental segment, this has been confirmed.
But that's not all.
As we showed a week ago, it is not just the coincident housing signals confirming that the latest artificial bounce has faded, but both upstream and downstream indicators. Specifically, we showed that lumber prices - that one component so critical in the building of new homes and a traditional leading indicator - have cratered.
That's the upstream indicator.
As for the downstream, we go to Bank of America which finds that not only has home improvement store spending declined substantially since the dead housing bounce peak last summer, but that furniture spending according to BofA estimates, is now once again negative:the first such drop since early 2012.
From BofA Michelle Mayer, who very soon will also have to change her tune from 2012 proclaiming the housing collapse over and a recovery is just beyond the horizon.
Spending in home improvement stores ticked up in May, but the pace of spending on a yoy basis has slowed substantially from the cyclical peak in November 2013.
Spending at furniture stores had picked up over 2012 through early 2013 but has been on a downward trajectory since last fall. Sales actually slipped into negative territory on a yoy basis in May, showing weakness into the spring season. This weakness is consistent with a wide array of indicators on the housing market, including Census Bureau's new home sales as well as weak household formation data.
But what by far worst for reality deniers is that with QE fading, there will be no additional stimulus to push all important housing away from the upcoming drop and into its fifth "dead housing bounce." Unless, of course, the Fed has no choice but to untaper and unleash even more trillions in liQEdity once the latest version of QE (we forget if it is 3 or 4) ends and is found to not have generated any "self-sustaining", escape velocity growth in the US economy yet again.
The definition of death rattle is a sound often produced by someone who is near death when fluids such as saliva and bronchial secretions accumulate in the throat and upper chest. The person can’t swallow and emits a deepening wheezing sound as they gasp for breath. This can go on for two or three days before death relieves them of their misery. The American retail industry is emitting an unmistakable wheezing sound as a long slow painful death approaches.
It was exactly four months ago when I wrote THE RETAIL DEATH RATTLE. Here are a few terse anecdotes from that article:
The absolute collapse in retail visitor counts is the warning siren that this country is about to collide with the reality Americans have run out of time, money, jobs, and illusions. The exponential growth model, built upon a never ending flow of consumer credit and an endless supply of cheap fuel, has reached its limit of growth. The titans of Wall Street and their puppets in Washington D.C. have wrung every drop of faux wealth from the dying middle class. There are nothing left but withering carcasses and bleached bones.
Once the Wall Street created fraud collapsed and the waves of delusion subsided, retailers have been revealed to be swimming naked. Their relentless expansion, based on exponential growth, cannibalized itself, new store construction ground to a halt, sales and profits have declined, and the inevitable closing of thousands of stores has begun.
The implications of this long and winding road to ruin are far reaching. Store closings so far have only been a ripple compared to the tsunami coming to right size the industry for a future of declining spending. Over the next five to ten years, tens of thousands of stores will be shuttered. Companies like JC Penney, Sears and Radio Shack will go bankrupt and become historical footnotes. Considering retail employment is lower today than it was in 2002 before the massive retail expansion, the future will see in excess of 1 million retail workers lose their jobs. Bernanke and the Feds have allowed real estate mall owners to roll over non-performing loans and pretend they are generating enough rental income to cover their loan obligations. As more stores go dark, this little game of extend and pretend will come to an end.
Retail store results for the 1st quarter of 2014 have been rolling in over the last week. It seems the hideous government reported retail sales results over the last six months are being confirmed by the dying bricks and mortar mega-chains. In case you missed the corporate mainstream media not reporting the facts and doing their usual positive spin, here are the absolutely dreadful headlines:
Wal-Mart Profit Plunges By $220 Million as US Store Traffic Declines by 1.4%
Target Profit Plunges by $80 Million, 16% Lower Than 2013, as Store Traffic Declines by 2.3%
Sears Loses $358 Million in First Quarter as Comparable Store Sales at Sears Plunge by 7.8% and Sales at Kmart Plunge by 5.1%
JC Penney Thrilled With Loss of Only $358 Million For the Quarter
Kohl’s Operating Income Plunges by 17% as Comparable Sales Decline by 3.4%
Costco Profit Declines by $84 Million as Comp Store Sales Only Increase by 2%
Staples Profit Plunges by 44% as Sales Collapse and Closing Hundreds of Stores
Gap Income Drops 22% as Same Store Sales Fall
Ann Taylor Profit Crashes by 75% as Same Store Sales Fall
American Eagle Profits Tumble 86%, Will Close 150 Stores
Aeropostale Losses $77 Million as Sales Collapse by 12%
Big Lots Profit Tumbles by 90% as Sales Flat & Exiting Canadian Market
Best Buy Sales Decline by $300 Million as Margins Decline and Comparable Store Sales Decline by 1.3%
Macy’s Profit Flat as Comparable Store Sales decline by 1.4%
Dollar General Profit Plummets by 40% as Comp Store Sales Decline by 3.8%
Urban Outfitters Earnings Collapse by 20% as Sales Stagnate
McDonalds Earnings Fall by $66 Million as US Comp Sales Fall by 1.7%
Darden Profit Collapses by 30% as Same Restaurant Sales Plunge by 5.6% and Company Selling Red Lobster
TJX Misses Earnings Expectations as Sales & Earnings Flat
Dick’s Misses Earnings Expectations as Golf Store Sales Plummet
Home Depot Misses Earnings Expectations as Customer Traffic Only Rises by 2.2%
Lowes Misses Earnings Expectations as Customer Traffic was Flat
Of course, those headlines were never reported. I went to each earnings report and gathered the info that should have been reported by the CNBC bimbos and hacks. Anything you heard surely had a Wall Street spin attached, like the standard BETTER THAN EXPECTED. I love that one. At the start of the quarter the Wall Street shysters post earnings expectations. As the quarter progresses, the company whispers the bad news to Wall Street and the earnings expectations are lowered. Then the company beats the lowered earnings expectation by a penny and the Wall Street scum hail it as a great achievement. The muppets must be sacrificed to sustain the Wall Street bonus pool. Wall Street investment bank geniuses rated JC Penney a buy from $85 per share in 2007 all the way down to $5 a share in 2013. No more needs to be said about Wall Street “analysis”.
It seems even the lowered expectation scam hasn’t worked this time. U.S. retailer profits have missed lowered expectations by the most in 13 years. They generally “beat” expectations by 3% when the game is being played properly. They’ve missed expectations in the 1st quarter by 3.2%, the worst miss since the fourth quarter of 2000. If my memory serves me right, I believe the economy entered recession shortly thereafter. The brilliant Ivy League trained Wall Street MBAs, earning high six digit salaries on Wall Street, predicted a 13% increase in retailer profits for the first quarter. A monkey with a magic 8 ball could do a better job than these Wall Street big swinging dicks.
The highly compensated flunkies who sit in the corner CEO office of the mega-retail chains trotted out the usual drivel about cold and snowy winter weather and looking forward to tremendous success over the remainder of the year. How do these excuse machine CEO’s explain the success of many high end retailers during the first quarter? Doesn’t weather impact stores that cater to the .01%? The continued unrelenting decline in profits of retailers, dependent upon the working class, couldn’t have anything to do with this chart? It seems only the oligarchs have made much progress over the last four decades.
Retail CEO gurus all think they have a master plan to revive sales. I’ll let you in on a secret. They don’t really have a plan. They have no idea why they experienced tremendous success from 2000 through 2007, and why their businesses have not revived since the 2008 financial collapse. Retail CEOs are not the sharpest tools in the shed. They were born on third base and thought they hit a triple. Now they are stranded there, with no hope of getting home. They should be figuring out how to position themselves for the multi-year contraction in sales, but their egos and hubris will keep them from taking the actions necessary to keep their companies afloat in the next decade.
Bankruptcy awaits.
The front line workers will be shit canned and
The CEO will get a golden parachute. It’s the American way.
The secret to retail success before 2007 was:
Create or copy a successful concept;
Get Wall Street financing and go public ASAP;
Source all your inventory from Far East slave labor factories;
Hire thousands of minimum wage level workers to process transactions;
Build hundreds of new stores every year to cover up the fact the existing stores had deteriorating performance;
Convince millions of gullible dupes to buy cheap Chinese shit they didn’t need with money they didn’t have; and
Pretend this didn’t solely rely upon cheap easy debt pumped into the veins of American consumers by the Federal Reserve and their Wall Street bank owners.
The financial crisis in 2008 revealed everyone was swimming naked, when the tide of easy credit subsided.
The pundits, politicians and delusional retail CEOs continue to await the revival of retail sales as if reality doesn’t exist.
The 1 million retail stores, 109,000 shopping centers, and nearly 15 billion square feet of retail space for an aging, increasingly impoverished, and savings poor populace might be a tad too much and will require a slight downsizing – say 3 or 4 billion square feet.
Considering the debt fueled frenzy from 2000 through 2008 added 2.7 billion square feet to our suburban sprawl concrete landscape, a divestiture of that foolish investment will be the floor.
15B - 2.7B (Minimum) = 18%, Likely 3-4B = 27%
If you think there are a lot of SPACE AVAILABLE signs dotting the countryside, you ain’t seen nothing yet. The mega-chains have already halted all expansion. That was the first step. The weaker players like Radio Shack, Sears, Family Dollar, Coldwater Creek, Staples, Barnes & Noble, Blockbuster and dozens of others are already closing stores by the hundreds. Thousands more will follow.
This isn’t some doom and gloom prediction based on nothing but my opinion. This is the inevitable result of demographic certainties, unequivocal data, and the consequences of a retailer herd mentality and lemming like behavior of consumers. The open and shut case for further shuttering of 3 to 4 billion square feet of retail is as follows:
There is 47 square feet of retail space per person in America.
This is 8 times as much as any other country on earth.
2005 => 38 square feet in 2005;
2000 => 30 square feet in 2000;
1990 => 19 square feet in 1990;
1960 => 4 square feet in 1960.
If we just revert to 2005 levels, 3 billion square feet would need to go dark. Does that sound outrageous?
Annual consumer expenditures by those over 65 years old drop by 40% from their highest spending years from 45 to 54 years old. The number of Americans turning 65 will increase by 10,000 per day for the next 16 years. There were 35 million Americans over 65 in 2000, accounting for 12% of the total population. By 2030 there will be 70 million Americans over 65, accounting for 20% of the total population. Do you think that bodes well for retailers?
Half of Americans between the ages of 50 and 64 have no retirement savings. The other half has accumulated $52,000 or less. It seems the debt financed consumer product orgy of the last two decades has left most people nearly penniless. More than 50% of workers aged 25 to 44 report they have less than $10,000 of total savings.
The lack of retirement and general savings is reflected in the historically low personal savings rate of a miniscule 3.8%. Before the materialistic frenzy of the last couple decades, rational Americans used to save 10% or more of their personal income. With virtually no savings as they approach their retirement years and an already extremely low savings rate, do retail CEOs really see a spending revival on the horizon?
If you thought the savings rate was so low because consumers are flush with cash and so optimistic about their job prospects they are unconcerned about the need to save for a rainy day, you would be wrong. It has been raining for the last 14 years.
Real median household income is 7.5% lower today than it was in 2001. Retailers added 2.7 billion square feet of retail space as real household income fell. Sounds rational.
This decline in household income may have something to do with the labor participation rate plummeting to the lowest level since 1978. There are 247.4 million working age Americans and only 145.7 million of them employed (19 million part-time; 9 million self-employed; 20 million employed by the government). There are 92 million Americans, who according to the government have willingly left the workforce, up by 13.3 million since 2007 when over 146 million Americans were employed. You’d have to be a brainless twit to believe the unemployment rate is really 6.3% today. Retail sales would be booming if the unemployment rate was really that low.
With a 16.5% increase in working age Americans since 2000 and only a 6.5% increase in employed Americans, along with declining real household income, an inquisitive person might wonder how retail sales were able to grow from $3.3 trillion in 2000 to $5.1 trillion in 2013 – a 55% increase. You need to look no further than your friendly Too Big To Trust Wall Street banks for the answer. In the olden days of the 1970s and early 1980s Americans put 10% to 20% down to buy a house and then systematically built up equity by making their monthly payments. The Ivy League financial engineers created “exotic” (toxic) mortgage products requiring no money down, no principal payments, and no proof you could make a payment, in their control fraud scheme to fleece the American sheeple. Their propaganda machine convinced millions more to use their homes as an ATM, because home prices never drop. Just ask Ben Bernanke. Even after the Bernanke/Blackrock fake housing recovery (actual mortgage originations now at 1978 levels) household real estate percent equity is barely above 50%, well below the 70% levels before the Wall Street induced debt debacle. With the housing market about to head south again, the home equity ATM will have an Out of Order sign on it.
We hear the endless drivel from disingenuous Keynesian nitwits about government and consumer austerity being the cause of our stagnating economy. My definition of austerity would be an actual reduction in spending and debt accumulation. It seems during this time of austerity total credit market debt has RISEN from $53.5 trillion in 2009 to $59 trillion today. Not exactly austere, as the Federal government adds $2.2 billion PER DAY to the national debt, saddling future generations with the bill for our inability to confront reality. The American consumer has not retrenched, as the CNBC bimbos and bozos would have you believe. Consumer credit reached an all-time high of $3.14 trillion in March, up from $2.52 trillion in 2010. That doesn’t sound too austere to me. Of course, this increase is solely due to Obamanomics and Bernanke’s $3 trillion gift to his Wall Street owners. The doling out of $645 billion to subprime college “students” and subprime auto “buyers” since 2010 accounts for more than 100% of the increase. The losses on these asinine loans will be epic. Credit card debt has actually fallen as people realize it is their last lifeline. They are using credit cards to pay income taxes, real estate taxes, higher energy costs, higher food costs, and the other necessities of life.
The entire engineered “recovery” since 2009 has been nothing but a Federal Reserve/U.S. Treasury conceived, debt manufactured scam. These highly educated lackeys for the establishment have been tasked with keeping the U.S. Titanic afloat until the oligarchs can safely depart on the lifeboats with all the ship’s jewels safely stowed in their pockets.
There has been no housing recovery.
There has been no jobs recovery.
There has been no auto sales recovery.
Giving a vehicle to someone with a 580 credit score with a 0% seven year loan is not a sale. It’s a repossession in waiting. The government supplied student loans are going to functional illiterates who are majoring in texting, facebooking and twittering. Do you think these indebted University of Phoenix dropouts living in their parents’ basements are going to spur a housing and retail sales recovery? This Keynesian “solution” was designed to produce the appearance of recovery, convince the masses to resume their debt based consumption, and add more treasure into the vaults of the Wall Street banks.
The master plan has failed miserably in reviving the economy. Savings, capital investment, and debt reduction are the necessary ingredients for a sustained healthy economic system. Debt based personal consumption of cheap foreign produced baubles & gadgets, $1 trillion government deficits to sustain the warfare/welfare state, along with a corrupt political and rigged financial system are the explosive concoction which will blow our economic system sky high. Facts can be ignored. Media propaganda can convince the willfully ignorant to remain so. The Federal Reserve can buy every Treasury bond issued to fund an out of control government. But eventually reality will shatter the delusions of millions as the debt based Ponzi scheme will run out of dupes and collapse in a flaming heap.
The inevitable shuttering of at least 3 billion square feet of retail space is a certainty. The aging demographics of the U.S. population, dire economic situation of both young and old, and sheer lunacy of the retail expansion since 2000, guarantee a future of ghost malls, decaying weed infested empty parking lots, retailer bankruptcies, real estate developer bankruptcies, massive loan losses for the banking industry, and the loss of millions of retail jobs. Since I always look for a silver lining in a black cloud, I predict a bright future for the SPACE AVAILABLE and GOING OUT OF BUSINESS sign making companies.
05-31-14
RETAIL CRE
COMMERCIAL REAL ESTATE - Commercial Mortgage-Backed Securities: Hot ... But Very Dangerous
"With $367 billion of CMBS loans maturing in 2015 - 2017, do not assume that things will just work out. Clients of yours who hold CMBS securities need to think seriously about unloading them while the market is still liquid."
A SHOCK COMING:Retail commercial real estate sector – Only 7% think that values will drop.
SOURCE: Commercial Mortgage-Backed Securities: Hot ... But Very Dangerous 05-20-14 Keith Jurow via DShort
Introduction
On May 6, Crain's New York Business published an article entitled "CMBS market comes charging back to life." The author pointed to "a growing comfort level among investors with CMBS." With Wall Street also touting the improved health of the commercial mortgage-backed securities (CMBS) market, now is a good time to take a good look at this important topic. Has the CMBS market really returned to normal after its precipitous collapse starting in 2008?
Investor Bulls Are Euphoric
Investors in commercial real estate are more bullish than they have ever been. Take a good look at this chart from Marcus & Millichap's Commercial Real Estate Investment Outlook for the first quarter of 2014.
Source: Marcus & Millichap
This chart reveals nothing less than investor ebullience. 71% of investors in multi-family apartments believe that the value of their investments will increase over the next twelve months. A tiny 4% think that values will decline. Investors are the least optimistic about the retail commercial real estate sector – a whopping 7% think that values will drop.
The report goes on to point out that more than two thirds of those investors polled believe that commercial real estate offers "favorable returns relative to other investment classes." More than half believe that commercial properties have bottomed out.
Are there any fundamentals that could cause investors to moderate their bullish expectations? I could not find any which the report mentions. The chief strategy officer for Marcus & Millichap concludes the report by saying that
"Given the alternative investment options, the next several years are going to be very, very positive for commercial real estate."
CMBS Delinquency Rate Continues to Decline
Investors are very confident that their euphoria is built on solid ground. Aren't there any good reasons for their optimism?
That is a fair question. Let me give you one key factor that the bulls usually point to in support of their position. The delinquency rate on CMBS has been declining since it peaked in the summer of 2012. Take a look at this impressive drop in the delinquency rate just over the last year.
Source: Trepp
Doesn't this decline suggest an improved market? I must admit that the drop in the last 12 months has been huge. Let me explain why the decline is not all that significant.
The dollar figure through April 2014 for CMBS delinquent loans is $34.1 billion. That is down substantially from the $49.7 billion in May 2013. This also looks very positive, doesn't it?
Well ... not quite. Let's dig a little deeper. You need to keep in mind that the delinquent loans figure excludes all those loans which are past their balloon due date but are current on their interest payments. This factor is extremely important.
The percentage of loans which are delinquent is not the most important figure for investors. In my Capital Preservation Real Estate Report, I discussed in detail Morningstar's very important CMBS Delinquency Report. Let's take a good look at their more recent March 2014 report.
Morningstar's Watchlist is the crucial component of the report. It deserves some close examination.
The list starts with all loans which are delinquent, in foreclosure, already foreclosed (REO), placed with a special servicer, or whose borrower is in bankruptcy. This is a much broader picture of distressed loans. But it doesn't end here.
Added to this list are loans where updated financial reports indicate "potential problems." This could be a significant cash flow decrease since the loan's origination, a decline in the occupancy rate, or a pending loss (or bankruptcy) of a significant tenant.
As of February 2014, the Watchlist total of loans that are potentially heading for default was $134.7 billion -- more than four times the delinquent loan figures.
The Game of Extend and Pretend
In 2009, the banking regulators created a game which quickly became known as "extend and pretend." When a borrower defaults on a loan within a CMBS, the master servicer will usually transfer the debt to a special servicer for further action. The special servicer has considerable discretion in determining what course of action might provide the greatest net return to the lender. As the crisis deepened after the bankruptcy filing of Lehman Brothers, special servicers were flooded with delinquent and defaulted loans. They had to determine what action was in the best interest of the investor. Although foreclosure was chosen as the best route for some loans, this was not done to any great extent. The alternatives became known as "workouts."
Instead, the servicers searched for ways to modify the loan so it could return to being "current." This included extension of the loan if the borrower was able to continue making payments. The terms of the loan were often modified by reducing the interest rate, offering interest-only payments, or even cutting the balance owed. Loans could be completely restructured -- sometimes in the most bizarre manner.
More recently, a discounted payoff (DPO) is often selected. This is done if the special servicer believes the underwater property will not regain its value before the balloon is due and that a DPO will provide a greater net return to the investor than a foreclosure. The borrower had to come up with the cash to pay off the note at the agreed-upon discount.
Although these workout games managed to avoid a mountain of foreclosures that might have buried the CMBS market, they simply kicked the can down the road. Wall Street is confident that these workout strategies will continue to work their magic. After all, didn't the loosening of standards by the regulators prevent a banking collapse in 2009?
Notwithstanding this unbridled optimism, I remain very skeptical that the kick-the-can-down-the-road game provides any real solution. Let me explain why.
Paying the Piper: CMBS Loans Coming Due
One of the main reasons that the CMBS delinquency situation does not seem to be a major problem now is that the worst is yet to come. The problem is heavily concentrated in the loans originated or refinanced during the three craziest years of the bubble: 2005 - 2007.
Morningstar's March 2014 delinquency report points out that loans issued during these years account for 85% of all delinquent CMBS mortgages. Although the prices of CMBS loans in the secondary market have rallied substantially since the bottom, most of the borrowers are still underwater with their property. Take a good look at this chart showing the amount of CMBS loans coming due.
Source: Goldman Sachs and Trepp
You can see that it is in the next three years -- 2015 - 2017 -- when the great bulk of CMBS loans will be coming due -- $367 billion. The vast majority of them are ten-year mortgages originated during the bubble years of 2005 - 2007.
To say that underwriting standards disappeared during these three years is an understatement. Let me give you a better sense of what happened.
In 2004 before the market really heated up, the average loan-to-value ratio (LTV) on CMBS loans reported by the Big Three rating agencies was roughly 87%. This figure rose in each of the succeeding three bubble years.
By the end of 2006, most deals were being underwritten with LTVs of 100%. A year later, the average LTV had soared to roughly 110%. This means that lenders were writing loans which exceeded the appraised value of the property. That was total insanity and a recipe for disaster. Yet hardly anyone seemed to worry.
Debt Service Coverage Ratios (DSCR) plunged as completely unrealistic rental growth projections were permitted. The result was that enormous dollar amounts of loans were underwritten which would not have passed muster only a few years earlier.
Take a good look at this chart from Moody's showing the shocking decline in underwriting standards during these three bubble years.
One last key factor – Roughly 80% of the loans had interest-only terms with no amortization built in to protect against balloon payment risk. So when you read about balloon payments coming due in 2015 - 2017, keep in mind the quality of the loans we are talking about.
Investing in Distressed CMBS Loans
A sale of the note is one of the options which special servicers use if they believe it will net the lender more than a foreclosure might. There are quite a few funds which focus on purchase of distressed commercial real estate notes.
The most important and largest provider of a secondary market is DebtX. They are very important for sellers because DebtX helps them to value the loan. Since most of these loans are relatively small and very idiosyncratic, the assistance and data provided by DebtX enables them to price the loan as accurately as possible to increase the chance of finding a willing buyer.
Here is the biggest danger for unwary buyers which you need to understand. The market distinguishes between "non-performing" loans and "impaired performing" loans. Is this splitting hairs? Not at all.
Non-performing loans are usually seriously delinquent loans on the balance sheets of banks which are no longer accruing interest. However, the banks also have impaired loans which they still consider to be performing and continue to accrue interest. They have what are called well-defined weaknesses, but accrue interest because the bank considers them to be "well secured" by the collateral. Good luck trying to figure out if a loan is well-secured.
This difference between a non-performing loan and an impaired but performing loan is crucial for the note buyer. Take a good look at this updated graph from DebtX's January 2014 market report.
Let me explain. The graph shows the difference between the average price of impaired but performing loans and that for non-performing loans. This spread has fluctuated between 25 and 30 percentage points for more than two years. At the end of 2013, the spread widened to more than 30.
What this means is that a buyer would have to pay 30 percentage points more for an impaired performing loan than for a non-performing loan. That is a huge difference. Here is my question: How many investors can really distinguish between these two kinds of distressed loans? Not many. I am not sure that I could distinguish them.
If your clients are seriously considering investing in distressed commercial real estate notes, they would need to be able to differentiate one from the other. Otherwise, they could easily overpay for what was considered to be an impaired performing loan but was really a distressed loan where the likelihood of full repayment was highly questionable. Do you want them to take that risk?
My Advice for You:
For a year now, I have tried to give my subscribers a sense of how ugly the 2008 – 2009 crash was for investors. In the summer of 2009, Cornerstone Advisors published an article which reported the complete collapse of commercial real estate liquidity in April and May 2009. For those two months, less than $3 billion in commercial property sales were completed.
You must keep in mind that a record $522 billion in commercial property had been sold in 2007. In the spring of 2009, sellers refused to drop their asking prices sufficiently to meet the demands of the few buyers out there. Throughout the nation, the real estate market had essentially seized up.
I urge you to disregard the bulls and, in the interest of your clients, think carefully about risks. With $367 billion of CMBS loans maturing in 2015 - 2017, do not assume that things will just work out.
Clients of yours who hold CMBS securities need to think seriously about unloading them while the market is still liquid.
Those clients of yours who may be considering purchasing CMBS ought to picture the market as a minefield ahead without any markers. Leave the risk-taking to others.
05-24-14
RETAIL CRE
DOLLAR TREE - Uptick in its earnings before following economic downturns
Dollar Tree (DLTR) this morning reported first quarter earnings, and shares of the company are up about 7%.
The company said that same-store sales grew by 2%, or 1.9% when excluding the impact of the Canadian dollar. Management said it expects its same store sales for 2014 to grow by low-single digits.
Following Dollar Tree's report, dollar store peers Dollar General (DG) is rallying and Family Dollar (FDO) is barely in the green.
It might be tempting to conclude that strength in the dollar stores is a bad sign for the economy. This chart from Family Dollar's January investor conference, paints an interesting picture of what makes these discount retailers go. Family Dollar has seen an uptick in its earnings before income tax, or EBIT, following economic downturns.
But recent U.S. economic data has painted the picture of an economy that is growing, even if that growth hasn't been as robust as many would expect.
The move higher in dollar store stocks comes during what has been a busy week for retailstocks. The XRT ETF that tracks the S&P Retail index losing about 1% this week, underperforming the S&P 500's 0.8% gain.
In more specific instances, companies in the retail sector have sent investors mixed messages. Luxury retailers Coach (COH) and Tiffany (TIF) saw their shares go in different directions after their most recent reports: Coach sank, Tiffany soared.
High-end organic grocer Whole Foods (WFM) got smoked after its earnings report. But retail giant Wal-Mart (WMT), which has announced clear intentions to drive down the price of organic food, also fell after its results, which disappointed.
So the question for investors is if the economy continues to make incremental improvements, what story is retail really telling, and might discount retailers go from here?
Dollar General is set to report first quarter results on June 3.
05-24-14
RETAIL CRE
RETAIL CRE - E-Commerce Industry Is About To Explode
To absolutely no one’s surprise, it looks like America’s online shopping obsession will continue unabated.
A new report from Forrester Research says that online retail sales in the U.S. are expected to grow more than 57% to $414 billion by 2018, up from the $263 billion e-retail accounted for in 2013. With this jump, online sales will make up approximately 11% of all retail sales.
According to Forrester, millennials are playing a crucial role in this growth. As a generation that was raised with the Internet, 25 to 33 year-olds in particular are doing more of their spending online than any other age group. As this generation enters its prime spending years, its impact on eCommerce will magnify.
The report also notes the profound impact that the proliferation of mobile devices is having on ecommerce, as consumers are increasingly choosing to make purchases via mobile phones and tablets. While U.S. mobile retail sales accounted for only $8 billion in 2013 (that’s 3% of online sales and less than 1% of all retail sales), Forrester expects mCommerce to grow 33% annually through 2017.
While online retail’s pure revenue potential is certainly impressive, let’s not ignore the growing impact computers, smartphones, and tablets are having on in-store purchases, as well. With more and more retailers developing omnichannel strategies encompassing both digital and analog touch points, the bond between online and in-store is intensifying. In other words, eCommerce platforms are having a compound effect on sales.
Undoubtedly, there is also a host of challenges that accompany the precipitous rise of online sales. As the last 6 months have clearly demonstrated, even the largest retailers are still susceptible to fulfillment issues and cyber security breaches. (As Target’s recent struggles have highlighted, the repercussions of such breaches can be extremely damaging and wide-ranging.) In addition, companies must continuously enhance capabilities like site performance, mobile optimization, and user experience in order to stay competitive. This requires innovative strategic planning and, often, significant investment.
As online sales continue to be an increasingly critical revenue source, U.S. retailers will look to build out their digital capabilities. But cutting edge companies understand that these capabilities will not only enhance online sales, they will help them find bold new ways to connect their digital and in-store experiences.
"The American consumer is not fully back and remains cautious," is the oddly real tone of Ken Perkins, president of Retail Metrics, reporting that U.S. retailers’ first-quarter earnings are trailing analysts’ estimates by the widest margin in 13 years amid weak spending by lower-income consumers intensified competition:
*U.S. RETAILERS’ PROFITS MISSING ESTIMATES BY MOST IN 13 YEARS
*U.S. RETAILERS MISSING ESTIMATES BY 3.2%, RETAIL METRICS SAYS
While extreme weather is tossed out as the reason for this miss, what is an ugly smoking gun is the expectations the chains are missing had already been significantly lowered. Hope remains strong as "pent-up demand" has analysts projecting a 8.6% surge in profits in Q2... as long as it's not too hot or cold or wet or dry.
As Bloomberg reports,
Chains are missing projections by an average of 3.2 percent, with 87 retailers, or 70 percent of those tracked, having reported, researcher Retail Metrics Inc. said in a statement today. That’s the worst performance relative to estimates since the fourth quarter of 2000, when they missed by 3.3 percent. Over the long term, chains typically beat by 3 percent, the firm said.
...
“The American consumer is not fully back and remains cautious,” Ken Perkins, Retail Metrics’ president, wrote in the report.
...
What’s more, the expectations the chains are missing have been significantly lowered. While analysts now project retailers’ earnings fell an average of 4.1 percent, back in January they had estimated a 13 percent gain.
Most retail segments are showing profit declines, with department stores, teen-apparel chains and home-furnishing stores faring the worst, Retail Metrics said. About 41 percent of retailers have missed estimates, while 45 percent have beat.
But faith remains strong that it will all be ok...
Improved weather, pent-up demand and better employment trends may help the industry in the second quarter, Perkins said. Analysts are projecting an 8.6 percent gain in profit for the current three-month period, he said.
Unforntunately, the winter of 2000 was a relatively mild one - so we wonder what they blamed the miss on then...
05-24-14
RETAIL CRE
RETAIL CRE - More Disappointing Results
On Monday afternoon, Urban Outfitters reported that sales at its namesake store plunged 12% during the first quarter. "While Anthropologie and Free People continue to deliver record levels in sales and profits, Urban Outfitters had a disappointing quarter and is working diligently to regain its fashion footing," said CEO Richard Hayne. URBN fell 8.8%.
Dick's Sporting Goods announced weaker-than-expected quarterly sales and earnings. "Our difficulties this quarter were isolated to two categories: golf and hunting," said CEO Edward Stack. "After a very challenging first quarter in golf last year, we expected some further headwinds and only modest improvement, but instead we saw a continued significant decline. In the case of hunting, we planned the business down based on last year's catalysts, but it was even weaker than expected." DKS plunged 17.9%.
The TJX Companies, which owns T.J. Maxx and Marshalls, also announced weak financial results. "For the first quarter, our consolidated comparable store sales increased 1%, and our earnings per share of $.64 were slightly below our expectations with a negative impact from foreign currency exchange rates that was larger than our guidance assumed," said CEO Carol Meyrowitz. "While sales were not as strong as we would have liked, predominantly in our apparel business, I was very pleased that overall business trends improved as the quarter progressed." TJX fell 7.6%
Caterpillar disclosed that its rolling 3-month sales through April tumbled 13%. Latin America; Asia/Pacific; and Europe, Africa and Middle East (EAME) also saw sharp declines during the period. Caterpillar is recognized as a bellwether of economic activity. CAT declined 3.6%
Dick's shares are tanking following disappointing sales numbers. The company said that weak golf and hunting sales led to the decline.
Dick's Sporting Goods is expanding clothing offerings for women.
The company plans to open specialty stores for women in its existing retail locations.
"Think a colorful wall of sports bras, vibrant tables filled with color coded tees/tanks, and racks organized by specific needs, like running jackets and yoga pants," the company told Business Insider in an email. "Accessories will also have a designated space, so women can match everything from their socks, to their gym bags, to their headbands."
The expanded product offerings will also be online.
With the advent of brands like Lululemon, Gap's Athleta, and Under Armour, demand for women's athletic apparel is soaring like never before.
But the brand faces a ton of competition from retailers who have already established themselves with female clientele.
The mounting competition has even begun to threaten Lululemon, long seen as the paramount purveyor of fitness clothing for women.
In an earnings conference call with analysts, Dick's CEO Ed Stack said that the women's business has the most growth potential of any segment. He also cited youth and footwear as growth opportunities.
The company also has the advantage of partnerships with mega-brands like Adidas, Nike, and Under Armour.
Dick's Sporting Goods (DKS), one of the nation's largest golf retailers, this morning reported earnings and sales that disappointed, citing notable weakness in its golf and hunting segments.
Dick's shares are off more than 15% following its report. Shares of golf-club maker Callaway Golf (ELY) are also down about 4% following the report from Dick's.
Dick's CEO Edward Stack said the company expected a modest improvement in its golf segment during the first quarter, but instead saw declines. Same-store sales at its Golf Galaxy stores fell 10.4% during the quarter. In the prior year period, same-store sales at Golf Galaxy fell 11.8%.
"Our difficulties this quarter were isolated to two categories: golf and hunting. After a very challenging first quarter in golf last year, we expected some further headwinds and only modest improvement, but instead we saw a continued significant decline. In the case of hunting, we planned the business down based on last year's catalysts, but it was even weaker than expected," Stack said.
A report from GOLF 20/20 helps explain the pain. Total rounds played in February fell 4.6% from the prior year, with rounds played in the West North Central and Mid Atlantic regions, which endured historically cold and snowy winters, falling by more than half.
05-21-14
RETAIL CRE
RETAIL - April Surprised Most Investors who were looking for a stronger reading!
APRIL RETAIL SALES
Easter’s shift almost always aggravates monthly retail sales comparisons. The bizarre weather patterns in much of the U.S. aggravated demand and penalized store traffic, making prognosticating April retail sales a humbling, if not futile, exercise.
April’s advance monthly retail sales (excluding autos) registered a flat month- over-month comparison, surprising most investors who were looking for a stronger reading, especially in light of last week’s April same store sales results at numerous retailers.
Solid April sales momentum was reported at shops as varied as old navy, up 18 percent, to the 8 percent gain registered at victoria’s Secret and a 5 percent gain at Costco (excluding gas sales). l brands and gap both lifted first quarter guidance.
For much of this recovery consumers have improved their balance sheets and shopped with intent, benefitting one category to the neglect of another. Recent strength in housing meant apparel suffered. Industry consolidation improved sales results at individual.
According to the April consumer survey conducted by the n ational Retail Federation, of more than 6,000 adults surveyed, 49 percent say the current state of the U.S. economy is causing them to generally spend less, while 39 percent shop sales more often, 28 percent report spending less on apparel and 21 per cent say they are cutting back on small luxuries such as high end cosmetics and trips to coffee shops. with income growth static consumers are scrupulous with their discretionary purchases.
April probably benefitted from the late Easter and a more engaged consumer. But before we call for a sustained uptick in middle class purchasing we need to see the supports to purchasing – income growth and employment – gain traction. For now, the best call is a bifurcated retail shopping environment, with value retailers, such as TJ Maxx and o ld navy, gaining share from moderate department stores, and luxury names, such as Ralph lauren, Prada and Michael k or s, faring well with global demand.
Having been revised up to a 1.5% growth for March (the most since March 2010), retail sales crumbled across the board in April as the promise of un-harsh weather rebounds evaporated into the reality of a one-off pent-up demand pop. All sub-series of retail sales missed expectations with Ex-Auto/Gas actually dropping 0.1%. The broad weakness was led by furniture (-0.6%) and electronics stores (-2.3%).
The broadest measure of retail sales missed...
and ex-autos/gas saw a drop of 0.1% and its 2nd biggest miss in over a year...
The breakdown: after sliding 1.6% in March, electronics and appliances stores tumbled -2.3% in April. Adding insult to housing contraction injury, furniture and home furnishings stores saw a -0.6% drop in April also, while miscellaneous store sales tumbled by 2.3%.
As for the retail sales control group, yup: that is a negative print from March.
05-17-14
RETAIL CRE
RETAIL CRE - A 71% Consumption Economy Living off Government Deficits (Temporarily)
The Epitomy of 'Consuming More than You Produce'!
05-10-14
SMII
RETAIL CRE - Exploding Shift to Online Sales
05-10-14
SMII
RETAIL CRE - - Loss of Anchor Tenants Can Accelerate Downward Spiral
Loss of Anchor Tenants Can Accelerate Downward Spiral
NORFOLK, Va.—With J.C. Penney Co. and Sears Holdings Corp. racing to close stores, America's weakest malls are being pushed to the brink.
Nearly half of the 1,050 indoor and open air malls in the U.S. have both of those struggling chains as anchor tenants, according to real-estate research firm Green Street Advisors. Of those malls, nearly a quarter are struggling with sales below $300 per square foot and vacancy rates above 20%, meaning they will have a hard time finding new tenants if old ones leave.
For an already-weakened mall industry, the negative turn for two once-reliable anchors is promising more stress at a time when the Internet is steadily stealing traffic. And the pressure is only growing. Sears Chief Executive Eddie Lampert this week said he plans to close more stores to help return the company to profitability.
Vacancy rates rose and sales plunged at the Gallery at Military Circle, about 5 miles from downtown Norfolk, Va., after the Sears store closed its doors two years ago. Eventually the mall's owner missed multiple payments on its debt. Remaining retail tenants worry about what will happen when the Penney store closes this month, darkening another corner of the 44-year-old property.
Bruce Van, who manages Gent's, a locally owned boutique specializing in men's suits and fedoras and Sunday church clothes, said foot traffic fell by more than half after the Sears closed.
"When J.C. Penney goes out in May, it's going to be bad," said Mr. Van, who is also pastor at Rivers of Life Fellowship in Hampton, Va.
The first U.S. indoor mall opened in Edina, Minn., in 1956, and construction peaked in the 1980s. Only six new malls have been built since 2010, according to CoStar Group, a provider of commercial real-estate information. Meanwhile, the number of "dead malls," those with vacancy rates over 40%, has nearly tripled since 2006 to 74 properties.
The fate of the mall business matters, because even as the industry struggles, it remains an important source of economic activity.
Sales per square foot at the nation's malls grew just 2.6% last year—their slowest pace since 2009, according to International Council of Shopping Centers. Vacancy rates are stubbornly high, at an average of more than 8% at regional malls, not far off a 2011 peak in of 9.4%, according to data company Reis Inc.
"Just because people are making fewer trips to the mall doesn't mean they're spending less," said Jess Tron, a spokesman for the ICSC. Mr. Tron said that malls are trying to reinvent themselves by adding entertainment like indoor golf courses and higher-end restaurants, as well as services such as same-day delivery.
Still, it is tough to reverse such high vacancy rates when large anchor-tenant retailers like Sears and Penney are closing stores and others like Macy's Inc. are opening fewer locations.
Penney, which racked up $2.4 billion in losses over the past two years, plans to close 33 of its stores, most of them in malls. Sears, with losses of $2.3 billion over the same period, has closed 116 of its full-line Sears stores since 2010. Penney and Sears declined to comment.
To be sure, the exit of a troubled retailer can create an opportunity for stronger malls to find healthier tenants. But it is a different situation for struggling malls. And the potential damage from losing an anchor tenant is especially high in malls that have both Penney and Sears as tenants, said Gary Balter, a retail analyst with Credit Suisse. "If one of them goes, it almost forces the other one out, because the mall just won't get enough traffic," Mr. Balter said.
The exit of an anchor can cause other stores to leave or renegotiate their leases, contributing to a spiral of declining traffic and investment.
At the Gallery at Military Circle, the cavernous, 128,000-square-foot space once occupied by Sears remains empty. "For Lease" posters dot the windows of other darkened storefronts.
The mall's situation is already tenuous. In November, and again in February and April, Thor Equities LLC, its owner, missed payments on a $53 million securitized loan, and Thor is in talks to restructure the debt, according to Trepp LLC, a company that collects data on real-estate debt.
The Gallery is hanging on to its other anchors—Macy's at the north end and an 18-screen Cinemark Holdings Inc. movie theater on the south. A Macy's spokesman said the retailer has no plans to leave. Cinemark didn't return calls seeking comment.
At the Southlake Mall in Morrow, Ga., after the Penney there closed in June 2011, a number of national-chain tenants had their rent payments reduced, real-estate executives said. The mall's total sales fell to $58 million in January from $60 million in the year Penney closed as vacancies rose.
Several retailers at the mall said their sales have fallen by 30% since Penney left. "J.C. Penney brought people to the mall," said Joseph Nguyen, who operates a jewelry-repair kiosk near the food court and was one of the retailers whose sales fell off.
Southlake occupied what was considered prime real estate in suburban Clayton County when the property was built just off Interstate 75 in 1976. Housing developments were springing up as the city expanded southward, bringing in new residents and eager shoppers.
Over the past decade, however, Southlake's fortunes have turned. Newer shopping destinations in neighboring Henry County pulled customers away. Clayton County lost jobs when a nearby Ford Motor Co. plant closed in 2006. The mall took a further hit when Clayton County dropped bus service two years ago.
Southlake lost its first anchor in 2003, when Macy's closed one of its two stores at the mall. Unable to find another retail tenant, General Growth Properties, which bought the mall in 1997, turned the space into offices and a convention center. General Growth filed for Chapter 11 bankruptcy protection in 2009 and emerged in 2010. A year later, Penney left Southlake mall.
While the mall's occupancy rate has remained above 90%, Southlake has lost several national players, including The Limited and Gap clothing chains and the Chick-fil-A fast-food restaurant.
"Two anchors aren't enough to draw people to the mall," said Michelle Laidig, who has worked at Southlake for 25 years. "The mall used to be a destination. Now the locals just come here to return items they bought at other malls."
The future may be turning around. Vintage Real Estate LLC, which acquires and redevelops underperforming malls, bought Southlake in April for an undisclosed price and plans to invest $3 million to revitalize the property.
"We talked to every tenant," Vintage Chairman Fred Sands said. "We found out how they are doing and what the facility needs."
Mr. Sands said he is negotiating with new restaurants for the food court and is interviewing tenants to take over the former Penney space.
The chairman disputes the idea that the mall was hurt by Penney's closing. Sales excluding newly opened or closed stores have held steady at roughly $320 per square foot since 2011, according to documents Mr. Sands provided. Lost business from Penney was offset by increased sales from the mall's 16 shoe retailers, including Foot Locker and Athlete's Foot, he said.
RaeQuel Fagin, a 20-year-old-restaurant worker who met a friend at the food court on a recent Tuesday afternoon, said the mall was a good place to come for sneaker releases, but not for much else.
"I wouldn't say this is where I would come if I felt like shopping," Ms. Fagin said
STRIP MALLS DIED - Now INDOOR MALLS ARE DYING
Nearly half of U.S. malls have both Sears and J.C. Penney as anchor tenants. Above, the 1963 opening of a Sears at a mall in Lakewood, Colo. Denver Post/Getty Images
FAIR USE NOTICEThis site contains
copyrighted material the use of which has not always been specifically
authorized by the copyright owner. We are making such material available in
our efforts to advance understanding of environmental, political, human
rights, economic, democracy, scientific, and social justice issues, etc. We
believe this constitutes a 'fair use' of any such copyrighted material as
provided for in section 107 of the US Copyright Law. In accordance with
Title 17 U.S.C. Section 107, the material on this site is distributed
without profit to those who have expressed a prior interest in receiving the
included information for research and educational purposes.
If you wish to use
copyrighted material from this site for purposes of your own that go beyond
'fair use', you must obtain permission from the copyright owner.
DISCLOSURE Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
Last week the government reported personal income and spending for April. After months of blaming non-existent consumer spending on cold weather, shockingly occurring during the Winter, the captured mainstream media pundits, Ivy League educated Wall Street economist lackeys, and Keynesian loving money printers at the Fed have run out of propaganda to explain why Americans are not spending money they don’t have. The corporate mainstream media is now visibly angry with the American people for not doing what the Ivy League propagated Keynesian academic models say they should be doing.
BOB EVANS FARMS[B o BE] Earnings Call 7/9/14: “Fiscal 2014 financial that Bob Evans Farms Inc. was adversely impacted by a number of issues, most notably, historically high sausage material costs, abnormally severe and sustained weather across the Midwest where we have the heaviest concentration of Bob Evans Restaurants; a supplier dispute that restricted sales of Bob Evans Farms Foods’ high growth refrigerated side dish product line and also complicated the segment’s plant expansion projects. And finally, cost associated with supplemental tax and internal audit staff resources, strengthening the company’s internal processes and controls over financial reporting, as well as cost related to activist stockholder responses.” 
It was a surprising order from the top of a company that long ago devised one of retail's most successful formulas and milked it for nearly half a trillion dollars in sales last year. According to the book, Mr. Bezos himself studied Wal-Mart as he built Amazon, internalizing its credo of acting fast and experimenting often.
\
