It's hard to know what to think about the retail sector these days. It seemed as if the sector was booming due to improving job growth and low gas prices, and several retailers reported strong holiday sales numbers in the beginning of January. This week however, the Commerce Department said retail sales surprisingly fell in December, Radio Shack seems ready to file for bankruptcy, and Best Buy stock tumbled as it lowered its sales forecast for fiscal 2016.
There are a number of challenges for retailers today such as the rise of e-commerce and the changing tastes of millennials. Let's take a look at three retailers that are in a particularly weak position these days and appear unlikely to recover.
1. Staples (NASDAQ:SPLS)
Office retail has fallen on tough times. Not only has the rise of e-commerce hurt the brick-and-mortar stores, but, more importantly, these company's core products-paper, printers, copiers, and other analog-era machines are falling out of usage.
Staples, the largest of the pack, has seen revenue fall steadily by almost 10% over the last three years. Analysts expect continuing declines at least through this year, but shares have soared recently as activist investor Starboard Value is said to be seeking a merger between Staples and Office Depot, just over a year after Office Depot merged with Office Max. When an industry is in need of desperate consolidation and downsizing, it's not a good sign for the future.
Even if Staples remains as the only major brick-and-mortar office retailer, there will still be plenty of competition from Amazon.com and others. Like Radio Shack, Staples seems to be a company that modernization left behind. It hasn't reported positive same-store sales in North America, its core market, since 2006, and its assets that were once advantages -- real estate, brand name, and product selection -- offer little benefit for customers who have a decreased need for their products. And when customers do need such products, they can easily order them online. Management announced it would close 225 stores last March. It will likely close more, but cost-cutting alone won't save the business. The company needs to find a way to grow sales again, and that seems highly doubtful, considering the shift in market demand.
2. Sears Holdings (NASDAQOTH:SHLDQ)
While Staples has been a victim of market forces, Sears' demise has come at its own hand. CEO and hedge fund manager Eddie Lampert's record with the company looks almost like a "what not to do" list. Lampert engineered a merger between KMart and Sears, prioritizing real estate value over sales growth, encouraged competition between departments , which led to sabotage in some cases, and has severely underinvested in store maintenance, damaging Sears' image and brand name. Same-store sales have tumbled, and the company has racked up more than $5 billion in losses over the last three years.
Lampert has approached running the company as an investor, rather than a retailer, neglecting the business and spinning off or selling several subsidiaries including Sears Hometown and Outlet and Lands' End. Lampert has more assets to unload, and the core business seems to be past the point of no return as analysts expect double-digit percentage drops in revenue this year and next. Sears is headed to a loss of more than $10 a share this year, and free cash flow is down over $1 billion through the last four quarters.
Investors seem to have given up on the asset play rationale as the stock trades close to a 10-year low and is down over 80% from a pre-recession high. With 31 straight quarters of declining sales, Sears has nowhere to go but further down.
3. J.C. Penney (NYSE:JCP)
J.C. Penney scored a round of applause from the market last week when it posted a better-than-expected holiday sales report. Although sales may be moving in the right direction, the company is still piling up losses as it attempts to recover from Ron Johnson's disastrous tenure.
Despite the 3.7% same-store sales growth reported for the holiday season, comparable sales are still down nearly 30% over the last three years, and it's hard to see how Penney's can get those sales back. As the losses have mounted, liquidity concerns have arisen as free cash flow is close to negative $500 million for the last four quarters.
Finally, management remains a question mark as interim CEO Mike Ullman is getting ready to step aside so current Home Depot executive Marvin Ellison can take the reins. Ellison is renowned as an operational wizard, but has little merchandising experience and has not dealt with a turnaround situation such as Penney's.
Looking back at Johnson's tenure, the board brought such an outside thinker, who formerly ran Apple's retail stores, to rejuvenate the department store brand, as its sales were sliding even then. That strategy didn't work, but returning to the old plan doesn't seem like a long-term winner either. Perhaps Ellison can save the company, but he has enormous challenges ahead of him, including sizable losses, a brand identity in need of fixing, and an increasingly poor real estate portfolio.
Jeremy Bowman owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, and Home Depot. The Motley Fool owns shares of Amazon.com, Apple, and Staples. 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.