Best Buy, J.C. Penney and Lululemon: What's Killing These Retailers?

What do Best Buy  (NYSE: BBY  ) , J. C. Penney  (NYSE: JCP  ) and Lululemon  (NASDAQ: LULU  ) have in common? So far this year, they've cost investors a lot of money, falling between 37% (Best Buy) and 19% (Lululemon) so far in 2014. But beyond that, it's really three different stories behind three different problems. 

If you're invested in -- or thinking about investing in -- any of the three, the only question that matters, is if the problems are fixable or not. Let's take a closer look at the three and see where things stand: Should you buy, sell, or hold?

Perception is reality
2013 saw Lululemon deal with the embarrassment of see-thru pants, which led to the departure of Chief Product Officer Sheree Waterson. Two months later, the company announced that CEO Christine Day would be leaving after less than six years with the company. Don't forget the year ended with a bang, too. Founder and chairman of the board Chip Wilson essentially said -- with words only moderately more toned down -- that some women were too big for Lululemon's britches, but were wearing them anyway. He's stepping down as chairman in June, but will remain on the board.

The bottom line is "spandex-gate" (though the offending pants are actually mostly luon) and Wilson's comments did hit the company where it hurt -- right in the reputation with its women clientele -- and for an upscale brand like Lululemon, its reputation with customers is irreplaceable. However, the company is still growing at a nearly 19% clip, and just reached $1.5 billion in annual sales this year:

LULU Revenue (Quarterly) Chart

LULU Revenue (Quarterly) data by YCharts

What the chart above doesn't tell you is how much of Lululemon's growth has been a product of those loyal customers remaining loyal, with comparable store sales growth at or above 7% consistently, since the recession. Q4 (which ends next week) was originally projected to be flat comparable growth, but was recently revised down to "negative low to mid single digits." Management is partly blaming the extreme cold weather this month; and with a recent history of extremely thin material in its pants, maybe the weather -- and the company's bad rep from 20133 -- is coming back to bite Lululemon in the butt, so to speak. 

The good news is a new management team is coming together. Tara Poseley, named Chief Product Officer in October, has a strong resume, with time at Gap and Bebe Stores, and a recent stint as president of apparel at Kmart, where she oversaw a larger organization than all of Lululemon. Laurent Potdevin was recently named CEO, after serving as president of TOMS Shoes, Burton and LVMH. 

Losing relevance in a changing consumer world
Best Buy and J. C. Penney are both facing this change. Over the past half-decade, an enormous amount of consumer spending has shifted away from traditional bricks and mortar retailers as people have become more accustomed to the ease and convenience of the web.

The interesting thing is, since 2008, Best Buy's total sales are actually up 20%, and it's certainly more a victim of the success of the Amazon's of the world than Penney is, while Penney's revenue is down more than 39% over the same time period. Best Buy has benefited from the demise of Circuit City, and its sheer size and presence has buoyed it to some extent, but sales are down almost 7% in the past nine months. We just learned that sales dropped 1.5% over the holiday shopping season just ended, so sales will be down for the full year.  

Definition of insanity
Penney, on the other hand, is challenged with rediscovering favor with shoppers after spending 2012 and 2013 confusing and alienating them via two about-faces before taking the same approach as before. The company may run out of time (and money) before it's able to reestablish a message that resonates with shoppers and brings profits. For now, it's back to discounts and sales, the same formula that resulted in declining revenue and profits, and the ouster of CEO Mike Ullman -- who's now back in charge -- and has implemented the same marketing strategy.

The difference today? Billions in losses, a massive 40% dilution for investors through a stock offering to generate capital, and more losses to come. But the company is trying the exact same market strategy that was failing three years ago...

Final thoughts
Best Buy has the advantage of being the only major "analog" retailer in consumer electronics and appliances. The company has put serious focus on its web business, and is now using 400 of its stores as warehouses to fulfill web orders. If the company is able to attract customers and grow its online business enough, this hybrid approach could lead to it remaining viable. Despite falling sales numbers, Best Buy was profitable in the first three quarters of 2013, and will likely be so in Q4. 

J.C. Penney is absolutely hemorrhaging money, and is in more trouble than management will admit. Even if the holiday quarter brings a sales increase from 2012, the bar was so low it almost wouldn't matter, since it's about stopping the bleeding at this point. The recent announcement that 33 stores will be closed is a step in the right direction, but I'm not convinced that this management team can get it done before the clock stops. 

Lululemon still has all sorts of promise, and a ton of loyal customers, despite management's best efforts to run them off. The recent changes in leadership that has deep experience in both large retail like Gap and Kmart, and brand-oriented companies like Bebe and LVMH, should bring what sounds like much-needed new blood, and hopefully tact. With less than 200 stores, there's just too much growth ahead to give up now. 

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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 February 01, 2014, at 10:39 AM, jusato123 wrote:

    Customer service of lack of in ,Im a regular customer in Best Buy Best Buy and I spend thousand of dollars last year and I havenot found a person in Best Buy at Mays Landing,N.J that say hello when I browsing at this store or some one who want to help me with a item that I have question, I send email and call main corporate office and they can give not answer about the lack of customer service at Best buy in Mays Landing,N.J

  • Report this Comment On February 01, 2014, at 8:47 PM, george45 wrote:

    People have gotten wiser, keep raising your price and see how much merchandise you keep in stock and you can send it back to China and let them buy it. Clothes doesn't wear out every year. High prices loss of sales low prices sale bloom, it's not how many one have in stock, but how many one sell

  • Report this Comment On February 02, 2014, at 9:18 PM, lemontwist4 wrote:

    Jusato123 I agree completely!!! I have been in the Best Buy in Mentor Ohio several times looking to spend several thousand and walked out because after walking around for a hour and having 8 employees make eye contact but not so much as say hello to (as a matter of fact I got dirty looks like don't you dare bother me while I stock this shelf) I took my money else where! This has been the case every time I have been in there. I use to work at this Best Buy and the employee rule was if someone got within 15 feet of you than you had 5 seconds to greet them, if you were with someone already you excused yourself for a minute greeted the new customer and told then you would be right with them. That store was always PACKED people would pay more for the great service!

  • Report this Comment On February 03, 2014, at 9:30 AM, Roddy6667 wrote:

    JCP has an old, inefficient and expensive supply chain. No matter how sharp their buyers are, or how many customers buy merchandise, they cannot make a profit.

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