By Brian Sozzi
The year that was 2010 is winding down financially for the retail sector as January inches closer to its conclusion. Where 2009 may be deemed the year of surprising profit recovery by retailers, borne from lean inventories and the typical jolt in productivity inherent in the decision to shutter stores, 2010 will be seen as the return of the global consumer. Revenue gains for the retail sector were far from robust in 2010, but the periods of boom were able to offset the periods of bust. Along with but modest investments in inventory, people, and domestic expansion, earnings growth basically came in above market expectations held as the calendar flipped from 2009.
So another year of fundamental recovery in retail was notched from the sharp fall from grace immediately post Lehman's defunct. Therefore, a rising tide should have lifted all ships in 2010, right? Wrong. In going through my coverage universe, numerous examples existed of companies simply not getting it done financially, whether due to problems arising from pre-recession decisions or bungled initiatives coming out of the recession.
I believe heads will roll in the retail and consumer discretionary sectors this year, with Boards of Directors re-evaluating if the present management team, starting with the CEO, is best fit to steer the publicly traded ship in the new realities of doing business (emerging market dominance, up and down U.S. spending, and ever importance of online/mobile). The question is straightforward; in the face of increasing prominence of global retailing integrated with an online/mobile strategy, is the CEO currently getting paid handsomely deserving of the top job? The decision becomes dicey if the CEO in mind was at the helm pre-recession; after all, why would Boards want to see similar mistakes made moving beyond the recession and into a period of growth?
I have compiled a list of retail and consumer discretionary sector CEOs that I feel are on the hot seat. By noting hot seat, they are at risk of being dethroned in the not too distant future. Purposely, I left out Wal-Mart (WMT) CEO Mike Duke as the company's share price has been in the doldrums for over 10 years and I do not think missteps related to Project Impact bare his fingerprints. Ditto CEO of Pacific Sunwear (PSUN) Gary Shoenfeld, who is still somewhat new to the company and is feverishly trying to re-write the wrongs of prior CEO Sally Frame Kasaks.
What the hot seat list entrants have in common:
* Track record of underperforming share prices on both relative (compared to sector peers) or absolute bases (share prices not reflecting the value returned to shareholders via earnings growth, dividends, or share repurchases).
* Share price underperformed peers in 2010.
* Responsible for mistakes made pre-recession.
* All the above.
- Bob McKnight, Chairman, President & CEO
- Co-Founder of company in 1976
- Has received $3.7 million in salary and bonus in last three years (using most recent proxy filings)
- Stock price performance since being announced President of the company in February 2008: -44%
- Stock price performance since March 2005 all-time high: -69%
- Stock price performance in 2010: +138%
- Purchased a ski business (Rossignol) at inflated valuation and then sold it for next to nothing. Debt overhang lingers.
- Only recently has found religion on expense cuts and tight inventory management.
American Eagle Outfitters (AEO)
- James O'Donnell, CEO & Director since November 2003
- Has received $4.4 million in salary in last three years (using most recent proxy filings)
- Stock price performance since being announced CEO in 2003: +182%
- Stock price performance since January 2007 all-time high: -56%
- Stock price performance in 2010: -11.8%
- Opened up Martin & Osa chain near top of the market, and pledged allegiance to the model for too long.
- Inconsistent execution in men's and women's tops.
- Behind the curve on international store expansion, despite a balance sheet that is able to support a more aggressive posture.
Hot Topic (HOTT)
- Betsy McLaughlin, CEO & Director since 2000
- Has received $2.5 million in salary and bonus in last three years (using most recent proxy filings)
- Stock price performance since taking the CEO position: -27%
- Stock price performance since January 2004 all-time high: -81%
- Stock price performance in 2010: -5.3%
- Over expanded what is a niche teen apparel chain.
- Reluctant to reduce store fleet footprint.
- Has a viable model in plus-sized women's apparel business Torrid, but not pressing forward with expansion.
- Shockhound online music strategy continues to bleed money.
Ethan Allen (ETH)
- Farooq Kathwai, Chairman, President, CEO; President since 1985 and Chairman and CEO since 1988
- Has received $3.5 million in salary and bonus in last three years (using most recent proxy filings). Raises in salary each year since 1998.
- Ten-year stock price performance: -39.7%
- Stock price performance since all-time high in January 2004: -55.6%
- Stock price performance in 2010: +45%
- Has consistently under-delivered earnings story.
- Tried to overhaul business model by adding design center associates amidst a recession.
- Over expanded the chain.
Liz Claiborne (LIZ)
- William McComb, CEO & Director since November 2006
- Has received $4.2 million in salary and bonus in last three years
- Stock price performance since start date: -83.7%
- Stock price performance since all-time high in February 2007: -85.1%
- Stock price performance in 2010: +20%
- Received a sinking ship upon arrival, but owns recent earnings warning and current management team.
- Disseminated ambitious three-year guidance.
Electronic Arts (ERTS)
- John Riccitiello, CEO & Director since April 2007
- Has received $2.3 million in salary in last three years
- Stock price performance since start date: -69%
- Stock price performance in 2010: -11%
- Did not properly anticipate shift from packaged goods to online. Now overpaying for growth.
- Has under delivered on earnings.
- Business still searching for its version of Call of Duty.
- Brian Farrell, President & CEO since 1995
- Has received $2.0 million in salary in last three years
- Ten-year stock price performance: -40.3%
- Stock price performance since all-time high in April 2007: -82.9%
- Stock price performance in 2010: +12.6%
- Remained too reliant on children's games for too long.
- Took out debt, a rarity for a videogame publisher.