Thursday, July 3, 2008
INVESTORS' SOAPBOX PM
Mall Anchors May Weigh Closings
Chain-store closings are on track for the highest level in 15 years.
Credit Suisse
IN THE CURRENT CYCLE, MALL-anchor peak-to-trough market-cap declines now nearly
match the declines posted in their last peak-to-trough periods. From late 1998
to early 2003, mall-anchor market capitalizations declined by 66% on average
from their respective peak-to-trough levels, and enterprise values were down
56% over the same time periods.
Currently, mall-anchor market caps have declined 58% on average from their peak
levels reached in 2006-2007 to their current levels.
Enterprise values are down 47% on average. However, the average duration of the
current downturn is much shorter than the last. The average duration of the
peak-to-trough cycle for mall anchors in the 1998-2003 timeframe was 27 months.
The average duration between when the mall-anchor stocks peaked in 2006/2007
and now is 15 months. This suggests that while there may not be substantial
downside left in the mall-anchor stocks, we could see a prolonged "L"-shaped
recovery as opposed to a quick "V"-shaped recovery.
Our 2008 estimates imply average mall-anchor operating margins declining to
6.9% in 2008 from a peak of 9.0% in 2006. Our 2008 forecast represents an
average that is still above prior average troughs of 5.8% in 2000 and 6.6% in
1990, suggesting margins may decline further before they reach their trough.
Either way, operating margins have declined rapidly in line with stock prices.
While they may bottom sooner than in prior cycles, we believe mall-anchor
margins might also stagnate for longer at the bottom.
Focusing on what retailers can control (supply of stores) as opposed to what
they can't control (consumer demand), we believe 2008 and 2009 should mark
record years for retail-store closings given the current downturn in demand.
Store closings announcements from chain retailers in 2008 remain on track to
reach one of their highest levels of the last 15 years.
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Through June 2008, we have recorded 2,173 store closings announcements. With
very few store closings in the last several years, the mall-anchor industry is
over-stored and could benefit greatly from store-closings activity. We believe
the current demand environment will lead to substantial closings in the
mall-anchor industry in 2008 and 2009.
In general, the mature mall-anchor stocks tend to trough at 4.5-5 times
enterprise value/earnings before interest, taxes, depreciation and amortization
(EV/EBITDA) on a forward one-year basis. Currently, J.C. Penney (ticker: JCP)
and Macy's (M) trade at 4.9 and 5.3 times consensus 2009 EBITDA estimates,
suggesting that minimal downside remains in these stocks unless estimates prove
to be too optimistic (which we believe could be likely).
Nordstrom (JWN) has tended to trough closer to six times forward-one- year
EBITDA. Its current valuation is also approaching trough levels. Finally,
Kohl's currently trades at its lowest EV/EBIDTA multiple of the company's
20-year history, reflecting its closing in on maturity.
We believe it is too early to call a bottom to mall-anchor stocks in general
but not too early to begin doing work reconsidering a long term bearish thesis
for the group. If the stocks do bottom, near term upside is still unlikely in
our view based on the greater duration of prior downturns relative to the
present. However, we do believe that as mall-anchor operating margins get
closer to their prior trough levels and retail store closings accelerate, it is
prudent to invest selectively in those mall anchors that are well positioned to
gain market share.
At the top of our list is Nordstrom, which based on its current store footprint
in high-quality locations should not have to be concerned with either too many
forward opening commitments or rationalizing its existing-store base in the
future. As such, we believe it stands to enjoy an outsized benefit from
industry consolidation.
We also think Kohl 's (KSS) could benefit from competitors closing stores
without it having to close many stores itself because of its relatively young
store base with good standards.
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