What Happened to These 3 Retailers?

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

Retailers RadioShack (NYSE: RSH), J.C. Penney (NYSE: JCP), and Sears Holding Company (NASDAQ: SHLD) all experienced headwinds in recent years stemming from lower product demand, online competition, and botched turnaround strategies. Management turnover and lower shareholder wealth ensued. Share prices (including dividends) for RadioShack, J.C. Penney, and Sears declined 82%, 61%, and 50% respectively over the past five years (chart below). Here’s what happened.

<img alt="" src="http://media.ycharts.com/charts/5e19fa708a55a9708578db1e60b7e45b.png" />

RSH Total Return Price data by YCharts

Where are the hobbyists?

When looking at the inside of RadioShack you can tell that it caters to electronic needs, large and small. It sells electronic merchandise geared for the casual consumer such as televisions, computers, smartphones, and electronic toys for children. Moreover, RadioShack caters to the more niche based consumer, selling products such as weather and shortwave radios, along with parts for electronics repair such as cordless phone batteries and power cord adaptors.

If you look under the hood at the fundamentals you won’t like what you see. In 2012, RadioShack’s revenue declined 3%. Its operating income swung from a positive $155 million in 2011 to an operating loss of $61 million last year. RadioShack’s free cash flow swung from a positive $136 million in 2011 to a negative $111 million in 2012.

RadioShack performed slightly better in its most recent quarter. Its free cash flow swung from a negative $5 million to a positive $58 million year over year. However, its revenue declined 48 basis points year over year. Operating loss also expanded to $42 million in its most recent quarter from $14 million last year.

On the debt front, long-term debt increased 54%, from $324 million to $500 million, causing the long-term debt to equity ratio to increase from 46% to 99% year-over-year.

A number of catalysts lie behind RadioShack’s woes. First, the electronic hobbyist represents a very niche based market. People by and large shy away from building gadgets as a hobby. Other forms of entertainment, such as online gaming and surfing the Internet, dominates the top of the list when it comes to passing time.

Moreover, in this age of disposable electronics people would much rather throw away a cordless or cellular telephone than replace the battery. In some cases it’s cheaper to replace altogether.

RadioShack experienced a sharp decline in demand for its postpaid wireless business. Finally, RadioShack called it quits on its money-losing kiosk businesses in Target and Wal-Mart’s Sam’s club.

All of this resulted in the loss of RadioShack’s chief executive officer and chief financial officer within 2013 alone. So, the company needs to weather the transition process in that area.

RadioShack’s board brought in a new CEO, Joseph C. Magnacca, from Walgreen. He spent a big portion of his career in the retail drug industry where he turned “iconic brand names into strong operating businesses.” Selling drugs, groceries, and personal care items seems to reside in a different universe from the specialized electronic gear that RadioShack sells.

Mr. Magnacca promises the “five pillars of our turnaround strategy: repositioning the brand, revamping product assortment, reinvigorating our stores, operational efficiency, and financial flexibility.” RadioShack rolled out some new concept stores that promise a new revamped interactive experience for consumers. It also plans to open co-op locations in university bookstores.

A turnaround for this company seems risky at this point. Keep a close eye on this one, but your investment dollars might do better elsewhere.

Department store angst

Department store chains J.C. Penney and Sears were giants decades ago. In their heyday, they benefited from the consumer taste for big department store retailing. In recent years the shift in consumer shopping patterns toward e-commerce has worked against department store chains.

In 2012, revenue for J.C Penney and Sears declined 25% and 4% respectively. Both companies are bleeding cash.

Desperately, both J.C. Penney and Sears tried to turn around their companies in the past decade. In 2011, J.C Penney, in a clumsy strategic move, brought in former Apple executive Ron Johnson to head up the company. He oversaw the remodeling of some of its stores and made moves for customers to get checked out via tablets.

Moreover, Johnson alienated Penney’s core consumer base by instituting an “everyday low price” model. J.C. Penney’s board removed him from that post earlier this year and replaced him with his predecessor CEO Myron Ullman.

J.C Penney faces oblivion. The recent brawl between J.C. Penney’s board and Bill Ackman of Pershing Square Capital Management over who should hire whom to run things served as a distraction to J.C. Penney’s management at a time when it needs to focus on strategy and bringing customers a pleasant shopping experience. As of this writing Bill Ackman resigned from the board of J.C. Penney representing the best thing to happen to the company in recent memory, and maybe it can get down to focusing on growing its business.

Nine years ago K-Mart bought Sears in an attempt to gain greater ubiquity and wider product choices. In hindsight, this merger appears as a patchwork mismatch of two separate companies that never produced the synergies to move them forward.

Sears lacks any major initiatives that could move this company forward. The company sort of demonstrates an attempt at focus by spinning off its Orchard Supply Hardware Stores subsidiary.

Conclusion

On the whole, it’s best to look elsewhere with your investment dollars. With department stores such as Sears and J. C. Penney, change in consumer habits, management brawls, and a lack of cohesive strategies spell doom for these two companies. In the case of RadioShack, lower demand for products such as electronic parts means more dark days ahead unless the new CEO can turn things around.

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William Bias owns shares of Wal-Mart. 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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