A couple of weeks ago, I did something I had not done in ages: I went to a local Kmart at the Jersey Shore. The parking lot was nearly empty, and the store was an utter ghost town. There were rows and sections of merchandise, and literally no one looking at any of it, let alone buying. Intrigued, I have since made four more stops at that same store, at various times of the day, only to find similar conditions. Although I did not count, there were conceivably more employees than customers on several of my visits.
Just to be clear, this particular Kmart is located in a thriving, heavy traffic area that swells during the summer months given its proximity to the beach.
Less than half a mile away sits a Walmart (WMT) , which I have frequented over the years. That store is always busy. When we need to buy something, unless it is home improvement-related, it usually fits the bill. And judging by the activity at this store, many others in this area have similar sentiments.
While this is just one location, judging by Sears Holdings' (SHLD) (parent of Kmart) financial performance, it is probably not an isolated story. Growing up in the 1970s, Kmart had a reputation, but we would still shop there. However, that was long before Walmart moved north, and even longer before the membership warehouse craze took hold, and Costco (COST) and BJ's became forces to be reckoned with.
Perhaps I am just stating the obvious: there has been a major change happening in retail over the past several years, which has been fuelled by the emergence of internet shopping and newer and better bricks-and-mortar chains. Nevertheless, seeing it with your own eyes, in such stark terms really brings the point home.
It also raises one other interesting issue.
As a value investor, I have long been a fan of companies that own real estate, primarily land, but in some cases, store locations, too. It was not all that long ago that some of the bricks-and-mortar companies, including Sears and J.C. Penney (JCP) , were being heralded by some in the value-investing crowd, as undervalued due to the value of owned real estate. Neither of those situations has panned out, and Sears has been particularly disastrous for investors.
Fast forward a few years, and now you have to wonder, to what extent has the value of those store locations, millions of square feet of retail space been compromised? I see more and more vacant commercial locations, and some have been that way for years. Walmart's January announcement of 154 domestic store closings drives the point home even further, and that company, unlike Sears and J.C. Penney is profitable.
When the dust clears, what happens to all of the former stores that will be shuttered due to changing consumer-shopping habits, obsolescence and increased competition?
Retailer bankruptcies are nothing new. Does anyone even remember Caldor, Bradlees, Hechinger's, W.T. Grants, and Clover (and that is just a short list)? Many of those went under long before internet shopping was the phenomenon it is today. However, the potential dynamic that we are currently being set up for is unprecedented; a whole lot of large, empty, and perhaps abandoned retail locations.
My doom and gloom here, however, does not extend to the restaurant real estate space. I will conquer that topic in a future column.