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Wall Street Discovers the Brick-and-Mortar Meltdown

Summary:
Oh Lordy. Finally time to make some easy money by betting on the collapse of brick-and-mortar retail, years after it began? Here’s a grisly thought: Now there’s an ETF for that. In its launch announcement today, ProShares explained: Over 30 major retailers have declared bankruptcy over the past three years, nearly two-thirds of those in 2017, including Toys “R” Us, RadioShack, and Payless. The pressure is expected to continue with some analysts predicting that online sales growth will outpace bricks and mortar retailers 3 to 1 by 2020. Retail is being profoundly disrupted by shoppers moving online, oversaturated markets and changing consumer behaviors. The brick-and-mortar retail pain splits two ways: Retailers that have failed to build a vibrant online sales channel and are

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Oh Lordy.

Finally time to make some easy money by betting on the collapse of brick-and-mortar retail, years after it began? Here’s a grisly thought: Now there’s an ETF for that.

In its launch announcement today, ProShares explained:

Over 30 major retailers have declared bankruptcy over the past three years, nearly two-thirds of those in 2017, including Toys “R” Us, RadioShack, and Payless. The pressure is expected to continue with some analysts predicting that online sales growth will outpace bricks and mortar retailers 3 to 1 by 2020.

Retail is being profoundly disrupted by shoppers moving online, oversaturated markets and changing consumer behaviors.

The brick-and-mortar retail pain splits two ways: Retailers that have failed to build a vibrant online sales channel and are dependent on their physical stores; and the landlords that lease stores to them.

This EFT focuses on the first, the retailers. The ticker is evocatively named EMTY. As an inverse ETF, it’s supposed to rise in price when the Solactive-ProShares Bricks and Mortar Retail Store Index, which is composed of 56 “traditional” brick-and-mortar retail stocks, declines.

Included in the index are department stores, supermarkets, and retailers of apparel, consumer electronics, and home improvement items. From the top down, with the year-to-date share-price plunge unless otherwise noted:

  • Rite Aid (-82%)
  • C. Penney (-62%)
  • Office Depot (-47% since Aug 7, 2017)
  • Sears (-67% since April 18, 2017)
  • Smart & Final Stores (-47%)
  • Express (-33%)
  • GNC Holding (-43%)
  • Barnes & Nobel (-34% YTD, including the spike today … more in a moment)
  • Chico’s Fas (-46%)

Going back further, it’s even worse. Many of them have lost most of their value since their respective peaks a few years ago. For example, GNC is down 90% since November 2013.

Wal-Mart Stores and Target have only a tiny presence in the index, and Amazon is absent. So the top names on the list are truly among the weakest still-standing publicly traded retailers. But they’re in much better shape than the PE-owned retailers many of which have already toppled into bankruptcy.

In fact, most of the retailers that went bankrupt in recent years and that grace our Brick-and-Mortar-Meltdown hall of fame, were owned by private equity firms. This includes Toys “R” Us and Payless. Both are specifically named in the announcement cited above. Radio Shack, the third retailer named above, was also privately owned when it filed for bankruptcy. So you couldn’t short their shares because the shares are privately held.

What is toppling private-equity-owned retailers is the time-honored principle by PE firms of buying companies via a leveraged buyouts, stripping out cash, and loading them up with debt. For the retailers it means that debt servicing costs are so high that they have no free cash flow to advance and update their business, invest in a vibrant online presence, and invest in masterful merchandising and service at their physical stores. These retailers have been doomed by their PE owners.

But you can’t short the shares of these retailers because they’re privately held. So the easy targets for shorts are off the table. For the ETF promoters to throw those three bankrupt privately-owned retailers as a lure into the announcement of an ETF that bets against publicly traded retailers is disingenuous, to say the least.

Given the collapse of the shares of publicly traded retailers that started years ago, this newfangled ETF might have missed the best part of the party. And there have been other ways to short them: The SPDR S&P Retail ETF (XRT) – down 8% year-to-date and down 20% since its peak in July 2015 – has long been a short-seller favorite.

Nevertheless, the announcement goes on:

Investors are witnessing signs of trouble in the malls and falling stock prices in the markets. For the first time, investors can turn these trends into a potential investment opportunity through an ETF.

Physical retailers are under immense pressure. E-commerce is threatening to take over retail as consumer habits change, shopping moves online, and physical stores struggle to remain viable. With this disruption comes opportunity.

This ETF is the first one “specifically designed to benefit from the decline of bricks and mortar retailers,” it says.

So the lowest hanging fruit – retailers owned by PE firms – is not available to short. The weak retailers that are publicly traded and are available to short have been declining for years, their shares have gotten crushed, and much of the fun has been had.

Despite this prepackaged once-in-a-lifetime opportunity to short an entire industry years after the sell-off has started, additional risks remain, even in this long-term structural decline of the brick-and-mortar retail industry that will never recover: Short term, anything can happen. See Barnes & Noble today.

When the Wall Street Journal reported that, “according to people familiar with the matter,” Sandell Asset Management has approached Barnes & Noble with a buyout offer of over $9 a share, BKS spiked 16% in one fell swoop just after 1 pm Eastern Time today before losing steam. Anything can happen in this crazy market awash in liquidity that is trying to find a place to go. And short sellers have their heads handed to them regularly.

Malls are dragging down commercial real estate, but one sector is hot. Read…  Brick-and-Mortar Meltdown Sinks Property Prices




Wolf Richter

Founder, Wolf Street Corp.

In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China.

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