The big-box graveyard is expanding

Three familiar names in retail are fast approaching their day of reckoning.

By MSN Money producer Jan 18, 2012 4:48PM

By Jeremy Bowman, Motley Fool

 

While our banks may be too big to fail, it seems that our superstores are now too big to survive. The news for several familiar big box chains has gone from bad to worse lately as a slow economic recovery, increased competition from online channels, and a failure to adapt to new market conditions have a number of retail chains teetering on the brink of collapse.

 

The writing's on the wall
After posting an EPS loss of $1.31 in 2011, Barnes & Noble (BKS) recently announced this year's loss would be twice as large as previously expected, between $1.10 and $1.40. The bookseller's Nook e-reader, on which the company's last hopes seem to be riding, sits in a purgatory. Company execs had toyed with the idea of spinning it off entirely before announcing a partnership with TheNew York Times (NYT), in which the Times will subsidize the Nook for readers in exchange for a full year's digital subscription to the newspaper.

 

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Investors sent the stock price down 17% after news of the revised projections broke, and they seemed unimpressed with the spinoff proposal. The deal with the Times is more intriguing. Even if it benefits both parties -- and I think the Times has more to win here -- B&N is already taking an overall loss on the Nook, and it's carrying an albatross in the form of millions of retail square feet that readers don't need anymore. As online giant Amazon.com's (AMZN) sales grow at a blistering pace, up over 40% in its latest quarter, it's hard to see how Barnes & Noble brings itself back to life.

 

Best Buy is anything but
Best Buy
(BBY), the ubiquitous electronics retailer, posted a 1.2% decline in same-store sales in December, and embarrassed itself in the Christmas run-up by canceling some customers' orders. Its share price dropped over 15% after a disappointing third-quarter report, which included a 29% drop in net income.

 

In a blog post vaguely reminiscent of the Cleveland Cavaliers owner's tantrum after Lebron James left for Miami, CEO Brian Dunn fired back at negative coverage in Forbes and other news outlets. Dunn's message included an apology for dropping the ball on the Christmas orders, and a concession that criticism of his company's failure to adapt its business model was deserved. But he also took a swipe at detractors, saying that research had shown that 80% of consumer electronics are still purchased at physical stores, and the company's prospects remained strong.

Investors might disagree. Since Dunn took over as CEO in June 2009, Best Buy's share price is down about 25%, and industrywide, consumer electronics sales fell 5.9% over the holiday season after dropping by 6.2% in 2010. With smartphones and tablets fulfilling many of the functions of yesterday's stand-alone technologies like camcorders, video players, and GPS devices, the days of big box electronics stores appear to be numbered.

 

Sears is the new Woolworth's
The company whose name once graced the tallest building in the world has surely fallen from great heights. Sears Holdings (SHLD), parent of Sears, Kmart and other familiar brands, recently announced it would be closing up to 120 stores. Same-stores sales have declined remarkably, sliding every year since 2005 when hedge-fund investor Edward Lampert merged Kmart with Sears, establishing the holding company.

 

For three straight quarters, the retailer has reported negative net income, losing over $400 million in earnings and $824 million in operating cash flow in its last quarter. Fitch recently downgraded its credit rating to CCC, and the company will record up to a $2.4 billion charge this quarter for its store closings.

 

Management seems to be the culprit here. Lampert took an investor's approach to running the chain, scrimping on necessities like store maintenance and ignoring traditional metrics like same-store sales. Meanwhile, he spent $1.5 billion on share buybacks from 2008 to 2010.

 

Sears' dismal financials have held consequences for shareholders as well, driving the stock down more than 50% in the last year. With revenue declining and its chief officers in a revolving door, Sears looks like it's destined for the dustbins of history.

 

The gravedigger
There's no question who's holding the shovel here. Having stepped up its market-grabbing efforts with added media offerings to its Prime service and its new tablet, the Kindle Fire, Amazon is making mincemeat out of the once-mighty retailers.

 

Membership to Amazon Prime, which offers free two-day shipping, instant video streaming, and access to thousands of E-books for an annual price of $79, grew from 2 million in 2009 to 5 million in 2011. Users are clearly happy with the service. In a survey, 92% said they would renew their membership, and their average expenditure more than doubles in their first year of membership.

 

While Prime may be a favorite of consumers, its effects on Amazon's bottom line are less clear. Net shipping costs for the company grew from 3.4% of sales in 2009 to 4% in 2010. Amazon's profit margins have also declined three quarters in a row.

 

Foolish takeaway
The merits of Amazon's last-man-standing strategy are debatable, but the consequences for its brick-and-mortar competitors are obvious. Every dollar spent in Amazon is one less being spent at stores like Barnes & Noble, Best Buy, and Sears. Those brands may survive by evolving into predominantly web-based businesses, but their big box outlets will be going the way of the dinosaurs. That's why I'm making a bearish CAPScall on all three. I don't see any of them outperforming the S&P 500 in the years to come.

 

Fool contributor Jeremy Bowman holds no positions in the companies above. The Motley Fool owns shares of Amazon.com and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com and writing covered calls in Best Buy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.