More Signs of Cracks in the Shopping Mall and Real Estate Bubble: Robinsons Land’s Stock Rights Offering

To raise Php 20 billion, Robinsons Land Corporation [PSE: RLC] announced on Friday that (November 24) it would undertake a ‘stock-rights’ offering “to finance the acquisition of land located in various parts of the country for all its business segments”.

Since the offering would likely involve “1 Rights Shares for every [approximately 3.6 to 4.3] Common Shares”, the number of shares to be offered could approximately be 950,000,000 to 1,100,000,000.  But the price of the stock rights had yet to be established by the company. Nevertheless, the proposed number of shares provided a clue: Php 21.05 for 950,000,000 shares and Php 18.18 for 1,100,000,000 shares.

For whatever reasons, the market reacted violently against the proposed offering. The news crushed RLC share prices by 14.63%. The market brought RLC shares (close) to its proposed offering prices. Losses of RLC share prices had been the largest for the day.

However, the decision to raise financing via stock rights offering didn’t emerge from a vacuum.

 

Though RLC reported a 28.8% spike in net income in the 3Q, the weakness during the prior quarters -7.86% in 2Q and -10.89% in the 1Q, dragged 9M net income growth to a paltry +1.54%.

Such sluggish net income performance had been offshoots to a considerably frail top-line.

9M rental revenues rose by a scant 4.66% despite the opening of 3 new malls and 2 mall expansions in 2016. Rental revenues accounted for 50.5% of RLC’s 9M sales. Rental revenue growth had been vulnerable in three quarters (Q3 +2.19%, Q2 +5.43% and Q3 6.59%).

Why so? Has the BSP’s historic free money done little to improve the mall’s occupancy rates? Have such been signs of more mall vacancies?

Real estate sales had likewise been dismal.

In 9 months, property sales plunged 16% from 3 consecutive quarters of sluggish sales (Q3 -22.49%, Q2 +6.3% and Q1 -27.89%).

With the emergent susceptibility of two major sources of revenues, 9M total revenues were down by 2.79% from last year, again mainly from consecutively fragile quarterly results (Q3 -9.62%, Q2 +3.14% and Q1 -.87%)

Has RLC failed to attract buyers despite the BSP’s inducement to increase the individual’s leveraging of their balance sheets? Or, has this been only a marketing problem? Or, perhaps a supply problem- insufficient property inventories for sale?

Even more, the conundrum RLC faces have hardly been confined to 2017. There were already signs of incipient financial feebleness in 2016; top-line and bottom-line turned considerably south. (see lower pane)

 

Debt financing has relatively been new to RLC. When it began to use debt, it became hooked on it.

And because the company relied heavily on leverage to finance its recent operations, in the face of floundering net income, financing conditions have reached a point of being strained.

So RLC officials had a choice. Tap more credit lines but increase exposure to interest rate risks and credit risks. Or, raise funds through the equity issuance from existing shareholders and let them bear the market risks.

As for the latter, since JGS controls 60.97% of RLC, then much of the Php 20 billion worth of financing from the prospective stock rights offering would emanate from the parent holding company.

If JGS uses debt for the subscription, this transfers the risk from leveraging to them

The stock rights offer may also be used by JGS to increase its control over RLC. If RLC’s share prices drop to the stock right’s price level, many stockholders may opt to pass or prefer to get diluted. JGS would then subscribe to these. If so, the question is why? Is JGS considering the option to take private RLC?

However, as a way out, I believe that this offering represents a step in the right direction to reduce RLC’s debt. If I were a part of their team I might have chosen this path too.

RLC should consider building up their strategic competitive advantages using their existing resources rather than go along with the carefree crowd in chasing returns through “increasing market share financed by leverage” - a formula for insolvency. They should instead conserve their resources and wait for opportunities.

A great too many people believe that current conditions have become immune to risk. So they readily absorb a prodigiously enormous amount of leverage to magnify returns.

And as I pointed out earlier, the BSP’s monumental free money environment has hardly helped the sales of major non-durable retail chains.

An escalation of the predicament of the consumer nondurable retail space may be triggered by two forces, one, by the market itself (massive losses from oversaturation/overcapacity), or two, from the BSP’s tightening. Feedback loops will likely to occur from the trigger point: losses lead to tightening and or tightening leads to losses.

And considering that the retail industry has been JOINED TO THE HIP with the real estate industry, losses in one of them will have a leash effect on the other. Another potential feedback loop mechanism.

RLC’s stock offering exposes this heightened fragility.

Aside from RLC, the Filinvest Megawide squabble over receivables should be another sign of mounting strains within the industry [Signs of Market Top: Financial Felony, Swindles and Fraud: Filinvest-Megawide Collection Troubles? Three Unprecedented Days of PSEi Magic! September 28, 2017]

And here’s more on the real estate.

 

An update of Philippine property prices, as of the 2Q, was provided by the Bank for International Settlements. The National Statistics Office (NSO) and an unspecified the private sector entity/-ies were the sources of the BIS data. I fused the BSP’s domestic liquidity data with them.

Property prices have risen almost conjointly with credit-driven M3 or with a little time lag.

This relationship exhibits the transmission mechanism of credit financed speculation on property prices. Rising prices have been popularly, but mistakenly, perceived as a productivity induced boom. It isn’t. It is clearly an inflationary (malinvestment) boom: a bubble (belief in attaining something out of nothing) pillared by credit expansion.

This exhibits why the BSP has been petrified of raising rates.

In fact, the BSP continues to fight pressures building on the real economy (price pressures, a.k.a. inflation), bond markets (rising yields/flattening curve) and the currency (falling peso).

A Deeper Look at the Retail Non-Durable Woes: 3Q and 9M Performance of SM Retail, Puregold, Robinsons Retail, Metro Retail, 7-Eleven and SSI

In this issue

A Deeper Look at the Retail Non-Durable Woes: 3Q and 9M Performance of SM Retail, Puregold, Robinsons Retail, Metro Retail, 7-Eleven and SSI

-GDP’s Consumer Spending Veers Away From Retail Sales; The Free Money Subsidy

-PureGold’s Dwindling Topline Filters into the Bottom Line

-Unanimous Downturn in Robinsons Retail’s Diversified Retail Portfolio

-Metro Retail Stores Group Net Income Soared Even as Sales Growth Have Been Crashing

-7-Eleven’s Top-Line Plagued by Price Inflation, Cut-Throat Competition and Overcapacity

-SSI as Paradigm for Retail Rationalization; Surprise! SM Retail Hunkers Down on Store Expansions!

A Deeper Look at the Retail Non-Durable Woes: 3Q and 9M Performance of SM Retail, Puregold, Robinsons Retail, Metro Retail, 7-Eleven and SSI

GDP’s Consumer Spending Veers Away From Retail Sales; The Free Money Subsidy

First of all, the performance of select listed retail firms in the 3Q has hardly chimed with the PSA’s sharp decline in consumer spending in the national accounts.

At current prices, 3Q household final consumption expenditure (HFCE) growth slowed to 7.5% from 8.9% in the 2Q and 9.2% in the 1Q. Differently put, the consumer spending growth rate in the 3Q fell by 16% compared to 2Q.

Current prices of the national income account (GDP-GNI) are supposed to somewhat reflect on the cumulative (business) gross sales.

In the 2Q, the sluggish retail gross sales had been reflected in the substantial downshift in consumer spending growth rate.

[Wow. Revenues of Listed Retail Firms Validate Slowdown of Consumer Spending GDP in 1H! August 28, 2017]

A synchronized slowdown had barely been visible in the 3Q performance of retail sales. To the contrary, gross sales of major retail outlets even inched up!

With such seemingly unrealistic numbers, the GDP headline bewilders. Could it be that 3Q HFCE had been deliberately ‘suppressed’ intended to serve as a booster for 4Q GDP, hence the setup for a grand finale?

 

Second, credit and domestic liquidity conditions should serve as highly useful barometers of aggregate demand translated into industry sales*.

Thus I used the BSP’s data on M1 (currency in circulation and demand deposit) to estimate sales from cash and also credit card. Payroll loans can also provide useful insights into the contribution of leveraging on business sales. Payroll loans be transformed into cash or credit card or debit card sales

Nota Bene: *Spending from money and credit creation are not the same. Not all of the freshly created money from consumer credit expansion has directly been funneled into consumer consumption.  For instance, personal credit cards may be used for business-related expenditures, or for extension of loans. Nor does this entail of the transmission of credit expansion entirely into sales of the industry. Since the economy is a dynamic latticework of complex relationships founded on interdependent chain effects and feedback loops, there are manifold ways to finance spending. Nevertheless, the fact is that money supply growth, which emanates mostly from credit expansion, influence TOTAL spending in the economy.

Now to the data.

Nominal GDP, in 9 months, grew by 9.24% (headline GDP 6.65%) or by Php 958 billion from a year ago. For an apples-to-apples comparison, I’ll be focusing on the current (or nominal) prices which, again, should reflect on gross sales of the industry.

On the other hand, the end of period M1 soared at a rate of 16.7% in the 3Q from a year ago. The amount of M1 (cash and demand deposits) injected into the economy totaled Php 476 billion representing about half of the NGDP.  M1 accounted for a third or 32.87% of the commonly used measure of domestic liquidity M3 (M1 + M2 -peso savings and time deposits - and peso deposit substitutes, such as promissory notes and commercial papers, i.e., securities other than shares included in broad money).

Meanwhile, credit card usage rocketed 18.19% to a record high in the 3Q at Php 28.98 billion.

After a rapid ascent which peaked in the 2Q of 2016 (at 65.76%), payroll and general consumption loans began an equally sharp descend. The end of period (September) unsecured salary loans grew by 15.5% or by about Php 57.6 billion from a year ago.

That is to say, at the smoldering rate of liquidity injected into the economy, gross sales of major listed retail non-durables or Fast Moving Consumer Goods (FMCG) firms were not registering close to similar credit and cash growth rates.

Just where has such torrential stream of freshly created money and credit flowed into?

Excluding SM Retail, gross sales of the biggest 5, namely, Puregold, Robinsons Retail, Metro Retail Group, SSI Group and Philippine Seven Corporation recorded an aggregate or cumulative growth of 9.34% in the 3Q. Though this was higher than 8.17% in the 2Q, 3Q 2017’s growth rate was materially lower than the 13.68% registered in 3Q of 2016. (lower window)

In the perspective of market share, Puregold had the largest at 39.43%, Robinsons Retail came second at 35.24%, Metro Retail and Philippine Seven followed at 10.17% and 9.86%, while SSI Group was last at 5.3%.

While it is true that these companies cater to a variety of consumer segments, the slowdown in sales has been unanimous. And such a downshift has not been restricted to limited timeframes but has signified a trend.

And such escalating sales decay comes amidst continued expansion of these FMCG retail chains. This is with the exception of the SSI Group and MiniStop

Again the crux of the matter is: why have these retail outlets been underperforming in the face of free money?

PureGold’s Dwindling Topline Filters into the Bottom Line

Let us start with Puregold [PSE: PGOLD], the largest of the five.

Puregold is a chain of supermarkets complimented by its warehouse discounting chain, S&R.

Though 3Q 2017 sales had been slightly up to 11.95% in the 3Q from 10.44% in the 2Q, these were significantly lower compared to last year’s 14.4% and 17.11% in the same periods. In 9 months, net sales grew by 11.2%, 34% down from last year’s growth rate of 16.94%.

PGOLD added 23 stores or by 7% from 2016 to boost its outlets to 352 (291 Puregold stores, 13 S&R membership shopping warehouse, and 31 S&R New York Style QSR, 9 NE Bodega Supermarkets and 8 Budgetlane Supermarkets).

Because 3Q’s gross and operating margins dropped by 2.3% and 8.5%, net income grew by only 2.37%. In the three quarters, while gross margin was up by a measly .68% operating margin was down by 3.4% thus representing a drag to the bottom line which chalked up a net income growth of only 7.11%.

It is interesting to observe that previous financial records of PGOLD have become inaccessible or incomplete, hence the limitations in historical performance.

Unanimous Downturn in Robinsons Retail’s Diversified Retail Portfolio

Robinsons Retail Holdings [PSE: RRHI] is the second largest of the five listed non-durable retail chains. And because the company houses a smorgasbord of retail chains, its diversified sales provides a better perspective of the conditions of the domestic consumers

RRHI’s concentric diversification platform attempts to reach the entire spectrum of domestic consumers through its variable retail exposures.

Though one would expect differences in consumer behavior based on differences in spending power, which supposedly should translate into sales performances, this impression hasn’t held ground.

Since 2014, there has been a queer uniformity in RRHI’s sales trend: sales of ALL its segments have been trending lower!

Tacked into RRHI’s portfolio are the department stores, the supermarkets, the Do-It-Yourself (Hardware) stores, convenient chains, drug stores and the (high end) specialty stores.

To reiterate, sales growth of all segments including the high-end specialty stores has turned south. Though the acquisition of The Generic Pharmacy (TGP) boosted the drug store’s top-line in 2016, that didn’t last.

Here are some 3Q 2016 sales numbers comparable to last year’s 3Q 2016: supermarkets 7.57% in 2017 vis-à-vis 10.32% in 2016, department store 1.95% compared to 4.56%, DIY 10.98% and 11.12%, convenient store 2.62% and -1.22%, drug stores 9.25% and 63.66%, and the high-end specialty stores 21.64% and 34.56%.

Wow, even the posh spenders became penny-pinchers!

In total, RRHI sales in the 3Q 2017 grew by 8.7% relative to 16.5% in 3Q 2016. The company’s sales growth had nearly been halved!

The corresponding distribution share of total sales by segment in the 3Q as follows: supermarkets 46.8%, department stores 11.9%, DIY 10.9%, convenient store 5.03%, drug stores 13.33% and specialty stores 12.06%.

The company’s 3Q presentation exposes the decadent topline performance through the Same Store Sales which stunningly crumbled by nearly half! (lower window)

Though gross and operating margins improved 3.48% and 3.51% in the 3Q, the substantial drop in net sales dragged net income growth lower by -.35% to Php 1.357 billion from Php 1.62 billion in 2016 (middle window)

The dampened 3Q performance pulled down 9-month income growth to 10.53% the lowest in 5 years (13.21% 2016, 18.79% 2015, 28.34% 2014 and 128.5 2013) or since RRHI’s listing.

Wouldn’t this signify a supreme irony? We are witnessing a HISTORIC race to build supply financed by RECORD credit expansion from the LOOSEST monetary environment EVER. And yet, what have these brought about? Nothing but falling sales! A symptom of no less than the slomoerosion of capital formation (via malinvestments)!

Metro Retail Stores Group Net Income Soared Even as Sales Growth Have Been Crashing

Improvements in cost side factors may offset declines in revenues thus spur increases in earnings

And this has been the formula that has goosed up earnings of the next three!

Metro Retail Stores Group [PSE: MRSGI] reported a fantastic 1000% increase in net income in the third quarter to double net income in 9-months!

Yet, the company’s sales revenues have been astoundingly plummeting! The numbers: 1Q 2017 4.69% versus 1Q 2016 10.57%, 2Q 2017 1.89% vis-à-vis 7.29%, 3Q 2017 1.99% compared to 2.9%, and in 9 months 2.81% against 6.8% in 2016 and 14.94% in 2015. (see upper window).

And to consider, the company have added stores equivalent to 6.12% this year, 6.52% in 2016 and 15% in 2015. (lower window) So with top line figures crashing, additional stores indicate the aggravation of selling inefficiencies.

Such signifies the contradictory logic embedded in the company’s stated numbers.

In the past, big numbers failed to produce the current income growth levels and growth rates. Today, with sales growing at a rate less than the government’s CPI, it has been a marvel to observe and speculate on how the company would be able to sustain the current earnings manna brought about mainly by a squeeze in costs (COGS and administrative) in the face of plunging sales.

And it seems very hard to square this ability to viably arbitrage from the slight differences in changes of costs and profits.

Moreover, it would be difficult to match the company’s numbers in the knowledge that real economy prices have become volatile.

Presently, MRSGI’s gross margins have kept them afloat. That’s if the company’s numbers have been credible.

But if the present collapsing sales trend persists, no amount of accounting acrobatics will hide its weakness.

7-Eleven’s Top-Line Plagued by Price Inflation, Cut-Throat Competition and Overcapacity

Operator of the biggest convenient 24/7 retail chain 7-Eleven, Philippine Seven Corporation, [PSE: SEVN] is the fourth largest non-durables retail chain

The company reported a net income growth of 19% (18.92%) in the 3Q of 2017 compared to the same period last year.  The sterling 3Q performance bumped its 9-month net income to increase by a measly .77% from the same period last year.

The company’s store sales merchandise revenues have been cratering! Some numbers (3Q): 13.44% in 2017, 22.34% in 2016 and 33.45% in 2015. Though the company announced system-wide sales grew by 21% this year relative to 19.09% in 2016 and 32.52% in 2015, the franchise revenue growth rate plunged to 9.11% from 42.77% in 2016 and 20.18% in 2015. The total revenue growth rates tumbled to 14.28% in 2017 from 23.81% in 2016, and from 31.17% in 2015. (see upper window)

Applied to 9-month merchandise sales: 11.14% in 2017, 32.08% in 2016 and 29.11% in 2015. Though the company announced system-wide sales grew by 18% this year compared to 24.42% in 2016 and 24.81% in 2015, the franchise revenue growth rate tanked to 10.16% from 34.83% in 2016 and 29.33% in 2015. The total revenue growth rates withered to 12.34% in 2017 from 31.53% in 2016, and from 29.22% in 2015.

These changes are enormous and significant.

To describe the picture a bit more fully, growth rates of merchandise revenues, franchise revenues AND total revenues have been the LOWEST since 2011 (or since 7-11’s available record).

And the swiftly eroding growth rates came amidst the company’s massive expansion. Thus, additional outlets in the face of faltering sales translate to reduced store efficiencies. Such inefficiencies have become visible via the negative revenue per store (middle window).

SEVN appears to have recognized this, hence the material moderation in store expansions: 18.04% in 2017 from 24.41 in 2016 and 26.52% in 2016.

And here’s another thing. I’ve often written about how inflation reduces the people’s purchasing power, with the low-income groups being the most adversely affected. The lowest chart appears to reinforce this dynamic.

The recent surge in inflation as measured by the government’s Consumer Price Inflation (CPI: violet bar) and General Retail Price Index (GRPI: green bar) has coincided with the slump in sales growth of BOTH 7-Eleven (red trendline) and MiniStop (blue trendline). So price inflation may have abetted or aggravated such systemic overcapacity issues.

Again, this provides reasons behind the hasty sales of Familymart by the Ayala-SSI group consortium [See The 7-Eleven and Mini-Stop Perspective Expose Ayala Corp-SSI Group’s Rush to Sell FamilyMart!, November 12, 2017]

Perhaps to assure the public that the company remains unscathed by price inflation, cut-throat competition, and overcapacity issues, SEVNrecently declared a 62% stock dividend.

SSI as Paradigm for Retail Rationalization; Surprise! SM Retail Hunkers Down on Store Expansions!

The SSI Group, a specialty retail chain which holds a multitude of high-end consumer luxury goods franchise, has been the pioneer in the retail non-durables chain to have embraced a defensive posture.

Part of the company’s rationalization program involved the pruning of 9.44% of retail stores and 6.78% gross selling space as of the 3Q from a year ago.

So far they have been rewarded. 3Q sales grew by 2.65% from -2.47% in the 2Q and -1.36% in 1Q. 9-month sales had slightly been down -.45%, but lower than the 7.23% growth rate a year ago.

Because of higher margins from lowered costs, the company’s 3Q net income advanced by 6.39% compared to last year’s 43.28% slump. In 9-months the net income expanded by 12.5% compared to a 56.33% crash a year ago.

The company has even slashed its debt exposure by 14.8%.

While SSI’s undertaking is admirable, it is too soon to know if their rationalization program would work under an environment of reduced free money.

Nevertheless, SSI should serve as the paradigm for the race to build supply retail industry, once free money dissipates.

 

I may add that the largest retail entity, SM Retail, have also been exhibiting sparse growth in its retail line.

SM Retail is the larger version of the concentrically diversified Robinson’s Retail.

The company’s 3Q merchandise sales of Php 66.3 billion accounted for about 84% of the combined 5’s revenues of Php 78.6 billion.

SM Retail’s merchandise sales had been up 7.43% in 3Q from 5.2% in the 2Q but had been slightly lower than the 8.14% in 3Q of the last year.

SM’s data on merchandise sales have been blurred since SM Retail folded into SM Investments. It will take a year or two to have a better perspective on its turnover.

Nevertheless, the changes in the trend of SM’s stores provide a useful glimpse of its retail performance.

SM’s core stores are the SM (Department) Stores, Supermarkets, Savemore, Hypermarts and Waltermarts. Specialty stores have been merged into the company in 2015.

Curiously, the growth rate of SM’s core stores FELL to its LOWEST level since 2012 (lower window). SM’s core stores grew by 7.27% in 2017, 10.29% in 2016, and 15.24% in 2015. So from a core store perspective, 3Q’s 7.43% growth rate reflected mostly on new stores. There was hardly any growth from same stores sales or like for like sales.

The most significant development has been that SM retail chopped by a massive 21% its specialty stores to 1,231 from 1,556 a year ago!

Although SM declared that they would add 83 more specialty stores for the year that would still entail 16% decline in store inventories.

Yes, folks, economics have started to hit the largest retail chain. Despite the hype about expansions, SM have begun to hunker down!

Action speaks louder than words.

And these frantic brick and mortar race-to-build supply in the retail realm will eventually be challenged by technology  

Overcapacity abetted by shifting consumer preferences, who would likely imbue technology to conserve purchasing power, would mean the spreading of retail woes from non-durables to other segments, such as food.

Wait ‘til free money dissipates. Then we should see the domestic version of America’s retail apocalypse.

From the Bloomberg:

The reason isn’t as simple as Amazon.com Inc. taking market share or twenty-somethings spending more on experiences than things. The root cause is that many of these long-standing chains are overloaded with debt—often from leveraged buyouts led by private equity firms. There are billions in borrowings on the balance sheets of troubled retailers, and sustaining that load is only going to become harder—even for healthy chains.

The debt coming due, along with America’s over-stored suburbs and the continued gains of online shopping, has all the makings of a disaster. The spillover will likely flow far and wide across the U.S. economy. There will be displaced low-income workers, shrinking local tax bases and investor losses on stocks, bonds and real estate. If today is considered a retail apocalypse, then what’s coming next could truly be scary.

Rings a bell?