Will This Be the Next Retailer To Go Belly Up?

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Office DepotIt happened to Borders. It happened to Circuit City. Don't be surprised if it happens to one of the three major office supply stores before long.

Market leader Staples (SPLS) announced last month that it would be closing down stores and unloading its European printing business. Wall Street analysts expect that Staples and its peers -- Office Depot (ODP) and OfficeMax (OMX) – will post declines in sales this fiscal year.

Wait a minute. Isn't the economy supposed to be improving? Shouldn't Corporate America be buzzing with orders for new printer cartridges, task chairs, and register ribbons?

That's just not happening.

Here Comes the Shakeout

In merrier times, we would expect some consolidation in this retail space. Players would combine, cashing in on merger synergies.

However, it's easier and cheaper these days to just sit back and watch the distant silver medalists of dying retail industries simply implode. That's what Wall Street is expecting.

Analysts don't see 2013 as turning out any better. They expect all three companies to post flat sales growth next year. It's even worse for Office Depot. Wall Street's targeting an annual loss for the company in 2013.

Office Depot Could Use a Little More Toner

Earlier this month, Maricopa County in California moved to claim $5.2 million in refunds from Office Depot. Maricopa had teamed up with other counties in California to sign a deal with Office Depot that reportedly promised the lowest prices available as a result of the group's bulk purchases.

But an internal audit by the county – checking up on 192,000 items -- revealed that San Francisco paid a lot less. About 32% less than Maricopa County.

Office Depot disputes the allegations, but the damage has been done. Ever since Florida reached a $4.5 million settlement with Office Depot for improper billing two years ago, the superstore chain has had to battle the stigma of overcharging.

In other words, even if Corporate America and the public sector were humming along, Office Depot would have a hard time drumming up business given its reputation.

An Activist Arrives

Shares of Office Depot rallied last month when Starboard Value LP took a 13.3% stake in the struggling retailer. The activist investor argued that there was a substantial opportunity in the chain, but changes were necessary.

Starboard Value LP advocated downsizing to smaller stores, slashing advertising expenses, and shifting to higher-margin services.

It's a great plan on paper, but don't you think that Office Depot would be doing any or all of these things if it could?

There are problems in this retailing niche. Companies just don't have to buy as much paper and printer cartridges as they used to in this age of e-mail and cloud storage. PC sales have stalled, and cloud-based enterprise solutions make it less necessary to upgrade hardware or operating systems.

The ho-hum economy isn't helping, but it's not the only problem. There's a real problem here with the office supplies superstore model itself.

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For a while it seemed as if Office Depot and its peers wouldn't suffer from the "showrooming" trend that has seen brick-and-mortar chains lose out to nimbler and cheaper online retailers. Amazon.com (AMZN) doesn't have the localized fleet to provide free next-day delivery the way that Staples, Office Depot, and OfficeMax do.

However, Amazon and other online retailers with bare overhead and great prices are leaving a dent. There's a reason why the restructuring that Staples announced last month included an investment in boosting its mobile and online capabilities. Amazon is now a legitimate competitor. If Office Depot had a hard time keeping up with Staples before, just imagine how the future will be when it also has to butt heads with the cheaper Amazon?

Printing Money Isn't Easy Even When You Sell Printers

Analysts see Office Depot barely breaking even when it reports its latest quarterly results in three weeks. Don't bet on that happening. Office Depot posted a much wider quarterly deficit than Wall Street was forecasting three months ago, and there's little evidence that things are getting any better.

If there's a shakeout here it will be the weaker debt-saddled players closing down, or perhaps market leader Staples being acquired.
Investors can't make the same mistake that Maricopa County did in viewing today's low share price as a buying opportunity. If the grim scenario plays out, buyers of Office Depot's stock will also be overpaying.

Brands That Will Disappear in 2013
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Will This Be the Next Retailer To Go Belly Up?

It would be hard to find another large American company as bad off as Avon Products (AVP). Avon's long time CEO, Andrea Jung, was ousted late last year after nearly wrecking the company. Avon's new CEO, Sherilyn S. McCoy, formerly of Johnson & Johnson (JNJ), joined the company in April. She has never before run a public corporation, let alone one in big trouble.

The Security and Exchange Commission's examination of Avon's communications with securities analysts already has cost CFO Charles Cramb his job. Avon is also under scrutiny over whether its Chinese operations meet compliance standards under the Foreign Corrupt Practices Act.

But beyond the scandals, Avon's fundamental problem is that the beauty market is highly competitive, yet management has not concentrated on its core business. As Morningstar analyst Erin Lash recently wrote, "Despite restructuring initiatives that have cost the firm nearly $800 million through fiscal 2011, it appears to us that Avon is constantly putting out fires rather than proactively moving forward."

There is much here that needs fixing. Avon announced disastrous earnings in the previous quarter, and it forecast that things will get worse.

Avon, however, is fortunate that it may have a suitor. In May, perfume company Coty offered $24.75 a share for Avon, nearly 20% above Avon's stock price at the time. Coty had the financial backing of, among others, Warren Buffett. Avon dragged its feet and Coty withdrew its offer. But Coty, another consumer products firm or a private equity house will be back. Since the Coty offer was withdrawn, Avon's shares have dropped below $16 -- down from $43 four years ago. The market has no confidence in Avon, but with its brand and revenue, it is an ideal takeover target.

By Douglas A. McIntyre, 24/7 Wall St.

This tiny carrier has lost any chance it may have had to compete with larger competitors T-Mobile, AT&T (T), Verizon (VZ) and Sprint-Nextel (S). Investors have abandoned the company, depressing its shares from a 52-week high of $17.84 to $5.86 -- very near its period low.

Competition with the larger companies has begun to take a significant toll. The Associated Press recently reported that, "MetroPCS Communications Inc. says it gained a net 131,654 subscribers in the quarter, the worst result in years for the first quarter, which is normally the company's strongest. It ended the quarter with 9.5 million customers." The carrier's first-quarter earnings were so weak that a number of securities analysts downgraded its shares.

MetroPCS often is mentioned as a takeover target. In May, several Wall Street analysts said that the company was in buyout talks with T-Mobile, which is owned by giant European telecommunication company Deutsche Telekom. This immediately gave MetroPCS (PCS) stock a push higher. Later in the same month, MetroPCS shares rose again as the CEO of Sprint-Nextel said he expects consolidation in the cellular carrier market. Sprint and T-Mobile both continue to struggle because of their modest subscriber bases compared to AT&T and Verizon. Each needs more customers. While MetroPCS is too small to survive on its own, its purchase would give either Sprint or T-Mobile the additional customer critical mass it needs to compete.

By Douglas A. McIntyre, 24/7 Wall St.

The Raiders will play in the NFL next year -- they just won't play in Oakland. The team, founded in 1960, was one of the original members of the AFL and joined the NFL when the leagues merged in 1970. The Raiders won Super Bowls in 1976, 1980 and 1983, but their track record has been poor over the past decade.

The Raiders left Oakland once before, when the franchise worked out a better stadium deal in Los Angeles from 1983 to 1994. Oakland lured the team back with an agreement to add $220 million in improvements to the stadium where the team would play.

This time, the team's departure from Oakland will also be driven by the financial plans of its new owners. Al Davis had controlling ownership of the Raiders from the 1960s until his death last year. His heirs and several smaller shareholders now control the team. Current team managing owner Mike Davis already has said he may move the Raiders back to L.A. to get a better stadium deal after the Oakland stadium contract expires.

Davis recently told the San Francisco Chronicle, "Yeah, Los Angeles is a possibility. Wherever's a possibility. We need a stadium." The Raiders also could move to Santa Clara, where they would share a stadium with the San Francisco 49ers, much as the New York Jets and New York Giants share MetLife Stadium.

By Douglas A. McIntyre, 24/7 Wall St.

Launched in 1995, Salon.com was one of the pioneering news and commentary sites on the Web. In recent years, it has been eclipsed by larger and better financed sites such as The Atlantic and Washington Post (WPO)-owned Slate. Of course, today, there are thousands of websites that comment on the news constantly. 

One sign that Salon is very close to being shuttered: The company "lost" its CEO and CFO recently. Chief Technology Officer Cynthia Jeffers, was put in charge, but Salon will need a great deal more than new management. At the end of the final quarter of 2011, it had $149,000 in the bank against short-term liabilities that included $12.7 million in loans. During the same quarter, Salon lost $997,000 on revenue of $1.03 million.

Rumors are that John Warnock, the cofounder of Adobe Systems (ADBE), and investment banker Bill Hambrecht fund the company. But with it falling apart at the seams, more money is unlikely to be forthcoming.

By Douglas A. McIntyre, 24/7 Wall St.

Suzuki Motor Corporation sold just 10,695 cars and light trucks in the U.S. in the first five months of this year. That was down 3.9% compared with the same period in 2011. The sales gave the manufacturer a U.S. market share of just 0.2%.

The obvious reason the company has trouble moving its vehicles is their poor reputation. In the 2012 JD Power survey of U.S. vehicle dependability, Suzuki's scores in power-trains, body and materials, and features and accessories were below those of almost every other brand.

One sign Suzuki is having trouble selling its vehicles is that it currently offers a very aggressive zero-percent financing package for 72 months on all of its 2012 cars, trucks and SUVs. Yet even with aggressive sales tactics, Suzuki cannot improve its position in the American market. Most of its cars sell for less than $20,000 and its trucks and SUVs for under $25,000. Almost every other manufacturer with a broad range of vehicles has flooded that end of the market with cheap, fuel-efficient models. And what is arguably the most successful car company in the U.S. based on growth -- Hyundai -- is doing particularly well in this segment, leaving little room for a Suzuki comeback.

By Douglas A. McIntyre, 24/7 Wall St.

Pacific Sunwear, which began in a surf shop in Newport Beach in 1980, built its reputation offering "California-style" accessories, primarily sunglasses, shoes and swimwear.  It was popular for years, but recently, highly regarded corporate balance sheet and earnings research firm GMI Ratings put Pacific Sunwear of California on its list of companies at risk of going bankrupt -- and that should come as no surprise.

Five years ago, the company's stock traded for $23. Recently, it dropped to $1.50. In its most recent reported quarter, Pacific Sunwear lost $15 million on revenue of $174 million. The retailer's cash and cash equivalents dropped to $22 million from $50 million at the end of the previous quarter. Pacific Sunwear management said the company would have a non-GAAP net loss in the current quarter as well.

Pacific Sunwear also disclosed it had a new line of credit with Wells Fargo (WFC). Its comments about the loan in its latest 10-Q were telling: "if we were to experience same-store sales declines similar to those which occurred in fiscal 2010 and 2009, we may be required to access most, if not all, of the New Credit Facility and potentially require other sources of financing to fund our operations, which might not be available."

Why is the company in so much trouble? It is too small and is in a commoditized business. Nearly every major department store chain sells products similar to those Pacific Sunwear offers, and so do many niche retailers. Pacific Sunwear, meanwhile, has only 729 small stores. What will happen to the retailer? It could be bought by a larger company -- its market cap is only $108 million -- or it may go out of business with its inventory sold to other retailers.

By Douglas A. McIntyre, 24/7 Wall St.

RIM (RIMM) once owned the smartphone market.  Its BlackBerry products were used largely by businesses. It is hardly worth repeating the story of how RIM was late to the consumer market, where it has been pounded relentlessly by Apple and an army of Google Android phones from manufacturers as diverse as Taiwan’s HTC, South Korea’s Samsung and Motorola in the U.S. The pace at which the company fell apart once the process began was even more extraordinary than its rise. Revenue and net income had jumped from $6 billion and $1.3 billion, respectively, in fiscal 2008 to $20 billion and $3.4 billion in fiscal 2011. In just the past year, however, the company has warned twice that it would miss its earnings forecast, replaced a longtime CEO, warned a third time and disclosed plans for layoffs of thousands of employees.

Al Gore's Current TV was on life support even before it fired its only bankable star, Keith Olbermann, in March following a set of battles with the host over his perks. He was replaced by serial talk show host failure Eliot Spitzer. Compared to Olbermann's March figures, Spitzer's ratings in April were down nearly 70%, according to Nielsen. At the time, The Hollywood Reporter wrote, "Replacement Eliot Spitzer pulled an anemic 47,000 total viewers in the first outing of Viewpoint, with just 10,000 among adults 25-54. The weeks since saw an early rebound, particularly in the demo, but in its four weeks on air Viewpoint has steadily declined in both respects."

Reuters recently reported that Current TV's audience had fallen enough that cable giant Time Warner Cable (NYSE: TWC) may have the right to discontinue carrying the channel. The closest Current TV has to a star is talk show veteran Joy Behar, a former cast member of "The View," who had her own show canceled by CNN's HLN in November. Gore does not have the deep pockets to keep a network with no future going.

By Douglas A. McIntyre, 24/7 Wall St.

Battered retailer The Talbots (TLB) is supposed to be getting purchased by Sycamore Partners for just over $2.75 a share, or $190 million, but the offer has been delayed for some reason. Sycamore already has lowered its offer once from the $3.05 a share it extended to the company in December.

Among the retailers most badly damaged by the recession, Talbots has to be near the top of the list, and its problems were compounded by its failure to appeal to consumers with distinctive products. While its shares traded for almost $26 five years ago, they now change hands for $2.50.

It's a wonder that Sycamore wants to buy the retailer. Even if the deal closes, Sycamore may find there is no solution to making the company viable again. When it last announced earnings, Talbots management said it planned to close 110 stores. The company also said it would try to find a new CEO. Talbots made only $1 million last quarter on $275 million in revenue. At the same time it announced earnings, it admitted that it could be in default under its debt facilities if its financial condition deteriorated further.

Talbots has been flanked by a number of department stores that carry women's discount ware and a number of niche chains, including Ann Taylor (ANN), Chico's FAS (CHS) and Limited Brands (LTD). The company's earnings demonstrate clearly the extent to which customers have abandoned Talbots. Its revenue was $2.3 billion in fiscal 2008, a figure on which it lost money. Annual sales are barely half that now. With the exception of a tiny profit last year, the retailer has lost money every year in the past five.

By Douglas A. McIntyre, 24/7 Wall St.

American's parent AMR filed for Chapter 11 bankruptcy in Nov. 2011. The airline itself still operates largely as it did prior to the filing, but with some of the advantages the bankruptcy brings. Labor costs will be cut, along with debt service and lease obligations for airplanes.

AMR says it plans to emerge from Chapter 11 as a viable airline. But that will not happen. US Airways (NYSE: LCC) already has made it clear that it wants to buy American's assets. As soon as the rumors of a potential buyout started in April, some of American's largest unions said they backed such a plan as a way to protect jobs.

Earlier this month, US Airways CEO Doug Parker announced his desire to merge the two airlines. With US Airways probably willing to give AMR's creditors a good deal to get American's assets, the potential deal received tremendous support from bondholders and analysts. US Airways has much to gain from this transaction, as its position in the carrier market has been eroded by the mergers of Northwest and Delta and the later combination of United and Continental.

By Douglas A. McIntyre, 24/7 Wall St.


Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Amazon.com and Staples. Motley Fool newsletter services have recommended buying shares of Amazon.com and Staples.

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