The Trend

Retail Apocalypse: The Most Important Lesson Learned

In 10 years, the retail industry will look nothing like it does now.

That’s what Warren Buffet, the Oracle of Omaha, had to say when asked about retail at the Berkshire Hathaway meeting in early May 2017. 

“The department store is online now,” he added.  “I have no allusion that 10 years from now will look the same as today, and there will be few things that surprise us. The world has evolved, and it’s going to keep evolving, but the speed is increasing”.

Granted this was nothing new to hear. 

The writing had been on the wall for quite some time.  And only foolish investors were venturing into retail considering just how weak the industry became.  But the lesson was swift and painful for those that bought anyway – never buy into a sector where the underlying fundamentals are nightmarish.

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For months prior, retailers had been closing stores and filing for bankruptcy protection at rates now seen since the Great Recession.  Brick and mortar retailers had announced more than 3,200 stores closing in the first five months of 2017. Analysts argued that closings could soar to 8,600 before the end of 2017.  Department stores like Macy’s, Sears and JC Penney were some of the hardest hit.

Just to survive, department stores cut more than half a million jobs.

Yet, investors – believing the worst was priced in – bought anyway and lost big.

It wasn’t just the online behemoths that were crushing brick and mortar.  Tapped-out consumers were, too.  In fact, according to CBS News, about 75% of U.S. consumers were cutting back and scrambling just to cover their monthly living costs.

It’s a tough lesson many investors have had to learn the hard way.  If the underlying nuts and bolts of an industry are nightmarish, never buy.  Avoid it at all costs, like one time high fliers, like JC Penney, which fell under the weight of poor sales, online giants, and poor consumer spending.  It’s not likely to survive.  It’s on death’s door at historic lows.

But is there a way to profit when all looks as bad as it does?  Absolutely. 

You buy when others are fearful.  You buy the blood in the streets.  You buy the excessive pessimism.  But you do it with strategy and smarts.  You seek the gold among the muck, digging deep to find the long-term survivors – the ones that will be around in 20 years.  The very stores we can’t live without, like Wal-Mart, which after a very bad 2015, has bounced from a low of $55 to $76.

In any struggling sector, there are always the standouts.  Your goal is to identify what’s being overlooked.  Remember, in any crisis, there is an opportunity to win big.  Just follow the fundamentals and the technical as your guide.