Retail Rolls Market As Summer Looms

Once a new technology rolls over you, if you’re not part of the steamroller, you’re part of the road.

If you are a red blooded, living, breathing, and curious teenager, one of enjoyable moments of ones life has traditionally been hanging out at the mall with your friends. Teenage girls shopping for clothes, nail polish, shoes, bikinis, and getting propositioned by adventuresome and debonaire young guys is part of doing the teen thing, at least it used to be when yours truly was growing up. If you actually go into the stores and do some shopping, there is nothing like finding a real bargain for something you really want. The act of visiting different businesses and comparing the merchandise for value is a life long lesson which can be applicable for many years and bode well when making a big ticket purchase like a car or house. So, while it may seem a trivial thing when mall traffic is down, there potentially could be serious ramifications for the future.

Last week, a firm specializing in analysis of malls in North America made the observation that nearly one third need to be closed down over the next five years because there are simply too many. This week, domestic equity markets were roiled because of a series of earnings misses by, you guessed it, mall based retailers. We are not talking about marginal players either, Macy’s Inc (NYSE:M), Nordstrom Inc (NYSE:JWN), Kohl’s Corporation (NYSE:KSS), and JC Penney Company Inc Holding (NYSE:JCP) all took it on the chin in a big way. Just to put it in perspective, the combined market value of all four of these companies is about $25 billion dollars, representing nearly $75 billion of sales and over $8 billion of cash flow. Amazon.com (NASDAQ:AMZN) now is worth over 10X the combined total of these four entities, and it’s sales and cash flow also exceeds the aggregated figures as well. Retail is a notoriously difficult area to invest in, and if you cannot own one of best department stores without getting torched 20% in a day, you have to wonder what the environment is like for something of average or lower quality. Clearly, we can see why one rule of thumb is to avoid the 800 pound gorilla, a.k.a. Mr. Bezos and his Seattle juggernaut. Another consideration is be very careful of anything involved with technology as roadkill ain’t our idea of fun, eh?

In our little area of the markets, the last few weeks have been quite productive on a number of fronts. Strategically, a few of our holdings have completed transactions which should bode well for the future. On the execution side, quite a few holdings performed well and even in the difficult environment have been rewarded. In a few specific situations, the management teams of these companies have proven their mettle and it looks like they may become dominant enterprises. As far as opportunities are concerned, markets always throw up plenty to look at and this week was no exception. On Friday, the retail sales number came in stronger than what the market expected, yet stocks sold off again, making it three straight weeks of lower prices It shows the dominant sentiment is currently negative with investors questioning whether there is any growth to be found, where, how quickly, and most importantly, at what price (unless you are Amazon or Facebook (NASDAQ:FB)). Next week we have more of the big boys in, you guessed it, retail, as both Wal-Mart Stores Inc (NYSE:WMT) and Target Corporation (NYSE:TGT) spill the beans. Wal Mart has been a serial disappoint-er and Target has seen some improvement the last year under a new CEO. Don’t get your hopes up.

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.