The Big Box Graveyard Is Expanding

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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 (NYSE: 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 The New York Times (NYSE: NYT  ) , in which the Times will subsidize the Nook for readers in exchange for a full year's digital subscription to the newspaper.

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's (Nasdaq: 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
(NYSE: 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 (NYSE: 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.

While the retailers of yesteryear may not be the best place to put your money, our experts at the Fool have an idea how you can profit as the rules of retail get rewritten. Check out their free report: "The Death of Wal-Mart -- The Real Cash Kings Changing the Face of Retail." It won't be around much longer. You can get it by clicking right here.

Fool contributor Jeremy Bowman holds no positions in the companies above. The Motley Fool owns shares of and Best Buy. Motley Fool newsletter services have recommended buying shares of 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.

Read/Post Comments (10) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 13, 2012, at 2:58 PM, foolindeed1 wrote:

    I don't even know why I keep responding to these biased writings of Amazon-worshiping teenager analysts of this web site but BKS digital division including Nook had sales up 70%. Yes BKS is short on money but it's not even in debt yet and still has $1 bil of credit line to work with and several large investors that sit on multi-billion $ assets.. That'll last it till 2014 when Amazon will start collecting sales taxes on all items including digital and see Anazon's profits ( and stock price) tank under $100.

  • Report this Comment On January 13, 2012, at 3:13 PM, snommis69 wrote:

    foolindeed1, while I agree somewhat, the news that B&N is considering spinning Nook off into it's own company sucks the wind out of your argument. If Nook is spun off, what will the BKS bottom line look like? The'll simply be another dying book seller with more retail square footage than sales.

  • Report this Comment On January 13, 2012, at 3:52 PM, foolindeed1 wrote:


    Key word is "considering" . Besides, IPO doesn't mean separation of companies - BKS will probably still have a controlling share of the new unit and will still have Nook as the flagship product with tight connection to the stores. This spin off proposal is just a marketing and accounting gimmick.

  • Report this Comment On January 13, 2012, at 4:06 PM, TMFHobo wrote:

    @foolindeed: I'm no Amazon groupie. As you can see from my third-to-last paragaph, I think the company's loss-leading tactics with Prime and and the Kindle family are having a negative effect on its profit margin. Last quarter it was under 1%. But the point is Amazon is happy to fight a war of attrition in any industry they choose to compete and they certainly have the ammunition.

    Long run, I don't see how the bumbling big boxes I mentioned survive. The Nook may somehow save Barnes & Noble from bankruptcy but its not going to make them a good investment. And I really don't see how it's going to become profitable when Amazon is willing to sell at a loss to undercut them on price. It's scorched-earth tactics. Call it Bezos's march to the sea.

    For more on my thoughts on Amazon, you can see these articles:

    Jeremy Bowman

  • Report this Comment On January 13, 2012, at 5:09 PM, Thuddd wrote:

    I really don't understand pointing to BBY's dropping same store sales(-1.2%) and the big drop in consumer electronics sales in the last two years as proof that Best Buy is doomed.

    Fill me in here. There has been a significant deflation in consumer electronic pricing-Blue Ray, TV's, laptops, mp3 players, tablets etc., etc. 20%-30% drops. What has gone up? Nothing. The small sales drop amazes me, as people must be buying more consumer electronics to offset the unit price drops-in the middle of a recession! I don't see this as an end of the world situation. It's just a reasonable reaction to a bad economy and falling prices.

    Disclosure-long BBY and well under water.

  • Report this Comment On January 13, 2012, at 8:03 PM, shadowgal wrote:

    I'm not sure the deal with the NY Times has anything to do at all with the spinoff proposals. I think the Times deal is simply a promotion.

  • Report this Comment On January 14, 2012, at 10:26 AM, Irish9314 wrote:

    Wow, fool is really out to get BBY. Ever since Dunn fired back, I have seen multiple articles slamming BBY. This reporting seems kind of one sided. Sure you had one bad experience, but my local Best Buy is great. They even price match Amazon when their price is higher.

  • Report this Comment On January 14, 2012, at 3:40 PM, kthup wrote:

    How silly of me to think that that there might be stores that I could walk into and buy things at in the future! I've been reading these articles all this time thinking it was just BN whose grave these MF writers had dug, but now I realize that these wise men with such complete and perfect knowledge about Business and Industry have forseen the death of ALL retail! Holy cow, that changes everything! I knew Amazon was getting bigger but I didn't realize they were going kill off every retailer in America! Would write more but must sign up for prime before server crashes and canned food runs out!

  • Report this Comment On January 15, 2012, at 8:05 PM, dougjhawk wrote:

    Man, I hate to see the empty store fronts all over Dallas-Ft Worth...but I have to admit, Amazon is sooo convenient and reliable. Can't say I have the same experience in Best Buy.

  • Report this Comment On January 17, 2012, at 3:54 PM, sepaton wrote:

    Once again..., my prediction is that Amazon will be bankrupt within 4-years following the loss of their sales tax advantage.

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AMZN $818.99 Up +8.67 +1.07% CAPS Rating: ****
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