It happens to every company sooner or later: Wall Street sets a mark for quarterly earnings, and the company misses that goal. Sometimes an earnings stumble is a signal to sell, but digging in the dirt is also a good way to find turnaround candidates while they're getting beaten down. Today, we're reaching the end of the pier, before going on a military-style bargain hunt and checking up on our home theater options.
Let's kick things off with a regular here at 3 Misses: floundering furniture retailer Pier 1
So how is the company fighting the slow business environment it created for itself? Deep discounts, of course. Hence, gross margins are down almost 3% from last year's comparable period. Oh, and there's a boosted advertising budget, which cuts into what little cash is left after paying store leases and employees. Fellow Fool Matthew Crews noted that Pier 1's bottom line has been sliding south for three years, and that the stock price is back where it was 10 years ago. Double ouch.
Investors have been calling for serious changes for some time, and it looks like we're finally getting some. CEO Marvin Girouard is retiring this February, so the company can deal a new hand at that point. We'll have to see who the board taps as his replacement, but I'd imagine they'll have to find a proven turnaround specialist. The turning radius on this boat has proven cumbersome so far, and Pier 1 could prove to be a challenge even for a bootstrap wizard like Nissan's
We're moving on to a slightly happier story featuring deep-discount retailer Dollar General
The store closing program is meant to clear the way for new stores in better locations, akin to the Walgreen
The elimination of "packaway" inventory is an even more fundamental change in direction than the real estate program. Unsold seasonal inventory used to go back into storage until next year, when that season came back around and gave the stores another chance to get rid of it all. Now, Dollar General stores mark down unsold seasonals to make sure inventory stays fresh at all times. It's costing the company some margin points, but it's another way to make stores more appealing to the customer, which can only be a good thing in the long run.
Will the customer-centric measures work out the way management has planned? Nobody knows, of course. But what the company is doing looks like a page taken right out of the playbook of some of the greatest performers in the retail business, like Walgreen and Wal-Mart
Is the best good enough?
Our final stop on this tour is Best Buy
Like Dollar General, Best Buy is focusing on driving customer traffic through its stores, even if it means sacrificing a few basis points in various margins. For many companies, a 0.9% drop in gross margins might not be a big deal, but with net margins below 2% to begin with, every point counts.
My esteemed colleague Rick Munarriz ranks Best Buy behind Wal-Mart and Circuit City as an investment in consumer electronics today, based on sales performance and valuation, respectively. I can't say I disagree on either point. Best Buy might still get its groove back, but the market conditions today aren't playing in its favor. Is this a buy-in opportunity, then? That has to be a judgment call, based on the likelihood of a return to fatter margins.
Sorry, store closed
Some of these underperformers are victims of larger circumstances, while others might have only themselves to blame. It's up to you to decide which down-on-their-luck companies should be able to pull themselves up by the bootstraps, and which really are stuck in the mud. Come back next Monday, and we'll take a look at another batch of mishaps and disappointments. It'll be fun and educational.
Further Foolish reading:
- Dollar General Cleans House: Fool by Numbers
- Best Buy Says: Bring It!
- Earn Great Returns From Retail
- Take cheap when you can get it
Seeking great deals on unfairly punished stocks? Philip Durell and his merry band of Fools at the Motley Fool Inside Value newsletter service are standing by to help you find great stocks at ridiculously low markdowns. Try a 30-day trial subscription to see whether bargain-hunting is right for you. Wal-Mart is currently an Inside Value recommendation, and Best Buy is a Stock Advisor pick.
Fool contributor Anders Bylund is a Nissan shareholder, but holds no other position in the companies discussed this week. He wouldn't mind upgrading his home entertainment system. The Fool has a disclosure policy, and you can see his current holdings for yourself.