Will the Magazine Cover Curse Strike Again?

When I saw the cover of Barron's this weekend, my mind immediately went to the magazine curse… I've discussed the magazine curse before, but as a refresher, from the April 13 Empire Financial Daily... There's a perceived curse on companies that have graced the cover of magazines BusinessWeek, Forbes, and Fortune. If a company is […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Will the Magazine Cover Curse Strike Again? By Berna Barshay When I saw the cover of Barron's this weekend, my mind immediately went to the magazine curse... I've discussed the magazine curse before, but as a refresher, from the [April 13 Empire Financial Daily](... There's a perceived curse on companies that have graced the cover of magazines BusinessWeek, Forbes, and Fortune. If a company is praised on one of these covers... look out. The origin story behind this Wall Street lore is an infamous 1979 Businessweek cover proclaiming "The Death of Equities." The cover coincided with a near trough for stocks... and the beginning of a nearly two-decade bull market. While the magazine curse feels like something that may be the product of urban legend, there's evidence that it is real. According to a study published in a 2007 CFA journal, there's plenty of evidence that the magazine curse is a real thing... Statistical testing implied that positive stories generally indicate the end of superior performance and negative news generally indicates the end of poor performance. Given this context, it makes sense that I was stopped in my tracks when I saw Barron's this week...  The web version of the article was even more attention-grabbing with its headline: "Mall Stocks are Back in Fashion." Retailers with stores heavily concentrated in enclosed malls were terrible performers in the decade leading into the pandemic. At the end of 2009, shares of department store Macy's (M) closed at $16.76. Ten years later, at the end of 2019, the stock was $17 – its stock had edged up a whopping 1% in a decade. Rival Nordstrom (JWN) fared a touch better, up 9% in a decade... but other department stores did way worse, with now-bankrupt J.C. Penney losing 96% of its value and the Bon-Ton Stores going belly up. Mall-based specialty stores didn't fare much better... teen retailer Abercrombie & Fitch (ANF) lost half its value in this 10-year period, and shares of The Gap (GPS) sank 16% over this time. In the same 10 years, the S&P 500 Index soared 190%. Sure there were exceptions – but for every Lululemon Athletica (LULU) bucking the trend – there were at least a handful of mall stores sinking... Or, in the case of the many bankruptcies and liquidations in the sector, drowning entirely... But looking at a five-year chart of the SPDR S&P 500 Retail Fund (XRT), it seems that a deadly global pandemic was just what the doctor ordered to fix what had long ailed the retail sector...  There's no doubt that the spring 2020 lockdowns were an extremely difficult but temporary setback for retailers. While some of the financially weak did not survive the shutdown, those that made it to the other side didn't see permanent impairment of their prospects. But this XRT chart makes it seem like they are better companies now, post-pandemic, despite the fact that even e-commerce holdouts got a crash course in shopping online during 2020. The pandemic is generally thought to have accelerated future trends... so why are retail stocks up so much? Shares of the XRT Fund are up 61% year to date... That's more than any other sector. Even with oil prices spiking, the Energy Select Sector SPDR Fund (XLE) is up a mere 53% so far this year. Is retail really a better place to be post-pandemic than it was pre-pandemic? Because that is what the stock prices seem to be telling us. The consumer is certainly very strong, as are the financial markets... Those who kept their jobs during the pandemic saved a lot of money on travel, dining out, and other expenses while stuck at home. There have been multiple rounds of fiscal stimulus. Low rates have reduced debt servicing costs for many on big-ticket items like houses and cars. Competition for labor has gotten intense, leading to wage inflation at levels unseen for decades. Put this all together, savings levels are at all-time records. All this sets up for a banner holiday season, as Barron's notes... Consumers could spend $851 billion, a 9.5% increase from last year's record $777 billion and more than twice the 4.4% average increase over the past five years, according to the National Retail Federation. It's important to note that retail sales generally always go up for the holiday season, except when we are in a recession...  Source: Barron's The growth this year is nevertheless unequivocally above trend, aided by a strong stock market as well as windfalls in cryptocurrencies. The power of the "wealth effect" brought on by rising financial assets is apparent in the big gains in holiday spending expected from the wealthiest households. From Barron's... Wealthy households are planning to spend 15% more than last year this holiday season, averaging $2,624 per household and driving much of the season's growth, an annual Deloitte study found. Also helping... a sense of making up for lost time probably contributes to the "[YOLO]( – or "you only live once" – with which many approach holiday spending this year. Looking ahead to 2022, though, the fate of the consumer, along with that of the overall economy, is more uncertain, as stimulus payments move firmly into the rear-view mirror, and uncertainty looms concerning inflation and how long the supply chain disruptions will persist. Is it possible that retailers' best days just happened in 2021... and operating conditions will get tougher from here, as well as the comps? After hitting trough comps in the second quarter, lapping the lockdowns, the bar will get incrementally higher to clear as time goes on. --------------------------------------------------------------- Recommended Links: [Joel Litman's L.O.C.K. System Called RNG at $20]( Now, the system that called the rise of 2020's biggest tech stocks has a new prediction – and its creator says Americans are woefully unprepared. [Learn why here](. --------------------------------------------------------------- [What Musk, Thiel, and Bezos have in common]( For the first time in his 30-year career, Jeff Brown is holding a special presentation... to reveal how anyone can invest before a company goes public, and with the same terms as Silicon Valley billionaires like Elon Musk, Peter Thiel, and Jeff Bezos. [Click here to reserve your seat](. --------------------------------------------------------------- Barron's is basing a lot of its future mall retail optimism on traffic recently turning positive... Data from Placer.ai, which tracks mall traffic, shows that foot traffic for indoor malls was up 3% in October compared with 2019, marking the first recorded monthly increase versus pre-pandemic levels...  Source: Barron's October's 3% was a steep improvement from September when traffic was down 6.5% at indoor malls versus 2019 levels. I'm focused on the performance of indoor malls, which had been suffering a severe secular decline in foot traffic for around a decade. Outdoor strip centers, anchored by retailers that are visited more frequently – like grocery stores and big-box discounters like Walmart (WMT) and Target (TGT) – had performed better, as well as outdoor lifestyle center malls, which tend to be newer, with a heavier tenant mix to restaurants and other entertainment venues. It's hard to get great long-term data on enclosed mall traffic, but this shorter-term graph with traffic data from Thasos gives a snapshot of the challenging traffic environment for enclosed malls before the pandemic...  Source: CNBC Declining traffic had been a problem for years heading into the pandemic, as evidenced by the dismal financial performance and stock returns at mall stalwarts like Macy's and Abercrombie & Fitch. So, does the 3% jump in traffic in October mean that lockdown reignited the lost passion that Americans once held for the mall? I don't think so. There's a couple of alternate explanations possible. First, there's pent-up demand... All those months when mall traffic was down 20% (or 100% during closures) leave the occasional mallgoer with catching up to do. We're seeing big increases over 2019 in many consumer areas because of pent-up demand. For example, the restaurant stock that is an open recommendation in Empire Market Insider saw its same-store sales jump an incredible 59% in October versus 2019 levels. In this context, mall traffic growth of 3% seems kind of anemic. Second, the constant messaging around supply chain issues has been to shop early this year or risk finding what you want out of stock for Christmas. This has led to many consumers starting their holiday shopping earlier than ever. We could see traffic patterns very altered this year, with October showing relative strength versus the norm and December showing relative weakness because of supply chain fears. Putting it together, I'm not convinced that the long-term secular challenge to enclosed malls is over. Mall owner Simon Property (SPG) now trades 14% higher than it did on January 2, 2020 – before the pandemic hit, despite its vacancies being higher...  This doesn't make sense to me. While SPG has some great assets – and there is no doubt that A+ malls will continue to outperform B and C ones – this company just isn't worth more than it was pre-pandemic. Its prospects are probably marginally worse, and when interest rates rise – which they inevitably will – real estate investment trusts ("REITs") tend to underperform. I would avoid SPG shares here. Turning back to retail, I'll acknowledge that there are some things the Barron's article gets right... Barron's proclaims that brick and mortar retail isn't dead, noting that companies, including digital-native ones, are increasingly making investments in physical retail stores. The article also notes that physical locations serve as great billboards for the e-commerce arms of omnichannel retailers, which operate both online and in physical locations. And the full promise of e-commerce is best realized through omnichannel operations, as the option to buy online, pick up in-store ("BOPIS") and buy online, return in-store ("BORIS") – greatly enhance the customer value proposition. Barron's also alludes to many mall-based retailers stepping up their online game during the COVID-19 crisis. While that may be true, I think the biggest gains were made by the retailers who had been persistently investing in e-commerce offerings for years and finally got a return on that investment during the pandemic, [as was the case with Walmart and Target](. I don't think the pandemic made things permanently better for retail, despite the price action in the XRT implying this... The trends that were firmly in place before are firmly in place now. Omnichannel capabilities are important. A-malls do better than B-malls. Despite one good month, it's probable that foot traffic to enclosed malls is still in secular decline. Brick-and-mortar isn't dead... but it never really was. Like always, there will be winners and losers in retail. It's why I like investing in the sector. There's a wide dispersion of financial outcomes in the retail universe, which means the stocks don't correlate as highly as they do in other sectors, like financials or energy. Consumers are fickle. Some retailers will do well, while others may flounder. That's why there are always opportunities to make money buying retailers, even in a world where e-commerce is nipping away at the size of the aggregate revenue pie for brick-and-mortar stores. I have three retailers among my Empire Market Insider recommendations, and I have called out others positively here in Empire Financial Daily, [most recently Foot Locker (FL) and Five Below (FIVE)](. But that doesn't mean I am on board with Barron's retail sector call... and that cover, combined with the price action in the XRT fund, makes me wonder if the curse will strike again and the sector is close to a top. In the mailbag, questions about Foot Locker and a new retail initial public offering ('IPO')... Are you visiting the mall more frequently than you did before the pandemic, and if so, what is driving you to go more frequently? Do you think the pandemic experience will permanently change your shopping habits... either drive you to buy more online or more in-store than before? Share your thoughts in an e-mail by clicking [here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna). "Hi Berna, I really enjoy reading your insightful writing every week. Thank you for sharing this interesting idea in this free newsletter. It's amazing that you can find such a cheap valuation in today's pricey market. "On Foot Locker, what do you think about their recent $1.1 billion acquisition of WSS and Atmos? "At a glance, it seems that they are paying 2 times revenue for these two chains while Foot Locker's own price to sales ratio sits at 0.4. Doesn't this look like the management is too desperate to chase growth? "If you believe strong chains will benefit from Nike's (NKE) wholesale distribution channel consolidation, wouldn't Dick's Sporting Goods (DKS) be a better bet as they are growing faster than Foot Locker and also have much better shareholder return policies, albeit a slightly higher P/E multiple? "Finally, while I can't afford your flagship newsletter subscription, I'd love to buy a more entry-level service if you come out with one in the future." – Yi D. Berna comment: Good question regarding the valuation of the acquisitions, Yi. Foot Locker indeed paid a higher multiple of sales for these two companies than its own multiple sits at. However, when there are substantial synergies to be realized in the acquisition of a company, it can make sense to pay a premium multiple versus that of the acquirer. According to guidance for earnings per share ("EPS") accretion given by Foot Locker, these deals should add between $0.44 and $0.48 to next year's EPS at Foot Locker. Generally, if a deal is accretive, the acquirer did not overpay. We'll see if these deals work out as Foot Locker has guided... but I doubt it would be so off in its projections that it won't prove accretive. As for Dick's Sporting Goods, I think it will also do well. While Nike is Dick's largest vendor, Nike makes up a larger portion of Foot Locker sales than it does Dick's sales. For that reason, I think this vendor rationalization helps Foot Locker the most. "Hi Berna, With regard to your expertise and your recent 'Don't buy, or rent, this stock,' have you any thoughts you can share on new IPO Lulu's Fashion Lounge (LVLU)? Thanks."– Bruno F. Berna comment: Bruno, I saw this company was going public, and I have to confess that my first reaction was that maybe the company hoped it would benefit from having a name and ticker so similar to Lululemon Athletica, which has been such a smashing success since its IPO. Putting aside my cynic's hat, I hadn't heard of Lulu's Fashion Lounge before it filed for the IPO, and I meant to watch the roadshow for it online but ran out of time and missed it. The company has roots going back to 1996 as a family-run brick-and-mortar apparel store but pivoted to be online only in 2008. It has taken in a couple of rounds of venture capital and looks a little bit like a lower-priced, more accessible [Revolve (RVLV)]( with a similar target demo of 20-somethings, a self-proclaimed reliance on data, and heavy marketing through Instagram. I need to take a closer look to offer an informed opinion on LVLU shares... although I am a little suspect of all the companies going public right now. Lately, the bar has been quite low for IPOs, and many companies are going public before ironing out a profitable business model. But I can't say that's the case for certain with Lulu's, so I will update after I have done the work. Regards, Berna Barshay November 15, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2021 Empire Financial Research. All rights reserved. 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