Two Ways to Profit From the Great Retail Apocalypse

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Great change brings great opportunity. And we have a great change. American retail is radically transforming before our eyes as icons of American retail continue to fall and more stores are closing every year than during the peak of the financial crisis. Two companies in particular are benefitting from the evolving tectonic transformation.

I remember the very first family shopping excursions I went on as a little kid. We went to a neighboring town that had stores all along the town square. We even got ice cream sodas at the soda bar at Woolworths. While it was all brand new to me, it was the very last days of that kind of shopping experience. Soon, malls exploded onto the scene and retail changed forever.

Between 1968 and 2005, an astronomical number of indoor shopping malls popped up all over the country. They were everywhere. A 1992 New York Times article estimated that there were 48 such malls within a 90-minute drive of Times Square. But I guess enough was enough. Not one single shopping mall has been built in the U.S. since 2006. Now, they’re closing like crazy.

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More than a third of all shopping malls have closed and it’s estimated that as many as half of those remaining will close in the next 10 years. Iconic retailers are going bankrupt or shuttering stores left and right, including Sears, Macy’s, Gap, Toys “R” Us, Victoria’s Secret, Payless and Gymboree. I could go on, but you get the idea.

What’s going on?

E-commerce is the most obvious reason. The explosion of Amazon (AMZN) and the proliferation of online shopping is taking a toll on brick-and-mortar retailers and mall goers. But consumers are changing as well. IPhones and related products now take a big chunk from consumers. Healthcare costs are rising as the population ages. The new “business casual” culture and CEOs in jeans and T-shirts is diminishing the appetite for fashion.

An older consumer wants a different experience. They don’t want to hang around the mall all day anymore. They want experiences more than stuff. The malls are a drag and consumers are demanding better. They want more pleasant, less cluttered experiences.

There’s an old adage about American retail, which holds that it undergoes a major transformation every 50 years or so. Damned if it ain’t so. Such transformation provides opportunities for those retailers that survive and are in the right place.

Here are two ways to invest in those retail survivors.

Retain Stock #1: STORE Capital Corp (STOR)

Store is a Real Estate Investment Trust (REIT) specializing in leasing properties to retail tenants. That sounds like a bad business to be in after what I just said. But the truth is certain retailers and properties are thriving in this environment of changing tastes.

Store Capital’s properties tend to be in more popular and contemporary strip malls and city/mall combination spaces. As well, few of Store’s tenants  compete with the internet, and they provide desired experiences. The largest holdings are in restaurants, early childhood education centers, movie theaters, and health clubs. These are services that are doing just fine.

In addition, leasing saves the lessee money. They don’t have to shell out the upfront cash and don’t have to get in the real estate business. Store Capital primarily uses triple net leases, where the lessee pay just about all the maintenance and upkeep costs. This arrangement cuts down on unforeseen expenses and most contracts are for 15 years or longer, providing a predictable cash flow. The company has a nearly 100% occupancy rate.

As a REIT, the company pays no taxes at the corporate level provided 90% of profits are passed on to shareholders in the form of dividends. It currently pays a stellar 4% yield. And the performance has been fantastic: STOR has returned 39% over the past year and barely went down at all during the selloff in December. The stock is a favorite of Warren Buffett’s and should continue to thrive.

Retail Stock #2: Home Depot (HD)

This home improvement giant may seem like an odd pick. But it is a great example of the type of retailer that continues to thrive in the new paradigm. Much of what Home Depot sells really isn’t big at Amazon and people actually go there to look around for stuff. It provides an experience that people still enjoy and it has a fantastic niche; just look at how full a Home Depot parking lot is on any given Saturday.

As for the stock, it’s a juggernaut that has significantly outperformed the overall market, even in a bull market, for the past several years. HD is also more recession resistant than most other retailers and offers a solid 3% dividend. Despite more than doubling the S&P 500 over the last five years (132.5% versus 51.68%) it still sells at valuations below its five-year average.

The retail landscape as we know it may be crumbling. But these two retail stocks are thriving—and should continue to do so in the coming years.

Tom Hutchinson

High Income and Peace of Mind

Tom Hutchinson, Chief Analyst of Cabot Dividend Investor, is a Wall Street veteran with extensive experience in multiple areas within the financial world. His advisory is geared to providing you both high income and peace of mind. If you’re retired or thinking about retirement, this advisory is designed for you.

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