Question for you:
What do Big Lots, TGI Fridays, Walgreens, Joann, Tupperware, True Value, and Spirit Airlines have in common?
Each of these companies declared bankruptcy in 2024. And there are a lot more names we could add to the list.
The statistics say that corporate bankruptcies in 2024 rose 16% from 2023. Just looking at the numbers, I don’t think 16% qualifies as an “alarming spike” in the number of companies that are failing. But the names that are failing seem more significant.
The biggest name to hit bankruptcy in 2023 was CVS, comparable to Walgreens this year. Of course, neither one is actually going out of business, they’re just putting the screws to their investors to force a refi on a bunch of debt.
Then there was the Silicon Valley Bank failure in March 2023. That one had some potential on the bankruptcy Richter scale, but JP Morgan was more than happy to take over its $212 billion in assets (for $10.6 billion!) and keep the tremors from spreading.
After that, the most noteworthy 2023 bankruptcy was Bird – one of the companies that spearheaded the urban invasion of those electric scooters you can rent from an app on your phone. My kids and I had a lot of fun riding those things around the Baltimore Harbor and Fells Point. But given the number of those scooters that got tossed into the Baltimore Harbor, I can’t really say the Bird bankruptcy was earth-shaking…
Not compared to Red Lobster, The Container Store, Lumber Liquidators, and Party City. These companies all seemed to have found their niche. Add these names to the ones I listed above, and the bankruptcy issue feels like it’s getting worse…
Stranger still is that bankruptcies are increasing in the midst of a supposed economic boom time, with stocks near all-time highs…
The Amazon Effect
Obviously, given the number of retail names that are failing, e-commerce is a factor. Amazon is taking its toll. Amazon was one of my favorite stocks coming into 2024, and remains a favorite today for exactly that reason…
CoreSight research says 7,100 stores have closed in 2024, up 69% over 2023 as companies like Macy’s, Rite-Aid, and Family Dollar close locations to postpone what may be inevitable.
E-commerce still only accounts for 17% of US retail sales. 83% of US retail spending still happens at brick-and-mortar stores.
E-commerce will continue to eat into brick-and-mortar revenue, another good reason to own Amazon. So yes, that pressure on revenue is a problem for retailers. But the bloated retail structure is a bigger problem…
If you Google “US retail square footage per capita” you’ll get the stat that there are 54.3 square feet of retail space per capita in the U.S. You might also see this chart:
Yeah, 23.5 square feet is a pretty far cry from 54.3. You know what they say about statistics…
But that doesn’t change the basic point that the U.S. has a stupid amount of retail space compared to any other country on earth.
Retailers and developers have overbuilt. Strip malls sit vacant. The Richmond Virginia mall where my friends and I hung out in middle school is now mostly condos – there’s even a church where the JC Penney used to be. The developer bought the failing mall for pennies on the dollar and got some big tax breaks thrown in.
Luxury retailers on New York’s 5th Avenue are being replaced by an 8,000 sq foot Ikea.
Who’ll Take the Loss?
Commercial real estate prices have gone negative for the first time since the Great Financial Crisis.
Nearly $1 trillion worth of commercial real estate (CRE) loans are due in 2025 and 3% of CRE loans are delinquent past 90 days. The real estate itself is worth less, and current interest rates mean refinancing is significantly more expensive. Who’s going to take the losses? Because the losses are coming…
The Harvard Business Review says that if banks have to take a 10% loss on their CRE loans, 100 banks could fail. But with a 20% loss, the number balloons to 900. And it will be the small- and mid-sized banks that get hit the hardest.
That could be a problem…
I know – I should probably just cool it with the negative waves. Investors are all still drunk on AI stocks and holiday cheer, anyway. But the commercial real estate problem isn’t going away. And now that higher inflation has forced the Fed to put rate cuts on hold, the odds of a mini-banking crisis are rising.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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