Markets Are Littered With Angst About Old-Line Retail's Downfall

(Bloomberg) -- The latest U.S. jobs report laid bare some of the sobering tribulations faced by American retailers: they’ve shed jobs on an annual basis for the first time since 2010, when the sector’s employment was just starting to rebound following the Great Recession.

The challenges are mounting as Amazon.com Inc. continues to grab market share in a secular trend in favor of e-commerce at the same time that cyclical consumption, the engine of U.S. growth, may be sputtering. Big-ticket spending items like autos have seen a marked slowdown in sales during 2017. And even maintaining the current pace of spending growth could prove difficult for U.S. consumers: the household savings rate is at a nine-year low. 

"Weak consumption, another miss on auto sales and the drop in ISM non-manufacturing sparked another round of concerns that the expected medium-term slowing in consumption may already be materializing," wrote Andrew Hollenhorst, Citigroup fixed income strategist in New York, referring to the ISM’s gauge of activity in services industries.

Rental-car companies showcase the latest signs of stress about firms that rise and fall on the back of the U.S. consumer -- and it appears across different asset classes. Shares of Avis Budget Group Inc. tumbled in after-hours New York trading on Monday as the firm cut its annual earnings-per-share guidance and missed expectations in its second-quarter results.

Nowhere is anxiety about the fate of American retailers more evident than in one of the most liquid exchange-traded funds tracking the sector. The SPDR S&P Select Retail ETF, which routinely sees short interest well in excess of 100 percent of the equity float, is down about 6 percent year to date. This is an equal-weighted basket of retail stocks, in which Amazon’s price changes wield as much influence as those of the much smaller Five Below Inc.

In the junk bond market, retail has separated itself from the pack in an undesirable fashion. In aggregate, spreads have tightened to levels not seen in three years, a trend the retail subgroup has completely bucked. A big gap in yields has emerged since last November:

While on the surface, the employment trends point to relative margin relief for physical retailers, there’s also cause to be concerned about volumes. Department stores continue to cede ground to non-store retailers (a segment that covers Amazon but doesn’t include sales made through the websites of brick-and-mortar stores):

And this disruption has taken its toll on publicly traded retailers. For instance, when Amazon announced that Sears would begin offering its Kenmore line of appliances on the e-commerce site on July 20, the result was a net destruction in equity market value.

It’s little wonder, then, that five-year credit default swap spreads for the likes of Macy’s Inc. and Toys R Us Inc. have widened materially in 2017.

Mall operators have likewise been unloved in 2017, with the retail real estate investment trust subgroup trailing the S&P 500 Index by about 19 percentage points through Monday’s close.

To contact the reporters on this story: Luke Kawa in New York at lkawa@bloomberg.net, James Crombie in New York at jcrombie8@bloomberg.net.

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Adam Haigh, Christopher Anstey