The Big Box graveyard is expanding

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

By Motley Fool Pick of the Day Jan 17, 2012 4:22PM

By Jeremy Bowman

 

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.

 

Article continues below video

 

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.

167Comments
Jan 18, 2012 2:53PM
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Best Buy's problem is the same a lot of companies have, they try to pay dirt wages and expect to get good employees. A friend of mine worked for them, he sold TV's like crazy, and was #1 in the entire DC area for signing up new credit card accounts. He also sold accessories to the TV's, which increased sales totals and made sure customers were completely happy with their purchase and didn't have to come back to get things they needed to hook up their TV's. But he was making the same low wage with no benefits as any other slacker on the sales floor. So he quit, he works as a security guard for $4 an hour more + full benefits.  Retailers will die as long as they view employees as a cost and a minus to profits. Retailers with the right incentives who view their employees as a necessary part of the profit chain will succeed. Investors need to understand you get what you pay for.  
Jan 18, 2012 12:49PM
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Sear's biggest problem 3 part time workers that know nothing instead of a full timer trained and knowledgeable.  full time employees with benefits are worth there pay
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I think the main problem with all the big box stores is they have forgotten the first rule of business is you exist to serve the customer. What you promise you must deliver. Each and every time a customer does you the favor of coming into your store treat them like they are doing you a favor.

Part two treat your workers as an important part of the business plan. If you see bad employees look at the leadership of the company. Time is running out fast get with the program or suffer the fate of the rest who refuse to change.

Jan 18, 2012 2:12PM
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Best Buy is the Circuit City of the 2010.  I recently went to purchase a laptop, found the one I wanted. Went to check out and they said this is 100.00 more than becasue the Geek Squad has set it up.  I replied I didn't need the Geek's to set it up I can do it myself just fine. Went to find one that diodn't have the extra 100.00 charge and there was none the Geek's had set all them up.  I went back to the cashier and told her to forget about my purchase and forget about me shopping there again.  I am not gonna be ripped off by a company that pays their employees 7.50 per hour then charge me 100.00 for that 1/2 hour work.
Jan 18, 2012 4:10PM
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Hmmm, I would like to share another viewpoint.  We are an independent, family owned appliance dealer in the Asheville NC area, Haywood Appliance.  Yes the landscape has changed and big box stores are certainly pushing independents to the brink of extinction.  However, when you read the complaints in this thread, you can see why people are starting to realize that "buying local" is a good idea.  We match all prices and once you take price off the table - things look a bit different.  When you shop local, more profits stay in your area.  Like us, many independents have a service department so getting someone qualified to service your products is easy.  We pay all our staff a decent wage - the majority of our staff has been with us 10+ years.  We are the last independent standing in our area.  My point is once the independents are gone, so is your choice to shop local - so give your local store a shot, you will be surprised to find the price is the same and that perhaps the chain store does not have to be the future model of american business.  Just sayin :)

Jan 18, 2012 12:47PM
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Until Wal-Mart is on the list this type of article doesn't really mean anything.

The day that craphole is broken up will be a day of celebration in this country.

And don't spout off about jobs and things you  know nothing about. Go read up on Wal-mart and the downward effect on pricing to it's suppliers and in effect putting them out of business. All the mom and pop stores gone, all the made in china **** you are FORCED to have since that is all they peddle. Garbage.

And on jobs....yeah... those are some quality 30 hour a week no benefit treat you like **** jobs at Wal-Mart. 20 years ago those were the jobs... you know...we would get as kids until we found real jobs. Nowadays you matriculate from Wal-Mart to McDonald's. (If your lucky)

Pity on Sear's in a way. You want to fix Sears = first thing to do is get that hedge fund wall street retard out of the driver seat. You know the one that wants to invest in nothing but take all the money out of guy.

Best Buy's business model has always been a "rip off those with no idea on electronics" one. Good riddance.

Barnes and Noble actually makes me sad in a way. But the day of the hard copy book is going away :( God help us. Just like the kids can't do basic addition and subtraction without a calculator and a school essay is a printout wiki page. Now if it isn't on a 3 inch by 5 inch screen you can't READ it anymore. (there's irony huh?)

Overpriced or not at least they sold BOOKS. People congregate and READ there while having their latte's. As opposed to what? Congregating and playing angry birds somewhere else. It sucks and it's a shame but it is what it is. :(

Jan 17, 2012 5:33PM
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The bad part about this news is the jobs that will be gone!

 

Jan 18, 2012 3:17PM
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These large companies are run now by accountants (who are notoriously penny wise and dollar foolish, and human resources trying to save a buck with part time help and tax credit eligible employees (search WOTC) The people at the top that are supposed to be "business men" are only worried about the fast buck huge bonus they get. When the company shuts down, they just move on to the next one with their golden umbrella in tow. The American way of doing business is and has been over.
Jan 18, 2012 3:13PM
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I stood in Best Buy the other day for 15 minutes and not one person asked me if I needed help.  The associate that was in the camera department was with someone chatting away and couldn't even say I'll be with you in a sec or at least get someone else to help.  All the while one guy working there in a diiferent colored shirt (different dept) stared at me the whole time and didn't say a word.  It's no wonder a place like this could go out of business, they've forgotten what keeps them alive........THE CUSTOMER!  I called and talked to the manager just to let him know what happened and got an apology.  I guess I'll buy electronics somewhere else next time.

Jan 18, 2012 12:48PM
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Unfortunately the bad service is explained, at least in the case of Sears, by the merging of companies in 2005. This was done by a hedge fund investor (remember how much we love them?) named Edward Lampert, and the sales have declined since then. If you read the article, you'd know that he took an investor's approach to running the companies, not a retailer's approach. That means cutting out unneeded items like enough sales people, customer service, enough stock to meet demand, etc. This will probably end with the closing of Sears, and Mr. Lampert and his cohorts will walk away with a few hundred million in their pockets. Sounds like Bain Capital all over again. 
Jan 18, 2012 3:11PM
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I can see why Best Buy is going to go belly up, I tried to by a computer from them and I went to three different stores to get a computer, not that they did not have them I could not get anyone to help me, lousy customer service, finally I walked up to a manager and said I would like to get this computer and he said he would get someone to help me, waited 1/2 hour to get someone to help me, I left and purchased my computer somewhere else, and look what they did at Christmas time to all those people that had tv's on backorder. They have the worst customer service of all the stores list.
Jan 18, 2012 2:36PM
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Quite bluntly the problem with Best Buy is their lack of concern for the customer and potential customers. Their sales staff are a bunch of college or High school kids who blab about certain aspects of their products but cannot really answer or solve specific issues for the customers. They spent time "doing things" instead of helping customers in their requests or issues. Last Black Friday I came into the BB store to collect a pre-ordered item in the morning but instead was told to come back in the afternoon. They refused to serve me citing one reasons after another about how busy they were. Fact is many of them were walking around with clipboards and talking with each other. This mentality that focus around "things" (products) and not people (customers) is a corporate culture unfit for today's service economy.

 

Return and re-Stocking fee. This is BB policy designed to further infuriate you the customer. Now that their sales is nose diving why not increased to 30% to shore up revenue? The once delighted customer should now feel physically sick when leaving the store.

 

Prices. Who cares about the price when thinking about Best Buy makes you sick?

 

Do yourself a favor - avoid Best Buy for your financial and mental health.

Jan 17, 2012 10:01PM
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I do hate corps!! That doesn't mean I am anti bussiness. I used to work for a bussiness and the bussiness was very successful. Now I work for a corporation that is 20 billion in debt and the head of the corproration made 90 million last year. And what is the brilliant stradegy that earned him this money? Extend the debt so it matures later and just pay more interest. Bussiness=jobs and services. Corporations= greed and coruption.
Jan 17, 2012 6:07PM
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I will miss puttering around the Tools section in Sears.
Jan 18, 2012 3:17PM
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after 40 years as a sears customer with a credit card that citibank eventually took over, we stopped shopping @sears when citibank raised the APR to 29% and "allowed" us to cancel the credit card eventhough we never missed a payment and usually paid off monthly balances;
since then we have been able to use internet shopping to find ways of buying what we would have obtained from a sear store six miles away at better prices;

too bad they "priced" themselves out of the market ...

Jan 18, 2012 2:23PM
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If Sears would only sell Craftsman tools and Kenmore appliances, they could succeed.

 

Shoes? Uh, no.0our shoe buyers shouldn't be born before 1980. By far, the worst collection of outdated plastic crap I have ever seen. 

 

I had a Kenmore washing machine that lasted 17 years and will always buy Kenmore. Nothing beats Craftsman tools and they have a great warranty. Stick to what sells.  

Jan 18, 2012 10:12AM
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Good riddance to Best Buy. Their on-line store is terrible. Tried to purchase an item for delivery. They stated it would be delayed by a few days as it was not in their warehouse. Checked into pick up at a local store - the site said that it was in stock at the store. Was then told that it was an 'Inventory item', meaning it was either a floor sample or a return, thus not available. I then found the item at another local (sort of) Best Buy after calling the store direct. Was treated very poorly by the staff. No knowledge of the item, just a push to buy an extended warranty. I WILL NOT shop at Best buy, again. Terrible customer service -by phone and in person. Sent two e-mails and never received a reply. Best Buy...you deserve to do down.

Jan 18, 2012 1:48PM
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went to Best Buy to get computer fixed by the "geek" squad....is there a singular form for squad?because there was only 1 person and he was busy loading a computer (new) for a customer and so I waited only to find out they wanted $400 up front and they were going to send it to Calif. and so not having $400 I took it to my neighborhood computer store and they fixed it for $69.  I always reccommend them now and even though I lost my hard drive which Best Buy said would happen with them......there is a whole lot of difference between $400 and $69 and I kept my little guy in business...........please do the same.......
Jan 18, 2012 2:48PM
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The days of a retailer providing goods and services for a reasonable price for a reasonable profit are long gone. The customer nor the employee are not all that important, It's all about return on investment for the stock holders

" too focused on short-term profit rather than long-term value"

Alan Wurtzel

CEO Circuit City (former)

Jan 18, 2012 2:45PM
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What bothers me is when all the big box stores are gone, what's to stop Amazon from gouging us with price increases? We need multiple internet sources to start competing with Amazon. The other problem is after the big box stores are gone, how are we going to be able to see, touch and judge quality if we can't get access to anything but a description and a picture?
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