Credit Suisse Downgrades Mall Anchors, Says 'Yellow Caution Light Is Flashing Faster'

In a report published Thursday, Credit Suisse analyst Michael Exstein downgraded the Mall Anchors sector to Underweight from Market Weight.

Exstein noted that excluding J C Penney Company Inc JCP, capital expenditure for the group will grow 23 percent year-over-year to reach 2007 levels. Including JC Penney, capex will grow 22 percent year-over-year in 2015 and reach levels last seen in 2006 and the third-highest level in the past 15 years. The analyst also stated that half of the absolute dollars of total mall anchor capex growth in 2015 will come from just one retailer: Nordstrom, Inc. JWN.

"The significant expected increase in capital spending at this stage in the cycle could pressure returns for the mall anchor group going forward," Exstein wrote.

Exstein also noted a troubling trend that could negatively impact the group. For the past five years "FAB" (footwear, accessories, beauty) sales have "powered" mall anchor sales growth and profitability. However, in 2014, FAB as a percentage of total sales were flat for the first time since 2009, implying the possibility that FAB sales are plateauing.

Retailers that benefited the most from FAB sales include Dillard's, Inc. DDS, Nordstrom and Macy's, Inc. M. Exstein stated that these retailers could see fewer tailwinds from FAB sales and be "vulnerable" to challenges facing women's apparel.

Finally, Exstein noted from a valuation perspective, mall anchors are trading just 5 percent below their five-year peak. On a market-cap weight EV/EBITDA basis, the sector is trading at 7.4x, slightly training the five-year high of 7.8x seen in March of this year.

Bottom line, earnings upside is unlikely with top-line growth becoming "increasingly more challenging."

Of note, the analyst downgraded two names in the space:

• Shares of Nordstrom were downgraded to Neutral from Overweight with a price target lowered to $76 from a previous $85.
• Shares of Dillard's were downgraded to Underperform from Neutral with a price target lowered to $100 from a previous $105.