A Bad Week for Bad Retailers

It's been more than a year since I wrote about five retailers that will be gone in five years.

None of the five chains are gone. In fact, four of the five stocks are trading nicely higher. This doesn't mean that the fundamentals are any better, despite the 17% to 64% gains in the shares of the four winners. The loser has shed 58% of its value. As a whole, the five stocks have an average gain of 25%, less than the S&P 500's 33% surge in that time.

None of the companies are in better shape than they were then. In fact, the fundamentals have deteriorated.

The market seemed to come to that realization last week when four of the five stocks took sizable hits.

Let's go over last week's carnage.

Company

May 24

Weekly Return

GameStop (NYSE: GME  )

$32.11

(19%)

Sears Holdings (NASDAQ: SHLD  )

$50.25

(13%)

RadioShack (NYSE: RSH  )

$3.88

(7%)

Best Buy (NYSE: BBY  )

$26.03

(3%)

Barnes & Noble (NYSE: BKS  )

$22.16

11%

Source: Yahoo! Finance.

GameStop was the biggest loser, shedding nearly a fifth of its value after posting uninspiring quarterly results.

Net income tumbled 25% on a 7% slump in sales. GameStop did boost the bottom end of its same-store sales and earnings-per-share guidance ranges for the entire fiscal year, but investors are noticeably concerned about the continuing slide in GameStop's high-margin resale business. Earlier in the week the new Xbox gaming console was announced -- and like the upcoming PlayStation 4 it won't play discs from earlier systems. Both new systems come with beefy hard drives and vibrant online ecosystems blurring the role of physical retail in the future of software sales.

Sears Holdings fell sharply after posting another terrible quarter. Comps have been sliding for roughly a decade, so another 3.6% decline in same-store sales for the parent company of Sears and Kmart isn't really a shocker. Both chains have lacked the necessary investments to turn the concepts around. A quarterly loss of $1.29 a share was also more red ink than analysts were projecting.

RadioShack is the only retailer trading lower since my original five-year death sentence, and it's off a sharp 58% in that time. There was no crummy quarterly report to accompany the stock's 7% dive. The only actual news involving RadioShack was a positive development where it will now begin accepting PayPal at its registers as yet another payment option.

However, RadioShack's fundamentals are lousy. The small-box retailer of consumer electronics with an emphasis on mobile products is losing a lot of money. It joins Sears and Barnes & Noble as three retailers that are expected to continue to lose money on an annual basis in the near future. The rub for RadioShack is that while Sears has its real estate and Barnes & Noble has its potentially valuable Nook business, RadioShack has little in the way of positive catalysts to break its fall.

Best Buy joined GameStop and Sears in putting up sloppy financials. Adjusted net income plunged 58% and the consumer electronics superstore chain's top line clocked in 10% lower. The chain blames the timing of the Super Bowl (there's a spike in TV and home entertainment sales in the week leading up to the NFL's big game) and the company's decision to stop selling musical instruments for the softness, but in reality most categories outside of mobile, tablets, and appliances fell during the period.

Barnes & Noble was the lone winner for the week.

Reports of Mr. Softy making a play to acquire the retailer's Nook business earlier this month have failed to pan out, but the shares still shot higher on Monday after Barron's argued that the value of its parts could still be worth as much as $30 a share. That's a little hard to believe, especially since Barnes & Noble's namesake store sales have slipped despite the liquidation of its closest rival two years ago. Nook has also turned out to be a fading rival to market-leader Kindle in digital books and e-readers. Let's not get started on the company's fleet of college bookstores at a time when textbooks have gone digital.

All five of these chains continue to show little signs of life. Best Buy and GameStop may outlive the others. They're at least still profitable, and Best Buy's new CEO is doing a decent job of slashing costs and making Best Buy's pricing more competitive.

However, at the end of the day -- or in this case, the end of four more years -- the models just aren't viable anymore.

Retail the right way
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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