Low-End Retailers Deliver Low-End Results

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sears (NASDAQ: SHLD), RadioShack (NYSE: RSH), and J.C. Penney (NYSE: JCP) have slaughtered investors' returns this past year, with an average retreat from their 52-week highs of over 30% while the market continues to climb. What should investors do?

Over the past 12 months, consumer-discretionary stocks have been the second- best performers in the S&P 500, with a return rate of 36.4%, trailing financial stocks by just 9% in the same time frame. The argument that discount stores are marketing to a segment of our economic population that has ever-decreasing discretionary income to spend is moot, as companies like Dollar General and Target have returned capital and market-share gains to investors.

What to do if you own these retailers 

Lackluster sales have contributed to the poor performance of Sears’ stock over the past year. The company continues to average a loss of 3.8% year-over-year in revenue (FY 2010 through and including FY 2012). With over $39 billion in revenue in fiscal year 2012, Sears cannot hold on to the money, passing along a loss of $13.20 in diluted earnings per share to investors. Looking forward, the average analyst expectation for revenue losses is an average of 2.6%, year-over-year.

Fiscal Year

Revenue

Diluted EPS

2012

$41.567 billion

-$29.15

2013-12 mths. Feb-02-13

$39.854 billion

-$8.78

2014 (estimate)

$37.153 billion

-$4.57

2015 (estimate)

$36.831 billion

-$2.32

2016 (estimate)

$36.638 billion

-$3.75

Source: S&P Capital IQ

It should not take long to consider the falling revenue isn't going to stop anytime soon, and shareholders will not be relieved of the bleeding anytime soon.

Sears’ answer to investor woes is even worse than its revenue performance. According to the Wall Street Journal, Sears is considering putting high-end products for sale on its website to gain a commission-only revenue share on products sold. Some of the items include Chanel purses, Rolex watches, and Jimmy Choo shoes.

Whether or not this is a marketing ploy by the Chief Executive Officer, Edward Lampert, the move is laughable. Rather than focus on the original core of the business and its “softer side” –which, by the way, brought Sears out from the brink in early 2000’s—it would rather compete against online retailers that have solidified their market share.

Action to take

Unless Sears is able to turn itself around by focusing on what made Sears, Sears, in the first place, investors will sink along with the company. But that begs the question:  Who is buying this stock now? One may argue, “Sears trades at 0.2 times revenue.” My answer:  “Who cares if the revenue cannot trickle down to its bottom line?”  Sears is a definite sell and should not be considered for investment in the near future, unless Mr. Lampert decides to take this company private, or better yet, sell it. Even then, shareholders will more than likely walk away with less than they put in.

RadioShack's signal is waning.

The stock has plummeted roughly 90% over the past three years and the company's second-quarter’s release just exemplified how much this electronics retailer is in trouble. According to its latest 10-Q, RadioShack had decreased operating revenue and net sales of $4.1 million compared with the same period last year. RadioShack attributed to its lower sales volume to aggressive discounts, clearance events, and customer coupons. The losses from continuing operations widened by over $30 million for the period six months ended June 30 compared with the same period last year.

According to Emily Glazer of the Wall Street Journal:  “RadioShack doesn’t have a clear strategy for its finances…” This is incredible for a company that has been spending hundreds of millions of dollars on trying to turn itself around.

Action to take

Sell this security if you still own it, or consider shorting the stock even at these levels. With the holiday season looming, RadioShack has announced it will try revamping stores to give it, “a focus more on digital fitness and accessories," according to a July 23 headline from the Associated Press.  With the $713 million in debt (over twice its market capitalization), a lot of digital fitness and accessories need to fly off of the shelf in order to keep this company alive.

J. C. Penney may just be worth one penny.

This retailer has had its issues in the past (it's a volatile stock) and pundits galore all the while. It has done an excellent job in keeping critics happy as J. C. Penney has continued to deliver less-than-impressive business performance.

Revenue has shrunk from $17.5 billion in 2010 to $12 billion in fiscal year 2013 ended Feb. 2. Profit margins steadily declined from 39.4% to 31.3% along with diluted earnings per share of $1.07 shrinking to a loss of -$4.49 per share over the same time period.

J. C. Penney is investing heavily into restructuring its supply chain, store outfitting and fixtures, and leadership amounting to over $70 million. Management has led us to believe the turnaround will take several quarters, but with a debt load of $3.8 billion, it will take much more than just an incremental investment into infrastructure and new talent.

Action to take

Out of all the stocks mentioned here, J. C. Penney isn’t one I would immediately sell (or short). Analysts do have this company close to breaking even in fiscal year 2016. Should we see the numbers begin to accelerate before then, I would opt to buy the stock at that point. This upcoming holiday season is very important for its future, so my advice is to be cautiously optimistic about this stock and enter in only if management shows signs of improving to beat consensus estimates.

Conclusion

The tides of popularity have ebbed against Sears, RadioShack, and J. C. Penney. The faded branding of these three companies has certainly led to their lackluster sales and stock performance. Although they may make for great turnaround stories, your investment dollars are well suited elsewhere.

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Michael Mandala has no position in any stocks mentioned. The Motley Fool owns shares of RadioShack. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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