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Profit from the Retail Apocalypse

February 13, 2020

Just as Walmart (WMT) changed the retail landscape from local shops to big box stores built by Sam Walton, Amazon (AMZN) and plenty of other online juggernauts have been transforming the landscape even more so on a colossal scale.

Online shopping is increasingly taking the place of visiting brick and mortar retail locations. Amazon itself is being impacted by its online presence in groceries, as its delivery services are taking the hassle of visiting a Whole Foods out of the process.

The result is that retail stores are closing. In 2019, companies announced the closing of 9,300 stores, surpassing the 2017 record of 8,000 closures.

And so far in the opening weeks of 2020, 1,900 stores have announced they’re set to close. Real estate behemoth Cushman & Wakefield plc (CWK) is projecting store closings of at least 12,000 in 2020, making it another bad year for retailers.

But there is an upside that subscribers of my Profitable Investing service are taking advantage of.

Closing Deals

Each and every store that is closed has to be dealt with. Think of all of the inventories, fixtures, real estate and other assets as well as local liabilities that need to be settled. And the company that’s the best in the business of closing the deal on closings is Great American Group.

Great American Group has reported closing over 6,800 stores since 2013, amounting to over $13 billion in assets and is set to do a lot of business in 2020 and beyond. Great American sees 30% of traditional US retail stores going away in the not-too-distant future.

I found this company while researching the beneficiaries of store closings and the process of disposing of the facilities. So, I tracked down who has been contracted to take care of the stores.

But Great American Group isn’t on its own, as it was acquired and merged into an even more interesting company called B. Riley Financial (RILY).

B. Riley was founded by its CEO Bryant Riley, who is the largest shareholder in the company and along with management owns 27.3% of the shares of the company.

It is a financial firm that provides a big umbrella and structural underpinnings for six core businesses that B. Riley has acquired or merged with over the past several years.

B. Riley also acquired FBR, a favored investment bank with capital markets expertise in specific industries. I used to have regular dealings with the company in my former banking days.

There’s another business that I also like, B. Riley Principal Investments, which makes loans and takes equity stakes in a variety of companies as it inches out traditional commercial banks.

Principal Investments works well with B. Riley Capital Management in loan origination as well as other direct asset acquisitions and management.

And in turn, B. Riley Wealth Management utilizes the strengths of FBR and the other business to provide family office and other private client asset management, with more than $10 billion reported in assets under management (AUM).

Then there’s GlassRatner, which dovetails nicely with Great American. GlassRatner specializes on workouts of failed or failing companies, including restructuring, bankruptcies and valuation of assets as well as legal and accounting counseling.

Now, valuation, auctioning and liquidation make up a reported 31% of the segmented income of the overall B. Riley, with capital markets and principal investment making up the core of its income.

So, while it’s not a pure play on store closings, the other parts have additional appeal for me, and it shows in investor interest in the company and its shares.

Investors Believe in B. Riley—Source: Bloomberg Finance L.P.

The shares have generated a gain of 161.6% over the trailing five years alone and, with dividends, a total return of 217.7%. Both of these measures amply outperform the general S&P 500 Index for the same period of time.

But it’s not an expensive stock. Shares are valued at a mere 1.2 times its trailing revenues. And that revenue over the past year has been advancing by 31.3%.

Its operating margin is fat for a financial at 10.7%, which helps to deliver a whopping return on shareholder equity of 19.6%.

Meanwhile, on a price-to-book value, the stock is only at 2.36 times book—a financial value stock. Also, B. Riley operates with less regulatory oversight than traditional banks with capital markets operations.

The company has been building up its assets with the underlying book growing at a compounded annual growth rate (CAGR) of 13% over the past five years.

It has ample cash on hand, but management likes leverage to drive returns higher, so debts to assets are relatively high at 73.1%. This gives me some pause if there’s a stumble.

But the fact that the company has divisions that work in both expanding and contracting economies and markets means there are internal business hedges, which helps hedge that risk.

It has a proven history of both regular and ongoing special dividends for an annual dividend yield of 5.69%—something I look for in all of my Profitable Investing recommendations. The distributions have been climbing by 118.4% on average over the trailing five years.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life