By Investment U Research Team The last few years have not been kind to retail stocks. The decline of mall culture has paired up with online competition from the likes of Amazon (Nasdaq: AMZN) to take a bite out of brick-and-mortar stores.
Then last week, investors were freaked out by Urban Outfitters CEO Richard Hayne, who said that there are too many stores in the U.S. today. Hayne implied that the apparel retail market is oversaturated to a bubble-ish extent.
How valid is this bearish view of retail stocks? Are we really seeing a bubble burst? We’re digging into the details of this controversial theory below.
Signs of a Bubble
On that earnings call, Hayne made a thoughtful comparison… but one that is unlikely to reassure investors in retail stocks.
“Our industry, not unlike the housing industry, saw too much square footage capacity added in the 1990s and early 2000s.Thousands of doors opened… and created a bubble. And like housing, that bubble has now burst,” he explained to shareholders.
According to Hayne, the symptoms of this bubble were very similar to the late ‘00s housing bubble. Overconstruction was a big part of it. The U.S. has six times more retail space per capita than Europe or Japan.
Runaway land values were another symptom. In recent years, the average rent per square foot of retail space has gotten as high as four times the average residential rent per square foot in some metro areas.
If the skyrocketing prices aren’t bad enough for the retail industry, it also has to deal with falling in-store revenue. According to a survey by UPS (NYSE: UPS), 2016 was the first year when the average American consumer bought more items online than in stores.
These are the reasons why Urban Outfitters, Express and many other clothing lines are halting their plans to open new stores.
“It makes little sense to enter into many new, long-term leases at this time when all signs indicate that a similar lease will be less expensive in the near future,” Haynes said on the recent earnings call.
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How Retail Stocks Can Move Forward
If we are really witnessing a retail bubble bursting, that doesn’t necessarily mean it’s Armageddon for every retail stock. Cisco Systems (Nasdaq: CSCO) survived the dot-com burst, and Citigroup (NYSE: C) survived the housing crash.
What will determine which retail chains survive this correction?
Retailers might take some hints from big-box stores. A few years ago, Best Buy (NYSE: BBY) was rapidly losing market share to online competitors like Amazon. But it finished 2016 as one of the biggest gainers of the year.
Best Buy owes its remarkable comeback to a pragmatic approach to online competition: If you can’t beat ‘em, join ‘em. Best Buy refocused its efforts on online sales and managed to reclaim most of the market share it had previously lost to e-commerce giants.
Going forward, if you’re considering buying retail stocks, make sure you buy companies with a strong online presence… because investing in brick-and-mortar retail today is a bit like investing in a Miami condo in 2007.
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Source:: Investment You
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