Macy’s, Gap, and Staples Put Mall REIT Investor in a Bad Mood

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Retailers don’t appear to have gotten off to a strong start in 2016. In fact, for many major retailers, the Q1 results are very disappointing. Some have argued that Q1 is not defining for the rest of the year and retailers could potentially make up ground in the coming months. While that’s true, it also means the 2016 results could be even worse than one might think.

Equity REIT stock returns have been negative over the past week. This is largely because of regional mall REITs. Regional mall REIT stocks fell by 6% across the board. This time, the drop affected REITs with high productivity, as well as those who have been the least productive.

For instance, Macy’s Q1 results left investors bearish on retail. The company downgraded their guidance for 2016 and referred to the uncertain direction of consumer spending as the cause of a projected 3 to 4% drop on 2016 comparable sales. Their previous guidance was minus 1%.

It is uncertain what is causing retail sales to drop, but there are plenty of possible reasons. Migration to online sales is definitely a possibility. In addition, we are in a presidential election year. Still others argue that we are heading into a recession. In addition, Macy’s mentioned that apparel spending by international visitors has dropped in major markets where Macy’s is a key destination. During the last week, Macy’s share prices plummeted by 17%.

Gap was another company that suffered immensely during the last week. Gap’s shares fell by 19% following the downgrade of its credit rating by Fitch from investment grade to junk status. The credit agency is not confident the company will be able to sustain its EBITDA levels, which dropped from 2014 to 2015. The company continues to see a decline in traffic and volatile gross margins.

To make perceptions worse, Staples merger with Office Depot didn’t work out after a judge agreed with government regulators’ decision to block the transaction for antitrust concerns. Staples stocks dropped by 19%, while Office Depot stocks plummeted by 40%.

This news has definitely resonated with Green Street Advisors’ recent research paper saying that one-fifth of anchor space in malls should be closed to regain the productivity they had a decade ago. Without a doubt, the pendulum didn’t swing in favor of retail this week.

Source: Macy’s, Inc.(NYSE:M), The Gap, Inc.(NYSE:GPS), Staples, Inc.(NasdaqGS:SPLS), Office Depot, Inc.(NasdaqGS:ODP), Fitch Ratings, WSJ

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on May 13, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of April 29, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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