Retail can be a great sector for growth. Look at names like Target (NYSE:TGT), Wal-Mart (NYSE:WMT) and McDonald's (NYSE:MCD) - all retail stores of one type or another, all that would have provided healthy gains if you had invested in them 10 years ago.
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The long-term growth story is one that can apply to the retail sector, like many other facets of the market. Unfortunately, like the entropy of our existence, as time passes, all companies will get to an apex, and will eventually start to tail off.
Iconography Does Not Equal Performance
It's tough to think about when you think of time tested names like Remington (c. 1816), Brooks Brothers (c. 1818), Pfaltzgraff (c. 1811), DuPont (c.1802), Cigna (c.1792), Lorrilard (c.1760), and Jim Beam (c. 1795). These companies give us reason to believe that all time tested names that have been around for 50 or 60 years are likely to continue on into oblivion. It's easy to lose that type of hyper-macro perspective, when companies that have already been founding (like MCD in my case) exist for people's entire lifetimes.
However, it's also important that you need to look at many different "iconic" brands who went past their heyday, and couldn't keep up with the times. Notable examples, to give you some perspective, include Eastman Kodak (c. 1888), Hostess (c. 1930), Reader's Digest (c. 1922), Fortunoff (c. 1922), and Lehman Brothers (c. 1850).
A lot of the mindset behind retail investing relies on the psychology that if a company or brand has been around for a while, it's likely to continue for just as many years as it's already been around. While this is true for some real staple stocks, like your McDonald's and your Procter & Gamble's (NYSE:PG), it's important to not rely solely on this notion when doing your long term investing.
The Current State of Retail and Our 3 Case Studies
So, let's carry this iconography discussion over to the most recent news on the retail sector, which included slower than expected growth. U.S. Retail Sales were reported on Friday morning:
U.S. retail sales rose less than expected in August even as demand increased for automobiles and other big-ticket items, the latest sign that economic growth slowed in the third quarter.
The Commerce Department said on Friday retail sales increased 0.2 percent last month as Americans bought automobiles, furniture and electronics and appliances.
However, they cut back on clothing, building materials and sporting goods.
Retail sales, which account for about 30 percent of consumer spending, were still up for a fifth consecutive month.
They had gained 0.4 percent in July and economists polled by Reuters had expected them to rise 0.4 percent last month.
On the heels of Friday morning's news surrounding less than expected rises in U.S. retail sales, there are a few companies that I think are subject to feeling the pain more than others in the retail sector. These companies, ultimately, I do not believe will make it until the end of the decade, and are what I believe to be the worst possible choices for a long-term investment in the retail sector.
All three of these companies have substaitial short positions, an argument frequesntly used by bulls of dying companies. "A short squeeze is coming", they'll argue - as they forget to realize that you need a catalyst to start a squeeze - and neither of these three companies have catalysts coming down the pipe. Sometimes, the shorts are just plain right.
1. Sears (SHLD)
SA Contributor Street Authority sums up the entire premise of my feelings about Sears - all in just the headline of his/her latest article:
"This Legendary Retailer Might Be the Worst Invesment You Can Make Right Now"
Well said, Street Authority. Well said.
Years ago, Sears was synonymous with leading retail; it was your one-stop-shop for housewares, clothing, electronics and tools. They were backed by big names and reputable brands like Kenmore, Westinghouse and Craftsman. Now, Sears has fallen to the stores having the same air of desperation to them as RadioShack and J.C. Penney. Kenmore and Westinghouse are no longer prominent leaders in housewares, and Sears stores are generally empty and sad perfunctory looking bookends to malls around the country.
Street Authority pretty much sums up where Sears is nowadays; in the junk debt club:
There's a reason why Moody's rates Sears debt at B3 and S&P gives it a CCC+ rating. Judging by the just-released financial results, and Sears' exposure to rising interest rates on that debt, further ratings downgrades may ensue.
Today, Sears is looking like a stock trader's first charting 101 example of what a sustained downtrend looks like:
The bulls will point out that yes, Sears is sitting on a large cash position of about three quarters of a billion. A lot of this cash, however, is from Sears liquidating a considerable amount of their assets. While the fundamentals are important, from a revenue standpoint, Sears is going on six straights years of declining revenues.
They'll also use the "iconography" argument here, too - which we've already discussed and will continue to discuss ad infinitum through the end of this article. The point is, staying power is derived from dynamically creating demand, staying ahead of the times, and having good fundamentals - not just from a name.
The company is simply a dinosaur from the past, who's time is fading fast. Sears will not be around, as we know it, come 2020 - and that makes it a poor short-term and long-term investment.
2. RadioShack (RSH)
If you've read my articles in the past, you know that I feel the same way about RadioShack as I do about colonoscopies: it's necessary to endure the intrusiveness of it once in a blue moon, but otherwise, it's not something you'd find yourself volunteering to take place in.
Before Tiger Direct, Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY), and other online electronic shops, RadioShack was the go to spot for electronics and accessories in the midst of the computer boom. Not only was it a place to go and keep up to date on the latest accessories and electronics to come out, it is a place where there always used to be a banter in the air amongst interested parties exchanging tips of the trade. It seemed like a bit more than a just store, it was like a daily meeting of your local electronics gurus.
Now, the RadioShack retail stores stink with an air of desperation. They're usually empty, there's little focus on electronics aside from mobile phones, and the sales pitch from the commission fueled associate trying to pitch either the product replacement warranty or the bargain du jour lasts far longer than the actual shopping experience itself. Stores are closing, and business is waning - it looks like the writing is on the wall for the beginning of an unceremonious exit for the company.
SA Contributor Vince Martin points out RadioShack's rough start to the fall, including having their debt downgraded:
Shares of RadioShack closed [early Aug 13'] down over 11 percent in response to a downgrade of its debt by Standard and Poor's on Thursday evening. S&P cut RadioShack's debt to 'CCC', defining the company as "currently vulnerable and dependent on favorable business, economic, and financial conditions to meet financial commitments." The ratings agency also warned that "a default could occur within 12 months," according to the Fort Worth Star-Telegram.
So, just like Sears, RadioShack has nasty debt.
Incidentally, though, the stock seems to be operating with some type of disconnect to RadioShack's reality. It's yielded 18% gains over the last three months, 47% gains in the last twelve months, and 89.2% gains year-to-date. What's that all about?
Another SA Contributor, A.J. Watkinson, tried to figure this out in his article that came out last week:
I think it's important to point out that the bounce seems to have no connection to earnings. As you can see below, the past four quarters look absolutely horrible…
· Sept. '12 - $47.1M
· Dec. '12 - $63.3M
· Mar. '13 - $43.3M
· June '13 - $53.1M
And given the negative earnings surprise of 250% and 120% in each of the previous two respective quarters, I wouldn't give much credence to the current batch of analyst estimates for the upcoming quarters (which still project losses).
So RadioShack, which was once a giant - founded in 1925 - looks to be on it's last legs, simply delaying the inevitable.
In addition, the company has a debt to equity ratio of 1.4x. That means this once giant has been given a one-two punch, and is just waiting for the final tip of the scales before it comes crashing down. RadioShack would be a great short, and a poor long-term vehicle for your investment.
3. J.C. Penney (JCP)
J.C. Penney is a great segue from the iconography discussion that started the article. Aside from generally spinning its wheels over the last 3-5 years in regards to its business plan, the company has loaded itself up with secured debt, wasted time worrying about issues that don't matter (like Martha Stewart), and turned its Board of Directors into a farce for the good part of this last year.
In terms of the company's "iconic" status, I wrote about J.C. Penney was a comparison of JCP with Eastman Kodak. I wanted to point out, before what I think will be Penney's impending demise, the similarities between what I feel are two iconic American brands that are both going to be facing the pitfalls of bankruptcy at one point or another.
I got started down this road earlier this month after reading an article in Forbes. I then took a direct jab at Forbes contributor Panos Mourdoukoutas, who penned an "article" about saving J.C. Penney. His basic, elementary style argument was that because J.C. Penney was an "iconic" brand, it would magically turn around.
In terms of everything else having to do with JCP - the company, like it's two predecessors in this article - has a nasty debt position leveraged against the company's assets. Bulls will argue that the assets alone are worth far more than the current share price, but I dispelled this line of thinking in my last JCP article:
The most common bullish argument that we do hear from a lot of JCP investors is that the value behind the company's assets alone are valued far beyond what the company's share price currently sits at.
The problem with this argument is a threefold. First, people seem to conveniently forget that the company has a $2 billion loan against the real estate of the company - so in the event that they did sell it off, that's $2 billion out the door first and foremost.
Secondly, how in god's name are you going to effectively and quickly sell off over a thousand stores without driving the price of the assets down yourself? Who are the buyers going to be and what are they going to be willing to pay? This whole hypothetical is a farce. It's likely to be sold at nowhere near what it's price would be if they were sold individually [the same type of problem that BlackBerry (NASDAQ:BBRY) would have if they tried to sell the departments of their company, and not the whole company itself].
Thirdly, the company is carrying $5.8 billion in debt, which far exceeds the value of its real estate. That's a big one that you might want to read again.
Penney hasn't done enough to reinvent their brand. They resorted to begging for business after Ullman returned as CEO. The company, in and of itself, has simply turned into a three ring circus that's constantly in the headlines for every move that the boobs in executive management or the Board makes to try and save the company. The free press, in JCP's case, isn't helping.
The ground that this company is standing on has never been shakier. I would consider investing in J.C. Penney at this point an extreme risk of serious loss and would not look at JCP as a vehicle for either a short or long-term investment.
In conclusion, three separate retailers all with similar problems.
1. They could not keep up with the times.
2. They have old brand names, all synonymous with lower-end products.
3. They all have questionable debt.
It's easy to see the direction that these three retails are going, and it's my contention that none of these three will be around by the end of the decade, adding three more names to the list of failed companies that were well past their prime and went under - despite their once "iconic" status.