High-End Retailers Do the Unthinkable
The carnage in retail continues... High-end retailers do the unthinkable... A bear market in Tesla... The biggest risk to Tesla shareholders today...
The carnage in retail continues...
Shares of troubled teen-apparel retailer Abercrombie & Fitch (ANF) plummeted more than 20% today to a new multidecade low.
Shares traded as low as $9.51... a price not seen since the summer of 2000, during the worst of the dot-com bust. The stock is now down more than 85% since hitting a post-financial-crisis high of more than $77 in July 2011.
The latest plunge followed news that the company's ongoing takeover negotiations had failed. As financial-news network CNBC reported this morning...
Shares of Abercrombie & Fitch plunged... on Monday and dragged down other stocks in the battered retail sector as the U.S. teen apparel maker terminated talks over a potential sale.
Investors saw Abercrombie's failure to sell itself as yet another blow to a retail sector already struggling to cope with changing consumer tastes and growing pressure from Amazon and other online retailers...
Abercrombie, which has a market value of $650 million, had said in May it was in talks with several bidders regarding a potential sale, a day after Reuters reported that the retailer was working with an investment bank to field takeover interest from other retailers.
Private equity firm Sycamore Partners came closest to acquiring Abercrombie, but could not meet the company's valuation expectations, people familiar with the matter said on Monday.
High-end retailers have long been 'immune' to discounting. But not anymore...
Of course, regular Digest readers know Abercrombie is not alone... The entire "brick and mortar" retail sector is struggling due to vast overcapacity and intense competition from Amazon and other online retailers.
All told, U.S. retailers closed roughly 5,300 stores through June 30. That's more than three times as many during the same period last year, according to retail-data firm Fung Global Retail & Technology. Total closings are on pace to trounce the previous record of 6,163 set during the financial crisis of 2008.
How bad has it gotten? Even high-end department stores are now being forced to do what was once unthinkable. As the Wall Street Journal reports...
Desperate to get shoppers in the door, department stores are discounting the one item they had long been able to sell at full price: cosmetics.
Last month, Lord & Taylor offered 15% off almost all cosmetics and fragrances. Bloomingdale's gave members of its loyalty program a $25 reward card for every $100 beauty purchase. The moves followed a decision by Macy's to offer 15% off cosmetics, which it touted in nationally televised advertisements this spring...
A decade ago, shoppers would have been hard-pressed to find any Estée Lauder lipsticks, Bobbi Brown mascara or Shiseido blush on sale. These "prestige" brands are sold mainly at department and specialty stores and tend to be pricier than the so-called mass cosmetics sold at drugstores.
Again, just as we've seen in elsewhere in the retail sector, these moves are being driven primarily by a change in consumer preference, rather than a strong slowdown in sales. More from the Journal...
Sales of prestige makeup in the U.S. are growing, totaling $8 billion in the 12 months to May, an 11% increase over the same period a year earlier, according to market-research firm NPD Group.
But department stores' share of the market fell to 19% in North America last year from 23% a decade ago, according to Euromonitor International data analyzed by Bernstein Research. Over the same period, specialty beauty retailers increased their share to 20% from 14%.
Expect this trend to continue...
More than 300 retailers – including 23 well-known names like The Limited, hhgregg, Payless, Gander Mountain, and RadioShack – have filed for bankruptcy so far this year, according to data from BankruptcyData.com. Many more will join them – or be taken over for pennies on the dollar – before the dust finally settles.
A bear market for Tesla...
Regular readers also know we have no love for Tesla (TSLA) and its "visionary" founder Elon Musk.
As we've explained many times, it's not that we have a problem with the company's products. Rather, it's Musk's questionable ethics, and the fact that the company's business model makes no sense...
Tesla is losing money on every car it sells. And that's despite forcing taxpayers to subsidize a huge portion of the cost. (More on this in a moment.) Yet its market valuation is absurd... It's valued at more than $800,000 per car it produces, compared with $25,000 per car for BMW and just $5,000 per car for General Motors (GM) and $6,000 per car for Ford Motor (F). Even if Musk succeeds and Tesla becomes a major automaker, today's investors are likely to lose money.
Of course, this has been the case for years... and the market has pushed the stock higher anyway. But today, there are signs that investors may finally be waking up to these risks.
Despite a continuing stream of mostly positive media coverage – including weekend fanfare around the production of its brand-new Model 3 sedan – the stock has been falling. As you can see in the following chart, shares have now fallen from an all-time high above $380 per share last month to as low as $308...
This decline puts Tesla shares dangerously close to bear-market territory for the first time in more than a year. It also marks the stock's steepest decline since the broad market bottomed in early 2016.
'Sales fall to zero...'
Meanwhile, the fundamental outlook for the company continues to deteriorate...
Remember, a huge portion of Tesla's revenues come from government subsidies. With these handouts, Tesla is a terrible business... Without them, it would be far worse. In fact, its very existence would be threatened. As Porter explained in the mailbag of the June 14 Digest...
I have no objection to solar power or electric cars. What I do object to, strenuously, is the government forcing people to pay more for electricity or transportation than is necessary. In my view, the government should simply be the "referee" between various competing technologies and allow the free market to decide which is best.
So far, it's clear that neither solar power nor electric cars can win in that arena. How do we know? Sales of all types of electric vehicles (both plug-ins and hybrids) in Denmark fell more than 60% this year.
What happened? The tax subsidies favoring electric vehicles over "direct carbon" vehicles were eliminated. And demand for electric cars has plummeted as a result.
Unfortunately for Tesla shareholders, Denmark is not alone. As the Journal reported over the weekend (emphasis added)...
Tesla's sales in Hong Kong came to a standstill after authorities slashed a tax break for electric vehicles on April 1, demonstrating how sensitive the company's performance can be to government incentive programs.
Not a single newly purchased Tesla model was registered in Hong Kong in April, according to official data from the city's Transportation Department analyzed by the Wall Street Journal.
In March, shortly after the tax change was announced and ahead of the April 1 deadline, 2,939 Tesla vehicles were registered there – almost twice as many as in the last six months of 2016.
The end of the tax exemption "has really put the brakes on electric-vehicle adoption in Hong Kong," said Mark Webb-Johnson, a founder of Charged Hong Kong, a group that promotes electric vehicles.
How much longer will cash-strapped governments around the world be willing to subsidize expensive luxury cars for the rich? We suspect Tesla shareholders won't like the answer.
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New 52-week highs (as of 7/7/17): Allianz (AZSEY), Boeing (BA), Becton Dickinson (BDX), Coach (COH), National Beverage (FIZZ), iShares U.S. Home Construction Fund (ITB), JPMorgan Chase (JPM), McDonald's (MCD), NVR (NVR), Stanley Black & Decker (SWK), and Weight Watchers (WTW).
A slow weekend in the mailbag. Surely, we've done something to please or upset you lately. Let us know at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
July 10, 2017