Barron's Streetwise - Retail After the Pandemic

Episode Date: April 3, 2020

How the coronavirus will accelerate a reckoning for America's stores. Plus, CVS CEO Larry Merlo on testing and telehealth. Learn more about your ad choices. Visit megaphone.fm/adchoices

With record levels of dry powder available for investment, find out what's in store for private markets in 2025 and beyond. Listen to Crafting Capital in partnership with UBS at partners.wsj.com slash UBS, Spotify and Apple Podcasts. Every day that passes and we're subject to corona restrictions is another day that consumers get used to a couple things. Number one, they get used to staying at home. Number one, they get used to staying at home. Number two, they get used to buying online.

And number three, they get used to just buying less. I'm Jack Howe. Welcome to the Barron's Streetwise podcast. The person you just heard is Randy Connick. He's one of two analysts I spoke with this week about how retail might change even after the virus is gone. We'll also hear in a bit from Larry Merlo. As CEO of CVS, the big drug chain, he's at the intersection of retail and healthcare. With me is our audio producer, Metta Lutsoft. Hi, Metta.

Hey there, Jack. Metta, I'm told our little podcast is going well out of the gate. We got some really good reviews. I was happy to see that. I was surprised to open the Wall Street Journal and find a full-page ad that had my noggin on it. I didn't know it was going to be there. It's strange to see you with a big cartoonish face looking back at yourself in the newspaper. But whoever put that ad there, thank you.

Are you going to frame it, Jack? Would that be wrong? I'm thinking about it. I bought two copies just in case. We talked last week about why if you're thinking about putting money to work in the stock market and you're trying to find the bottom, stop trying. As long as you're investing for the long term, let's say 10 years or longer, prices are reasonable enough now. And I heard passionate responses for and against that idea. Some people said, that's what I've been waiting to hear. We need more optimism right now.

And some people said, that's crazy. This market has a lot further to fall. We're going to have another leg down. One commenter said, well, how much money have you put into the stock market? How many shares have you bought? I'll tell you exactly what I've done. Going into this downturn, I was what I've described in the past as a financial Benjamin Button. I had prematurely aged, right? I had an asset allocation that was probably appropriate for a 70-year-old, and I'm 47. So I had slightly less than half my

money in stocks. When I say stocks here, what I really mean are mutual funds that hold stocks. I have this job where sometimes I write cover stories or feature stories about specific stocks and they move the share prices. There's a name for that phenomenon. They call it the Barron's Bounce. So it becomes difficult to reconcile that with me owning individual shares. So I avoid that conflict of interest by just owning mutual funds. What I did during the downturn was I shifted to 60% stocks.

That's still conservative for my age and my financial situation. Maybe I should be closer to 70%. I'll get there, but not right away. Maybe over time. I'm by no means certain that we're not going to have another downturn for stocks. But if you think about what you can do with your money, money that you don't spend over very long time periods, you can do three basic things. You can buy stuff that sits around and hope that stuff becomes more valuable. That's what you do if you buy gold. You can loan money to people and charge interest. That's essentially what you're doing if you're buying bonds.

Or you can take that money and you can start a business. You could start a corner pizzeria. But really, when you buy shares of stock, you're buying into businesses that are already up and running. So I'll lump stocks in there. And companies are not stationary things. They're run by smart people who can respond to changing conditions and work to try to keep investor money safe and make investors

more money over time. The longest term case for stocks, for me, is not about price to earnings ratios or anything like that. The fact that companies exist and that we have a market for them is evidence that these companies can turn stuff and financing into better returns over time. That's where I want to have the bulk of my money. into better returns over time. That's where I want to have the bulk of my money. Meta, what are you finding with your personal spending? I mean, we're working from home now and stores aren't open,

so we're all spending less. Are you spending dramatically less? I am. I'm spending money on, I bought a pair of overalls because I don't care how I look. Very comfortable. Would it be weird if I got a pair of overalls and we each wear our overalls when we do the podcast? No, I think that's the plan from now on. I think my biggest capital expenditure recently has been dirt and seed.

I'm feeling a little squirrely here. I need some exercise. I'm beginning to develop a bit of a corn tummy here from the extra calories and the lack of motion. So I've been going outside and I've been vigorously raking the yard and then spreading some of this dirt to sort of even out the lumpy spots and then overseeding the grass. I'm going to try to make a nice lawn. It's really something to kind of work off stress. But I'm not spending money on anything else. So I keep hearing from people about pent-up demand. When the economy reopens,

there's going to be this incredible surge of people saying, hooray, we're going to go out there and we're going to get spending again. And that's going to cause this rapid bounce back in the economy later this year. I don't know if I'm really convinced of that. Right now, the only thing I'm thinking about is safety, keeping my family safe. I mean, I look on the TV and I see they're setting up a field hospital in Central Park in Manhattan across the street from the hospital where my daughter was born. So it's hard to go from seeing that to thinking, yeah, we'll be okay. We're going to get right back there and spend again. I mean, maybe we will, but keep in mind, I'm also someone who I'm still working.

I have means to spend. There are plenty of people in this economy who are out of jobs right now, who are really hurting financially. So I have to believe that there's going to be some lasting trauma from this economic downturn, that we're not going to get right back to where we were, that it might take some time. So I want to spend these next few weeks exploring what that might look like for different industries. And I wanted to start with retail because consumer spending is such an important part of this economy.

To learn more, I called up Randall Connick. Hey, Randy, how are you? Hey, Jack, what's up? Randy is a retail analyst at Jefferies, and I was curious to hear how his work life has changed now that everything is closed. My work week is just I wake up every day. I get my laptop that's charged from overnight. I go in my car. I drive to a Dunkin' Donuts. I park in the parking lot. I attach to the Wi-Fi. I work away. That's my day. Why are you with Dunkin' Donuts so much? Are you going through so much coffee now that your machine at home can't handle the volume, or is this because you're on the road and looking at things? I didn't run out of coffee at home, and the machine is great. It's the kid that will knock on the office door in the house and say,

can we play or do this or do that? So I choose to kind of work off-premises. In a Dunkin' Donuts parking lot. Randy says the most worrisome thing isn't that stores are closed and making zero in sales. We have a theme that we've come up with called close-ageddon based on the word armageddon. It's the uncertainty of not knowing how long that will continue. The goalposts keep changing, he says. Retailers thought two weeks of closures. Now they're more thinking one to two months of closures. And I think number two, the other issue is what does demand look like on the other side? So how much of this is pause

versus permanently destroyed demand? Randy says supermarkets, maybe fast food, might fare best if we have a prolonged downturn because, of course, we need to eat. Beyond that, expenditures don't look too exciting right now. I mean, there's my dirt and there's your overalls, Metta. Randy says he's buying things for his home life. I think the one thing that's happening right now in the near, near term, and I can speak from personal experience, is, you know, I bought my wife a pair of workout pants. I bought myself a pair of running sneakers in the last seven days, which kind of is a response to being cooped up at home, going to be doing more workouts at home and just doing more things around the

house. So you kind of naturally say, let me get a pair of slippers, let me get a pair of sneakers. But after that kind of initial adjust to home life more, there's no spending that's going to occur incrementally in my household beyond food. I also spoke with Chuck Grom, who's a retail analyst with Gordon Haskett. Hi, Chuck. Hey, how are you? I asked Chuck which stocks he thinks would be the best bets for investors in terms of their ability to weather the period coming. He mentioned TJX, which owns TJ Maxx and Marshalls and Ross Stores. Both of these are off-price retailers, so they do what's called opportunistic merchandising. Part of that is buying goods that other chains can't sell.

They buy them at deep discounts. They mark them up and sell them to their customers. So they actually find more merchandise available to them when times get tough. And they will definitely gain market share when this all is said and done. The difficult thing about those two stocks right now is sort of determining how low is low in terms of sales because their businesses are closed. And so they don't have big online presence. So they're struggling right now. Chuck has covered retail for about 20 years through the September 11th terrorist attacks, through the 2008 Great Recession. Like Randy, he's most concerned about mall retailers and department stores. I cover the four large department stores. And I'd say in order of

concern would be JCPenney, Macy's, and then Kohl's and Nordstrom are sort of more insulated. Chuck also likes Home Depot and some discounters, Costco, Wholesale, and Walmart. Some of these chains could be in a position to benefit from the struggles of others if we have chains out there that fall on hard times and close stores. And I think you'll see heightened focus on value that will be very reminiscent of what we saw in 2008 and in the years subsequent. And so that benefits companies like Costco or Dollar General or Walmart, Target, in a world where, and I don't want to predict this because I don't want it to happen,

but if JCPenney and Macy's were to go away, that would be $35 billion of sales that would essentially come up for grabs. And situations like that, usually the off-price guys will benefit. like that, usually the off-price guys will benefit. J.C. Penney is where my mom bought my church and school clothes when I was a kid. The play clothes came from Sears.

They sold tough-skinned jeans that could really hold a knee patch, and they came in size Husky. So I'm sorry to see these types of chains struggling, but this was happening long before the virus. It's been happening for many years. I did a cover story for Barron's Magazine on retail towards the end of last summer, and store closings at the time, net of openings, were running about double what they had the year before. One point I made for readers is that the state of consumer spending last year was actually quite healthy. The problem, why we have so many store closings, it's twofold really. There's been some disruption from technology. Of course, we're ordering more things online and not every store chain has kept up with that change. But also, we just have far too many stores in America.

far too many stores in America. We had last year 24 square feet of retail space per person in America. There are countries in Europe where the average is four or six or eight. We have a lot of store space we don't need. Meta, you grew up in Denmark. Did you used to go to big enclosed malls and just walk around looking to do stuff? We have a little bit, but not really. This was the thing to do when I was in maybe middle school and high school in the 1980s. I'm going to find some 80s music to score this.

You just go to the mall, you get a slushie, you'd walk around with your friends, you go to the record store, you go to the video arcade. We told ourselves we would talk to girls eventually. It never quite happened. We got pretty good at playing asteroids though. There are still malls that are doing well in great markets, but in the B or C markets where malls are struggling, what's happening is developers will come in and they'll repurpose that space. One thing they might do is just flatten much of the enclosed space in the mall, repurpose that space. One thing they might do is just flatten much of the enclosed space in the mall, keep that cluster of healthy tenants that face the outside, maybe add a couple of other stores in, but then put some mixed-use space in. I would imagine medical offices, apartments, something that's designed more for the way people like to live and shop today.

What I wrote at the time was that America might go through 10 years of accelerated store closures in order to bring our store footprint more in line to the way people are shopping today. What I think this virus will do is greatly accelerate that change. And at the same time, you have to assume that the consumer will no longer be as strong as they were last year. Here's Randy Connick at Jefferies. So I think what's going to happen with Corona, and again, this is going to be even worse every day that passes, is these behaviors start to just shift permanently. So we'll see an even greater acceleration towards online spending or online shopping. online spending or online shopping. We will see a more accelerated decline in physical mall traffic.

And then lastly, and this is even more concerning, is we could see even just a shift away again towards frugality or just spending less like we saw during the Great Recession. like we saw during the Great Recession. That's more restrained than I've heard Randy in the past. He's normally quite bullish on the consumer. And that gets to this business of the letter shape for our economic recovery. Maybe you've heard some people saying we could be heading for a V-shaped recovery this year. As I keep hearing the phrase V-shaped recovery. V-shaped recovery. V. As I keep hearing the phrase V-shaped recovery. V-shaped recovery.

V-shaped. V-shaped. V-shaped recovery. That's where you get a sharp bounce back in activity. People who are more cautious say it might be a U-shaped recovery where you spend longer in the downturn. It's forecasting more of a U-shaped recovery as opposed to a V-shaped recovery. The market has completely given up on a V-shaped recovery. The market has completely given up on a V-shaped recovery. And what we're pricing in right now is something that's best case is U-shaped. Then there's a W-shape where you have a second downturn.

We could see that if the virus returns in the fall. The worst would be an L-shape. That's where growth never returns to its previous trend. If I have to guess a letter shape, I'm going to guess an L popping a wheelie. If you know what a wheelie is, that's when a little kid riding a bike pulls back on the handlebars and pops that front wheel up into the air. If you picture an L leaning back like that, you do get a sharp V-shaped recovery. It doesn't quite take you all the way back to where you were to start with, which is to say, I'm hopeful that

we'll see a sharp bounce back in economic activity and the consumers will get out there spending again. But I wouldn't be surprised if shoppers will be left cautious even after the virus is gone. Meta, are you ready to move on from retail? For sure. Meta, are you ready to move on from retail? For sure. I will meet you halfway because I want to talk about CVS. That is a retailer. It's a big drug chain.

And increasingly, that's a company that wants to be a health care company. I reached out to Larry Merlo, the CEO of CVS, because I wanted to see how CVS is responding to the pandemic. You can read the whole Q&A in Barron's magazine. I want to bring you a few of his comments here. I asked about testing for coronavirus. The company is running a trial in the parking lot of one of its stores in Massachusetts where it's offering drive-through testing. Jack, what we found is the drive-through testing process, it does work. The reality is the size of CVS parking lots, we've been able to accommodate one drive-through lane, if you will, with the appropriate access and egress to the location. So we're seeing anywhere from 100 to 110 tests being able to be performed over the course of the day.

Larry says one answer to that might be using schools, which are closed down right now, which have big parking lots. You can run in as many as four drive-thru lanes, and you can get up to 500 tests a day. One of CVS's health care strategies is to make care more local and available. They plan to do that by offering more telehealth services. That's where you can get services over the phone or through a video chat. And there's been a big increase there. As far as the telemedicine, you know, we spend a lot of time thinking about how we can increase access to care. You know, telemedicine is another way. We have seen unprecedented demand. The number

of telemedicine visits has increased by more than 2x, and that is continuing to grow. And we're continuing to work with our telehealth provider in terms of bringing additional clinicians online to handle the additional volume that we're experiencing. That matches exactly what I heard during a conversation this past week with Dr. Lloyd Miner. He's the dean of the Stanford School of Medicine, and he talked about a sharp increase in telemedicine that they've seen at the hospital there. And he said that long term, he expects there to be things available in telemedicine that aren't available today, like the ability to run scans at home, EKGs, maybe sonograms. Mehta, I'm starting to feel like talking to you for

this podcast each week counts as telehealth therapy. I'll send you my bill any day. When we wrap up, we might need to work through some issues from my childhood. That's fine. In the first episode, I asked for listener questions, and you can send them to me at jack.how

that's h-o-u-G-H, at barons.com. And I asked you if you could send me an audio file and I'll play it on the podcast. Here's John from Texas. I've been an index investor probably for decades now. I've always been approached by financial advisors trying to convince me that managed funds make sense. And one of the arguments that they typically fall back on is in a market of extreme volatility, a manager can basically get you out as the market is going down and has the potential to get you back in as the market is coming back up. I frankly haven't been persuaded by that argument. But I just wondered if there's any data out there

now as a result of this virus caused volatility that either refutes or confirms that opinion. Great question, John. Keep doing what you're doing with the index funds. You're fine. Actively managed funds do not have an ability to predict downturns in the market and sell just in time and get you out to avoid downturns. What they and sell just in time and get you out to avoid downturns. What they generally try to do is beat the market over time through stock picking. I can tell you that over the past 10 years, the record has not been great at all for active managers. And there's some debate about why. We have seen money flood into cheap index funds. And one theory is that all that money going into index funds has

flowed into those underlying stocks in the same proportion, and it's helped index funds outperform active managers. And another is just that the active managers haven't had as much money in big tech stocks. And so that's helped the indexes. There was a report from Bank of America on April 1st that said that active managers had relatively low weightings in consumer discretionary stocks and in financials and in energy, and that that helped their cause during the downturn. I think it's too early to say that that's the start of a shift where active managers will begin outperforming. We haven't seen that yet. What I would tell you is, if you've got your money in cheap index funds, you've got the right asset allocation, you're happy with what you have, stick with it. Whatever the case, no one can sell out at just

the right time to get out of a stock downturn just because they charge a higher fee. Now let's hear from Paul. Hello, Jack. I know you're not a physician, but could you kindly ask one of your professionals this question? Are there any high risk elderly patients that have acquired the coronavirus who have recovered? My fear is that 100% succumb to the disease. Thank you. Paul, this question has really weighed on me. Let me start with some numbers, and these come from New York City, which is the epicenter for this virus in the United States. Among people 75 and older, we've had 4,678 confirmed cases as of April 2nd, and we've had 635 deaths. Now, that works out to between 13% and 14%.

Not all those cases have been resolved yet, but there could also be a lot of cases we don't know about because those people haven't been tested. Clearly, the answer to your question is there are many, many older people who get this virus who go on to live. Now, I'm not a doctor. It's not for me to interpret these numbers, but I mentioned you to Dr. Lloyd Minor. He's the dean at the Stanford Medical School. And he confirmed that, yes, there are many people who get this virus, even older folks, who live and go on to do just fine. Of course, what we know is those folks are at greater risk than younger populations. So he encouraged

you to do whatever you can to stay safe, avoid contact with other people. It's one thing to know the numbers, Paul, but I would just add, don't fall into despair. Stay safe. But I'm hopeful that you're going to be just fine. Thanks for listening. Meta Lutzhoft is our producer. Thank you for leaving all those lovely reviews on Apple Podcasts and for subscribing wherever you listen to podcasts.

Follow me on Twitter to find out about stories and new episodes. That's at Jack Howe, H-O-U-G-H. See you next week.