A friend and a professional trader that I have known since high school (we actually worked at the same pharmacy together) pronounced about 10 years ago, that “20% of retailing will disappear, and the employees of those stores and the malls they are housed in, notwithstanding… and the effect on most Americans will be minimal. We are completely over-malled… and drowning in retail excess.” Larry is one of the smartest guys I know, and his major opinions are spot-on – this one certainly was.
Fast forward to February 2017. Sears and K-Mart are closing stores faster than you can say blue light special. Macy’s now sells less apparel than Amazon and is shuttering stores at a frightening pace. JCPenney’s, which I thought would keel over long ago, somehow made it to 2017, but recently announced hundreds of store closings. In my hometown, I can visit three Home Depots, two Lowes stores and two Menards stores within six miles of my house! This is insanity. Stratford Square, a mall in Bloomingdale, IL, is a vast ghost town with Macy’s and JCPenney recently closing.
While Amazon is a formidable competitor, they are not the only enemy, as the over-retailing of America is finally coming to grips with reality. The American population hasn’t grown that much to justify thousands of new retail openings each year. The stakes are high and countless malls and strip shopping centers will become a vast wasteland should this disturbing trend accelerate. While shakeouts in industry are the norm in capitalism, this one will be painful for the retailers.
“We’ve now gone to a business where your best customer can be standing in your best store and with three touches of their thumb to a piece of glass, they can buy from your biggest competitor,” Fred Argir, Chief Digital Officer for Barnes & Noble, told Retail Dive in an interview. “That’s changed everything.”
So why does In Sickness and Wealth care about the retail shakeout? Two reasons—CVS and Walgreens. Up until a couple of days ago, my thinking was that both companies are doing much better than the overall retail sector thanks to their involvement in healthcare. Approximately one third of revenues for both companies come from the back end… prescription drugs. I figured that both would thrive in the long run. But then, this past weekend, CVS announced it will close 70 stores around the country. While this isn’t catastrophic, it does raise a red flag about capacity in retail pharmacy. CVS says it is a strategic move to cut costs and shutter underperforming stores. The ISAW portfolio is not long on either CVS or Walgreens; however we sold the Walgreens April 82.50 puts for 3.20. The trade has been profitable as the puts are now trading at less than half that value. Should Walgreens drop to below 82.50 between now and the third week in April, the ISAW personal portfolio will have 100 shares of Walgreens put to the account. We thought in the low 80s or high 70s, that WBA would offer good value. We still think it does, but the latest CVS bombshell has my antennae set on ultra-sensitive. Will Walgreens make a similar announcement?
In our January 2016 issue, we covered both companies and issued a couple of caveats: 1) Over-expansion could lead to some bumps in the road should retailing take a hit. 2) If amazon ever got into the pharmacy game, the tens of thousands of brick-and-mortar stores between Walgreens and CVS would suffer significantly, as have the large department stores like JCPenney, Sears and others.
Given the short put position in Walgreens, we will monitor this very carefully as 2017 progresses.
Dave Lerman and Jodie Warner