Last week was a tough time for retailers. Some of the biggest losers in the bunch included Best Buy (BBY 0.66%), J.C. Penney (JCP +0.00%), Aeropostale (ARO +0.00%), and Big Lots (BIG +0.00%). Compared to their closing prices the previous week, shares of these four retailers declined 15.8% on average by the time Mr. Market closed last Friday.
While companies typically see their share prices fall for a reason, it's possible to grab a piece of a business at a discount if Mr. Market overreacts and sends shares down further than warranted.
Best Buy might be a best buy!
By far, the worst performer in this group last week was Best Buy. Shares of the consumer-electronics retailer fell 35.4% during the week, with 28.6% of the fall taking place last Thursday. After months of analysts touting the company as a turnaround (and the rising share prices that accompanied the rumors), Best Buy announced holiday sales results that fell far short of estimates.
During the nine weeks the company classifies as its holiday season, management reported a 2.6% drop in sales from $11.7 billion to $11.4 billion. This performance was due to a 1.5% decline in sales in its domestic segment and an 8.1% drop in its international segment, partially offset by a 23.5% rise in online orders. After seeing sales rise 12.6% over the past four years, shareholders are becoming concerned that the company's image as a back-from-the-dead business might be in jeopardy.
Despite the drop in share price, it's not unreasonable to ask if Best Buy really could be a best buy. Yes, it is true that sales fell when, in a turnaround, they are expected to rise, but such a large drop in market cap in the course of a week may provide investors some upside if business can pick up again.
J.C. Penney gets a haircut
The past few years haven't been kind to J.C. Penney. After the retirement of Mike Ullman as CEO in 2011, the company's board of directors brought on a former Apple executive named Ron Johnson. In an effort to reinvent the company's brand, Johnson eliminated J.C. Penney's coupon-oriented sales and began offering everyday low prices at J.C. Penney outlets.
While the new corporate strategy was supposed to attract new customers, its implementation had the opposite effect. Feeling cheated out of the coupon offers that allowed J.C. Penney to rise to dominance over the years, customers left en masse and took their business to other companies like Macy's and Dillard's. Signs of this became almost instantly visible and, in the first fiscal year reported following Johnson's arrival, the company saw sales fall 24.8%.
Despite seeing signs of a turnaround late last year, shares of the retailer fell 11.2% for the week following news that management would close 33 locations and lay off 2,000 employees. Even though the closures are expected to decrease costs by $65 million annually, shareholders fear that the company's release, combined with no specific December sales data provided by the company, signifies harder times ahead.
Aeropostale's going shopping for a buyer
Last week, shares of Aeropostale fell 8.5%. Over the past three fiscal years, revenue at the retailer fell 0.6% from $2.4 billion to $2.39 billion. While this isn't anywhere near as bad as the drop experienced by J.C. Penney, the company's bottom line has suffered. During this time frame, net income at the company fell 84.9% from $231.3 million to $34.9 million as costs rose as a percentage of sales.
In an effort to improve the company's prospects, Crescendo Partners, an activist investment firm, has pressed Aeropostale to pursue strategic alternatives. News broke that Aeropostale had reached out to at least two private equity firms to explore possibilities. Crescendo Partners estimates that Aeropostale could be worth around twice its closing price on Friday of last week, but Mr. Market pushed shares lower for fear that management's decision to look at different options might imply a darker future for the company.
Big Lots is about to get a little smaller
Despite receiving an upgrade from underperform to market perform, shares of Big Lots fell 8.2%. For the past couple of years, the company has been under pressure, as competition becomes more challenging. Despite seeing revenue rise 16.2% from $4.6 billion in 2009 to $5.4 billion in 2013, the company's net income has fluctuated between $151.5 million and $222.5 million.
Although this doesn't sound too bad, investors have become pessimistic about the company's prospects, as its margins have deteriorated throughout 2013 and the company jumped into a bold restructuring plan. As part of management's initiative to turn the business around, it announced late last year that the company will shut down the 78 stores that make up its Canadian segment. This will mean lower revenue for the company but will be accompanied by healthier margins.
Foolish takeaway
Based on the events that drove down each of these companies, investors have every right to be nervous. Moving forward, it's possible that any one of them could be a 10-bagger while any other may go out of business, but by researching further and finding which businesses are fundamentally the strongest, investors have the chance to buy a great investment at a great price.
