Retail Apocalypse: Why Brick and Mortar Retail Stocks Are in Trouble

Not long ago, brick and mortar retail businesses were really thriving. People went into malls and shopping centers regularly to purchase from their favorite brands in person. However, trends change fast, and most of the major brick and mortar retail stocks are officially in big trouble. These companies are more vulnerable than ever thanks to the global health crisis keeping people at home and the skyrocketing unemployment that likely means shoppers won’t be spending the way that they used to.

The decline in brick and mortar retail has been swift, with many investors expecting even more pain for these businesses ahead. We’ve already seen major companies like Neiman Marcus and J Crew file for bankruptcy. These are likely only the first of the major dominoes to fall, with many analysts and investors expecting even more pain for retail going forward.

What are some of the reasons why these once flourishing businesses have taken such a hit? Is there a road to recovery for them or is the global health pandemic the beginning of the end for retail? Let’s take a look at why the retail apocalypse is speeding up and assess whether or not there is still value to be had investing in retail stocks.

E-commerce Boom

Even prior to the global health crisis, retail stocks were seriously hurting as a result of the massive growth in the e-commerce space. Enormous e-commerce players like Amazon NASDAQ: AMZN have essentially made shopping in-person a thing of the past. People now prefer to shop from the comfort of their homes and have their favorite items delivered quickly at a minimal cost. This trend has completely changed the way that people shop, and pretty much all of the large retailers with physical locations are feeling the pain.

The problem with a lot of brick and mortar retailers isn’t that their brands aren’t strong, its that they aren’t adapting to the rapidly changing ecosystem of consumer expectations. Customer experience should be front and center if these businesses hope to survive Amazon’s onslaught. Many of them are trying to figure out how to adapt e-commerce into their business models, but as of now, they simply can’t compete with Amazon.

Huge Debt Loads

Another concerning thing for brick and mortar retailers has to due with the massive amounts of debt that they have on their books and the additional debt they are taking on in order to stay afloat. Lots of these companies have huge physical locations with large monthly operating expenses. They are burning through their cash even faster thanks to stay at home orders, which is why there is real cause for concern. Even major players in the sector like JCPenney NSYE: JCP, L Brands NYSE: LB, Gap NYSE: GPS, and Macy’s NYSE: M are on the verge of bankruptcy.

When you assess a company from a fundamental perspective, you want to find a business with either a healthy balance sheet or room for growth so that they can pay off their debt over time. Unfortunately for many brick and mortar retail stocks, they have neither of those characteristics. Just look at what happened to Neiman Marcus. The once-successful retailer was dealing with roughly $4 billion in debt even before the coronavirus. Now they have filed for Chapter 11 bankruptcy. It’s hard to imagine these companies making enough money to pay off their huge amounts of debt, which is why the end might be coming sooner rather than later for many major retailers.

Global Health Crisis

If things were bad for brick and mortar businesses before 2020, things have gotten downright apocalyptic for them thanks to COVID-19. These companies have been struggling to get customers in their doors for a long time now. Since people have been forced to stay home, their revenue numbers are essentially non-existent. Even after the country starts to reopen, it’s hard to imagine foot traffic in brick and mortar stores returning to normal anytime soon.

Also, with so much uncertainty in the economy right now, a sharp recovery in consumer spending seems unrealistic. The amount of hurdles that these businesses need to overcome just to stay afloat means that the road to recovery is going to be rocky for them. The global health crisis will have a huge impact on these companies’ earnings reports going forward, which means their stock prices could be in for a lot of downside.

Retail Apocalypse Now

Brick and mortar retailers might be stuck in the past, and it’s hard to see how they will weather the current storm. These businesses are in danger of becoming extinct, and their management teams will need to make big changes if they hope to survive the next few years. If you are interested in investing in brick and mortar retail stocks, make sure you put in the time to do your homework and select companies that offer a unique customer experience or have a loyal customer base. The truth is that all of these businesses run the risk of bankruptcy, so be extra careful if you do decide to invest.