The Big Box graveyard is expanding
Three familiar names in retail are fast approaching their day of reckoning.
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.
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.
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.
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.
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 :)
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. :(
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.
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.
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 ...
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.
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"
CEO Circuit City (former)
Copyright © 2014 Microsoft. All rights reserved.
Despite its size, the IPO will create just two new members of the 10-figure club from its executive ranks. A few others could net hundreds of millions.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.