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Larry Meyers, PDL Capital (76 clicks)
Value, special situations, long-term horizon, small-cap
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There will be a day historians will look back on and call "The Day The Retail Store Died." I don't know when that day will come, but it will come. I'm not talking about great American institutions like Wal-Mart (WMT) or department/grocery stores like Target (TGT) or even clothing stores. I'm talking about stores like Best Buy (BBY), RadioShack (RSH), Fry's Electronics, and Samy's Camera. The reason these sticks 'n bricks locations will die is not only because of Amazon.com (AMZN) -- although that will be a major factor -- but also because of all the resources the Internet offers, combined with the long-term deterioration of the nation's economy.

Amazon is great, but Amazon alone is not the be-all and end-all of Internet retailing. When it comes to products (primarily electronics), the real agents of death are sites like Pricegrabber.com and my new favorite, Bestcovery.com. These price aggregators allow consumers to find the best price for the product they are seeking. When combined with what I call the "Intelligence Crowdsourcing" of Consumersearch.com and Bestcovery.com, consumers can now do all the research they'll ever need to do without ever leaving home. Electronics in particular have become commodities, and with specifications and comprehensive photographs, there is no need to go to a retail store ever. With gas at over $4 per gallon, there is further disincentive to drive to the mall to buy something.

So this is the first phase of the retail store death spiral, and it has already begun. Let us note, for example, the demise of Circuit City and Borders. The next phase will be wrapped around the faux economic recovery that is currently unfolding and the irresponsible fiscal policies of our politicians. The national debt continues to grow unabated, the need to borrow more and more money is spiraling out of control, the Fed continues to devalue the currency by printing more and more money, and the unfunded obligations of Social Security and Medicare will result in their eventual collapse. Unemployment is getting worse (look at the U6 number, not the U3 number reported in the media).

The end result of all this is that there will be less money in people's pockets to spend, and that will be a long-term trend. When people have less money to spend, they first seek out bargains, and then they stop spending altogether -- except on consumer staples. Those trends benefit the Bestcovery.com's of the world, which likely secure affiliate fees on every sale generated from their websites. Bestcovery.com also reviews consumer staples. These private little companies will thrive while the behemoths tumble and burn.

Finally, as revenue declines at the retail stores and increases (or is at least stable) at online merchants, cash flow at retail stores will drop. Interest payments will default. Debt will come due. One by one, the stores will die off. This is not to say that any of these companies are in imminent danger of bankruptcy; however, they have now become sunset industries, and that is not where you want to invest. You want to be in sunrise industries.

So how do you play this meta-long-term trend?

First, I would sell holdings in any of these sunset businesses, not all of which are electronics but are vulnerable under my thesis: Best Buy, Radio Shack, GameStop (GME), Barnes & Noble (BKS), and Rite-Aid (RAD). I would also sell Overstock.com (OSTK) because it is not really deep-discounting as it was originally branded to be, and Amazon is eating Overstock's lunch.

Second, I would buy Amazon, Wal-Mart, eBay (EBAY), and Apple (AAPL). These will be the long-term survivors and are all trading at reasonable valuations for the long term.

Source: The Day The Retail Store Died