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Which Suffering Retailer Will Pull Off a Turnaround?

By Dan Moskowitz - Mar 25, 2014 at 5:00PM

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These five companies suffered significant year-over-year revenue declines in the fourth quarter. However, it’s likely that at least one of them will pull off an impressive turnaround.

Some retailers have managed to grow despite headwinds that include a hesitant consumer and fierce competition. Others haven't been so lucky. Then again, perhaps luck has nothing to do with it. Actually, if you look at each of the retailers below -- the ones that suffered the biggest fourth-quarter sales declines -- fell behind the curve somewhere along the line. In other words, they didn't innovate ahead of their peers and industry trends. Now they're playing catch-up, and that's not an easy game to play when consumers aren't as willing to open their wallets as in the past.

Lacking differentiation
Sears Holdings
( SHLDQ ) was once a dominant force in the retail space. However, it made the mistake of sitting back and assuming that the world wouldn't change. If there's one guarantee in business, it's change.

Sears now finds itself attempting to compete with other department stores, discount retailers, and online retailers. Without offering any real differentiation concerning products and services, it's difficult to see how Sears will manage to crawl out of its deep hole.

In the fourth quarter, sales declined 13.8% year over year, a steeper decline than any other large retailer. Sears also has a debt-to-equity ratio of 1.9. Though not terribly concerning, this still has the potential to impede growth potential going forward.

Over the past five years, Sears has suffered a revenue decline of 20.9%. Over the past year, it suffered a 7.3% revenue decline. According to CEO Eddie Lampert, Sears learned a lot about consumers thanks to the company's 2013 investments. Looking ahead, Sears will look to implement this information into its business strategy. It will also continue to focus on Shop Your Way membership as a potential growth catalyst.

Leadership problems
Abercrombie & Fitch
( ANF -1.94% ) saw its fourth-quarter sales decline 12% year over year. At one time, CEO Mike Jeffries was hailed as a hero. After arriving in 1992, he led the company to significant growth. However, just like Sears, Abercrombie & Fitch didn't change with the times.

Today's young consumer is about individuality, uniqueness, and expression; not belonging to the in-crowd, which is now seen as uncool. Abercrombie & Fitch is going to attempt to right the ship via fast-fashion with its Hollister brand. This could work, but it's not going to be easy considering today's consumer sees Abercrombie & Fitch in a negative light ever since Jeffries' comment about only targeting the cool kids went viral. 

Abercrombie & Fitch enjoyed a 25.3% revenue improvement over the past five years but suffered a 7% revenue decline over the past year. On the other hand, it sports a healthy debt-to-equity ratio of 0.1. As long as capital is available, anything is possible. Additionally, Abercrombie & Fitch is the only company on this list with a positive profit margin, at about 3.1%.

Reading book sales
Barnes & Noble
( BKS ) suffered a 10% sales decline in the fourth quarter on a year-over-year basis. The big question is whether or not there will be a future need for a physical book store. The likely answer is yes...but in a much smaller way. Therefore, Barnes & Noble will have to become leaner. Whether or not investors would respond well to this is unknown.

Barnes & Noble's revenue increased 25.1% over the past five years but declined 7.3% in the past year. Barnes & Noble has a debt-to-equity ratio of 0.2. Therefore, debt isn't a concern. At the same time, that doesn't mean much without growth. Barnes & Noble lost the e-book competition, and it's difficult to find future growth catalysts.

Several concerns
The Bon-Ton Stores
(NASDAQ: BONT) suffered a 9.9% sales decline in the fourth quarter. Revenue has declined 10.5% over the past five years and 5.1% in the past year. What makes Bon-Ton Stores different from the rest of the retailers on this list is its debt-to-equity ratio, which currently stands at about 6.8.

When a company has trouble growing its top line while faced with the long-term prospect of paying off debt, it makes for a very challenging situation; especially in the current consumer environment.

Bon-Ton currently offers a dividend yield of 2%. It will be interesting to see if this stays secure. Abercrombie & Fitch is the only other company on this list to offer a dividend yield -- 2.1% -- but Abercrombie & Fitch is more fiscally sound than Bon-Ton Stores.

Bearish on bear (for now)
Build-A-Bear Workshop 
( BBW -1.92% ) stores are found in malls, and malls are seeing traffic declines. Build-A-Bear was an amazing concept, but it's possible that the novelty has faded. This doesn't mean the company is doomed. It means the company must find a way to innovate in order to thrive again. Reigniting growth could even be as simple as more strategic locations -- not in malls. At least Build-A-Bear has no long-term debt to worry about.

Concerning recent results, Build-A-Bear suffered a 9.2% sales decline in the fourth quarter. Revenue has declined 11.8% over the past five years and 2.9% in the past year.

The Foolish bottom line
It's likely that at least one of these companies will pull off a turnaround. However, determining which one (or more) isn't easy. Thanks to profitability and a CEO who has delivered in the past, Abercrombie & Fitch should have the best odds for a turnaround. If it doesn't work out, Jeffries will be replaced. This event alone would likely lead to investor excitement and stock appreciation. Please do your own research prior to making any investment decisions. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Barnes & Noble, Inc. Stock Quote
Barnes & Noble, Inc.
Sears Holdings Corporation Stock Quote
Sears Holdings Corporation
Abercrombie & Fitch Co. Stock Quote
Abercrombie & Fitch Co.
$36.89 (-1.94%) $0.73
Build-A-Bear Workshop Stock Quote
Build-A-Bear Workshop
$21.44 (-1.92%) $0.42

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