After last year’s better-than-expected holiday season, I cautioned investors not to get too hopeful about the seemingly endless supply of retailers looking to rebound. With local stores starting to put up Christmas lights again, it seems like a good time to revisit that advice and check back on the sector. How has retail fared in 2015?
Pretty much the same as 2014, 2013, 2012, and just about every year for the last decade. That is to say: quite poorly.
If anything, this year has been one of the toughest I’ve seen on retailers. Eighteen months ago my analyst and I drove to Los Angeles to meet management teams at four teen-focused firms: Wet Seal, American Apparel, Quiksilver and Pacific Sunwear. Today the first three are bankrupt, while Pacific Sunwear is clinging to life at 35 cents per share. Even several companies that looked like they had defied the odds and regained momentum have faltered again. Late last year, I met with Michael Rouleau, the CEO of Tuesday Morning (TUES). Rouleau had been recruited to revive the home furnishings chain of over 800 stores. For a few quarters, his plan appeared to work: comp store sales were positive and improving. Tuesday was projected to grow revenues to $925M for fiscal 2015 (ending June 30th) and earn 35 cents/share. Its stock was above $20 at time of our meeting, up from the low teens at the start of 2014 and the $3 range in 2012. Rouleau and Tuesday’s chief financial officer, Jeff Boyer, had just bought $235,000 worth of stock with their own money.
One year later, TUES is back below $7. Fiscal 2015 earnings came in at only 24 cents a share; worse, Tuesday is estimated to earn only 26 cents in fiscal 2016. Michael Rouleau retired a month ago. Jeff Boyer left to become CFO at retailer Pier One in Forth Worth.
What went wrong? The same thing that usually goes wrong for retailers: sales growth slowed unexpectedly and costs were larger than expected. This highlights a dispiriting fact about the retail game: turnarounds are exceedingly rare. Ironically, Rouleau himself pointed this out to me during our meeting in late-2014. In thirty years in the business, he said he’d only seen a handful of struggling companies recover.
Setting aside the industry’s biggest threat (the $100 billion juggernaut known as Amazon), traditional retail has always been a risky space for investors. As soon as same store sales and new store openings slow, even the healthiest retail concepts have a hard time regaining the sales growth and profit margins of their heydays. However, sales can fluctuate unpredictably from quarter to quarter as companies lure customers in with promotions, only to lose them again as those initiatives fade. Making matters even trickier for investors, a retail business doesn’t need to be drowning in debt to go broke. A sudden slowdown in sales can quickly push companies with relatively healthy-looking balance sheets to the brink of failure.
Of the 200 plus companies I have shorted that eventually filed for bankruptcy, there have been more retailers—20 in total—than any other industry. This list includes Circuit City, RadioShack, Bombay, and Ultimate Electronics. I’ve also seen entire retail sectors disappear in the last 20 years. DVD rental stores (Blockbuster, Hollywood Entertainment, Movie Gallery, and Video Update) and nearly all consumer electronic retailers have vanished. Today, once iconic brands like JC Penney and Sears are attempting epic turnarounds, as are numerous niche concepts. This holiday season, like every year, will be critical for them. But even if they post positive numbers, my advice to investors remains the same as it did a year ago: stay away.