Wall Street this Week: Surprises in Store for Retailers

Abercrombie & Fitch
It's going to be a busy week for retailers as more than a dozen publicly traded chains offer up their latest quarterly financials.

Shopping's a popular diversion in this country, but don't assume that crowded mall parking lots are translating into blowout results for major retailers.

Saks (SKS) on Tuesday, Abercrombie & Fitch (ANF) on Wednesday, and Bonton Stores (BONT) and Buckle (BKE) on Thursday are all expected to post lower quarterly profits than they did during the same period a year earlier.

5 Big Retail Chains That Will Be Gone in 5 Years
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Wall Street this Week: Surprises in Store for Retailers

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By Rick Aristotle Munarriz, The Motley Fool

1. Barnes & Noble (BKS)

When the last of the Borders stores closed its doors forever a few months ago, it was only natural to view Barnes & Noble as the obvious beneficiary. Bibliophiles would just flock to the other gargantuan bookstore chain, right?

Wrong. Things aren't going so well at B&N. Sales actually fell in its latest quarter, as sales of the lower-margin Nook e-readers can't make up the sharp decline in physical books.

Yes, B&N is ready for the passing of bound books, but what will this mean for its cavernous stores? Store-level sales will continue to decline, and folks will continue to download their books from a wider variety of sources.

2. Sears Holdings (SHLD)

Lousy sales for Sears and Kmart during the holiday season proved that both department store chains continue to fade in relevance for bargain-seekers, and in late December, the parent of the two struggling retailers revealed that it would be closing as many as 120 stores.

Sears Holdings is in a lose-lose situation. It needs to update its stores if it wants to stand a chance against its "cheap chic" rivals. Unfortunately, the company just began tapping its credit line, so it's not as if it can afford the necessary upgrades.

Sears itself has been around for several generations, dating back to its mail-order catalog. Could it really disappear in the next five years? Well, Woolworth was around for more than 100 years when it was liquidated in 1997.

3. Best Buy (BBY)

Everyone seems to be buying smartphones and tablets. They're just not buying them at Best Buy. Shoppers are finding cheaper prices online, forcing Best Buy to shave its already meager margins just to remain competitive.

It gets worse.

"Best Buy's worst fears are coming to fruition," I wrote after the consumer electronics retailer's latest quarterly report. "The same shoppers whom it has armed over the years with smartphones, tablets, and laptops are now using those devices to find better prices online. Even when folks do walk into a store, they can seamlessly compare prices on their smartphone to make sure that they're getting the lowest price."

Let's also not forget that these are also the same devices that are making all of the shelf space that Best Buy has been devoting to CDs, DVDs, books, and video games obsolete.

For growth, Best Buy has turned to smaller stores that sell only mobile products. That strategy may or may not pan out over time, but either way, the gargantuan Best Buy stores as you know them now are toast.

4. RadioShack (RSH)

If Best Buy focusing on bite-sized stores emphasizing wireless handsets through different carriers and related accessories sounds familiar, welcome to RadioShack. The small-box specialist got into that game awhile back, after realizing that folks just don't need to stop by a strip-mall shop anymore to pick up some batteries or a remote-controlled car.

Is this market wide enough for both RadioShack and Best Buy Mobile?

Forget about the future. RadioShack's situation is ugly right now. The retailer has missed Wall Street's quarterly profit expectations all year long.

5. GameStop (GME)

Today, GameStop has one of the most profitable retail models around. The growing retailer's stores stock the latest gaming systems, video games, and accessories. Margins aren't that hot on hardware, but they're pretty sweet on software.
However, the juiciest part of GameStop's model is where gamers trade in their tired games and systems for store credit. GameStop goes on to resell those items at huge markups.

GameStop stores don't need a lot of selling space given the compact nature of their merchandise, so they fit conveniently in the middle of strip malls where rent is cheap. Sales have held up reasonably well, even though video game industry sales have been largely languishing since 2009.

GameStop definitely doesn't seem very endangered now, but now that even Best Buy and Amazon.com (AMZN) are accepting trade-ins, the most lucrative part of the GameStop model is under attack.

Let's also flash forward a few years. As console makers shift to digital delivery of software, where does GameStop fit in? The retailer has made some intriguing acquisitions in digital delivery, but the days of GameStop's physical stores are numbered.

Add It Up

Some of these chains will last longer than others. GameStop's balance sheet is a far cry from Sears Holdings, where credit ratings agencies are biting their nails as they ponder downgrades. However, all five of these concepts just aren't built to last in today's retailing climate.

Enjoy them while you can.

It's not just fashionistas on strike. Video game buffs are expected to see diehard gamer hub GameStop (GME) post a slide in net sales and profitability on Thursday.

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Where are the shoppers heading? Well, proving that we may not be entirely out of these recessionary woods, many of the chains that give buyers more bang for their bucks should do well. Marshalls and TJ Maxx parent TJX (TJX) on Tuesday, PetSmart (PETM) on Wednesday, and Dollar Tree (DLTR) and Wal-Mart (WMT) on Thursday are all projected to improve on last year's profitability this week.

Shoppers are flocking to where the bargains are, and that's where investors should be headed as well.

Other Stocks Worth Watching

  • Staples (SPLS) is pounding the "easy" button on Thursday, giving the market a great glimpse at the state of office supplies. It's a pretty important report. If small businesses are ordering more toner cartridges and file cabinets -- a good sign for the state of Corporate America -- we'll see it in the Staples report.
  • Home Depot (HD) is another company to keep an eye on. The home improvement superstore chain reports on Tuesday. Just as Staples offers a great look at how small companies are doing, Home Depot's performance will show whether homeowners are starting to spruce up their digs again. There's plenty to glean from orange aprons.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of GameStop, Staples, and The Buckle. Motley Fool newsletter services have recommended buying shares of Staples, The Buckle, The Home Depot, and PetSmart. Motley Fool newsletter services have recommended writing covered calls on GameStop.

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