The Painstaking Relentless Collapse of Brick-and-Mortar Retail.

“Our fourth quarter results reflect the impact of rapidly-changing consumer behavior, which drove very strong digital growth but unexpected softness in our stores,” lamented Target CEO Brian Cornell this morning in the earnings release.

“Unexpected” is a hilarious choice of words. Because we, mere outsiders, have been vivisecting the now structural brick-and-mortar retail quagmire for a long time, and no deterioration is “unexpected.”

Target’s revenues in the fourth quarter fell 4.3% year-over-year to $20.7 billion. Revenues for the whole year dropped 5.8% to $69.5 billion. Down from $69.8 billion in fiscal 2011. That makes for six years of sales stagnation.

Net income plunged 43% to $817 million for the quarter, and 19% for the year to $2.7 billion. But at least, Target is still making money – unlike other retailers, many of which are either already in bankruptcy or are slithering toward it.

Sales at stores open for at least a year fell 1.5% in the quarter and 0.5% for the year. It expects same-store sales to fall further in the “low-to-mid single” digits. Target also lowered its outlook for earnings, which caused even retail optimists to howl in pain.

Target’s shares crashed 14% at the open today – which would be its worst one-day dollar-decline since its IPO in 1972. Currently at $58.53, shares are down 30% from their 52-week high.

But Target has a plan. It has had plans for years. So another plan, including 12 new brands over the next two years. And it “will invest in lower gross margins” to get competitive.

Which means it will cut prices. Which means it’ll have to sell more merchandise just to keep dollar sales even. And that’s unlikely. Which means it’s going to hurt dollar sales further. Which is going to maul earnings even more. Hence the dive in the shares.

Everyone is trying to be competitive. Wal-Mart started running price-comparison tests in about 1,200 stores, and it’s pressuring suppliers to cut prices, something Wal-Mart has long been infamous for. Being a supplier to Wal-Mart can be a curse.

Wal-Mart too is under pressure. Last week it reported that quarterly revenues inched up merely 1% year-over-year, after announcing last year that it would close 154 stores. But its online sales jumped 36%, after the acquisition of Jet.com last year, for which it had shelled out $3 billion.

Brick-and-mortar retailers all know what they have to do to survive: ease out of brick-and-mortar, and get big online. Or else.

Target’s crummy results too were boosted by a 34% jump in online sales. But from a small base. So it wasn’t nearly enough. And online is even more competitive than brick-and-mortar.

J.C. Penney touted its buy-online-pickup-in-store options when it reported “positive net income” – instead of negative net income, we assume – of $1 million for the year on a decline in sales. And analysts cut their price target to $7.50 a share from $12. Shares currently trade at $6.35, down 4.3% for the day.

To raise cash, the company is trying to sell distribution centers and other properties that aren’t leased, but most of the stores are leased and there isn’t much to sell. In January it sold its headquarters in Plano, Texas, for $353 million. It’s also shuttering two distribution centers, which it owns and might be able to sell.

On Friday, it said it would shutter between 130 and 140 stores over the next few months, or around 13% to 14% of its 1,014 or so stores. But closing a leased store isn’t cheap – lease termination expenses can add up. J.C. Penney tried to put a positive spin on it, claiming that the closings would save roughly $200 million a year. But it would cost $225 million to do so. Once retailers decline, there’s no easy way out.

Macy’s too is focusing on its thriving online presence and slashing its brick-and-mortar footprint. Last August it announced the closure of 100 stores. It already sold its flagship men’s store in the prime Union Square location in San Francisco.

They’re all doing it. Target has pulled out of Canada in 2015 and has been closing stores in the US since 2016. Sears Holdings, which is skittering into bankruptcy, but not before the second half of 2017, has been shuttering Sears and Kmart stores left and right. It announced another 150 store closings in January.

Ratings agencies have been warning about retailers. Fitch expects their default rate to spike to 9% by the end of this year.

Moody’s yesterday warned that retailers have replaced oil & gas as the most distressed sector. Of the retailers it rates, 14% are rated Caa/Ca, which is in deep junk. At the worst point during the Financial Crisis, 16% were rated that low, and many buckled under their debts. It expects current retailers to beat that sad record over the next few years.

But credit is still flowing as investors chase yield, for now. Moody’s retail analyst Charles O’Shea:

“While credit markets continue to provide ready access for companies spanning the rating spectrum—allowing many to proactively refinance debt and bolster balance sheets—that could change abruptly if market conditions or investor sentiment shift.”

Retail chains – some due to bankruptcy or restructuring, others due to “foot-print rationalization” – have announced plans to shutter over 2,500 stores last year and so far this year, according to my own estimates, which are limited to the biggest names in retail. Smaller operations just disappear. That adds up to some serious mall space. The pace of store closings will pick up from here. And it will go on for years to come.

In some cases, these locations can be redeveloped. Uber bought the art-deco Sears Building in Oakland and is remodeling it for its new headquarters. The buyer of Macy’s men’s store in San Francisco will redevelop it into something else. No problem. But closing thousands of stores at already struggling malls around the country, in an industry – brick-and-mortar retail – that will remain on a sharp downward curve, cannot be so easily dealt with. And it will dog investors in that space for years to come.

This is happening for the first time in the US since the Financial Crisis. Read… Oops, this Isn’t Supposed to Happen in a Rosy Credit Scenario

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