This past year saw the continuation of ongoing change in the retail landscape—certain retailers in the brick-and-mortar segment struggled, causing widespread pessimism regarding traditional retail in the United States. Although there were many positive retailing storylines in both brick-and-mortar and e-commerce in 2016 (we’ll cover those later in the week), today we look at the companies that struggled most during the past calendar year.
As we covered on the Retail Focus Podcast this week, it isn’t enough to simply list retailers that caught the most media flak in 2016 in this list—companies like Nordstrom, who actually had a decent calendar year, got their share of negative headlines because of analyst or media outlet overreaction. So, we looked at a number of different factors in crafting this list, beyond which companies grabbed headlines.
In addition to the three most typical ways in which the market assesses success of a company (comparable store sales, top line revenue, and earnings per share), we also look at additional, less traditional factors. These include cash flow throughout the year, closures or openings of brick-and-mortar locations, supply chain and inventory management, and a company’s relative success across all channels. We also eliminated any retailers that entered bankruptcy or folded altogether during the calendar year—those will be addressed in a future post.
Considered: Whole Foods, The Container Store, Tuesday Morning, GNC
Although it was a trying year for each of these retailers, they were just proficient enough to stay out of the bottom five. Whole Foods spent much of calendar year 2016 spinning their tires, but did close with Q4 sales that increased 2% to a record $3.5 billion for the grocer. This, along with their 365 initiative and cost-cutting measures with an eye towards reducing prices, kept them off the list. The Container Store, meanwhile, saw a drastic reduction in comparable store sales (down 4.2% in Q2 of FY2016 alone), but did see a small bump in top line revenue as well as overall store count.
Tuesday Morning and GNC were closest to cracking the top five. Tuesday Morning is still showing losses on the balance sheet, despite comparable store sales increases of 5.1% in the most recent fiscal quarter. However, their initiatives to relocate and remodel a solid chunk of their store base keep intact optimism for the future. GNC was hit hard in nearly every metric during 2016—same store sales decreased 8.5% in Q3, accompanying top and bottom line decreases during the same period. This followed same store sales declines of 2-4% in Q1 and Q2. The specialty retailer announced plans earlier this month to close for one full day (December 28) as part of a plan to retool their stores and reform their image heading into 2017.
#5: Neiman Marcus
Despite the fact that Neiman Marcus is a private company (rumors of an IPO were teased in 2014 and 2015), there is still a decent amount of information on the premium retailer’s finances. The information released to the public wasn’t good for much of the year—they concluded 2016 with three consecutive quarters of comparable store sales declines, including a decline of 5.0% in Q3 of FY2016 and 8.0% in Q1 of fiscal 2017. Their bottom line didn’t fare any better, as they reported a net loss of $23.5 million in their Q1FY17 results.
This, in turn, led to a series of fairly defensive question-and-answer sessions during their earnings calls, where the company blamed everything from a brick-and-mortar retail downtown to a decline in income for oil-rich communities in states like Texas. In reality, the company is having a difficult time executing at multiple levels. Their e-commerce platform was called into question on social media earlier in the year, when their sale of collard greens from a third party vendor was criticized for its expense. For a short time on Twitter, the hashtag #gentrifiedgreens began to trend, sending a strong amount of negative media attention towards Neiman Marcus.
Overall, despite continually worsening comps, salvation for Neiman Marcus may lie in their Last Call stores, of which they have 29 (compared to 42 of their traditionally-branded stores). Nordstrom has seen comparable store increases in the 3.0% range from their Rack concept, and Neiman Marcus may be well-advised to build out Last Call to help salvage consistent losses from their other channels.
#4: Restoration Hardware
The year started out poorly for RH, with analysts noting massive supply chain issues in the company’s online platform. In some circumstances, it was said, customers might face a wait time of six months for certain products. As one might imagine, this is bad news in a retail sector where timeliness is everything.
Despite assurances that the problem was being worked through, the results never showed in the earnings calls. During the latest earnings release, RH noted a comparable brand revenue decline of 6% and drastically reduced adjusted net income ($8.0 million for Q3 2016 versus $27.7 million in the same quarter one year prior). Additionally, they lowered expectations for 2016’s Q4, stating that their holiday sales were slower than expected. Supply chain issues also dogged their “Source Books” they traditionally send out in the fall—because their Source Books were late in mailing to consumers, RH CEO Gary Friedman said that sales typically stemming from the catalogs would be pushed to Q1 2017. If Q1 2017 fails to see this predicted bump in revenue, the company may have more severe issues on their hands in the next calendar year.
As though all of this weren’t enough, the company rolled out their RH Grey Card membership program in 2016. The program charges consumers $100 up front for a 25% discount on purchases. Early indications are that the program may be costing RH some on the operating margin front—this is borne out in Q3 2016 numbers, where top line revenues increased by 3% to $549 million, yet earnings for the company took a significant hit, as noted above. Potential optimism for RH sits with their RH Modern, whose launch was blamed for “temporarily depressing financial results” for the company as a whole.
#3: Staples/Office Depot
Although we are cheating somewhat here by combining two companies in one spot on the list of most-struggling retailers in 2016, these two companies are inexorably tied together due to their attempted merger that fell through. After the merger was shot down in May, both companies were sent scrambling to identify future plans.
The FTC ruling seemed to hit Staples a bit harder than Office Depot, as the latter was already in the process of closing down stores deemed redundant by their merger with OfficeMax just a few years prior. In August, Office Depot reiterated plans to close another 300 locations, in addition to the 400 already closed by the Q2 2016. Some optimism lies in Office Depot’s “store of the future,” with a smaller square footage and increased omnichannel execution capabilities.
Staples, meanwhile, saw same store sales plummet in their Q1 and Q2 by nearly 5%. Additionally, they had to pay Office Depot a “break-up” fee of around $250 million. Much like Office Depot, Staples initiated store closures in 2016 (50 in the U.S.), which built on their total store closure count of 242 over the two years prior. Stock prices for both companies was extremely volatile over the course of the year.
#2: h.h. gregg
h.h. gregg, with a footprint mostly based in the eastern half of the U.S., hemorrhaged away top line sales over the past four quarters. In all likelihood, 2017 will prove absolutely crucial for the retailer who exists in the same sector as Best Buy.
Unlike Best Buy, which saw a surprising surge in 2016, h.h. gregg struggled outside of their appliance segment during the calendar year. Comparable store sales decreased 6.4% in 2Q 2017 alone, and their cash supplies dwindled down by another two million. Increases of 35.5% in online sales and appliance comps by 5.7% weren’t enough to offset slackening same store marks, with net sales down 6.6% for the quarter, the most recent for which financial information is available. Their major losses seem to be spurred by decreased sales in consumer electronics, which saw a 25% decrease over 2Q 2016, owing likely to increased competition from e-commerce retailers and Best Buy’s increase in brick-and-mortar market share.
The poor sales figures come amidst pressure on CEO Robert Riesbeck, who some investors blame for the lack of expansion in e-commerce and in their super-premium Fine Lines chain. As with the previous retailers on this list, there is some reason for optimism for h.h. gregg in 2017—if they can build out and capitalize on Fine Lines, they may yet find a way to turn around poor top line numbers. However, they will almost certainly need to do so on credit—while they’ve reported no interest-bearing debt over the last year, their cash reserves have been reduced to a dangerously low level over the last two years.
#1: Sears Holdings
It is no surprise to anyone that Sears Holdings as had a very rough 2016. Two waves of closings (and another just revealed for 2017) and consistently slipping same store sales make for a toxic combination, one that is likely to come to a head during 2017.
Although Kmart has seen lower same store sales declines than their Sears counterpart, the long-time retailer has been ticketed for more store closures over the past two years. The store closures have understandably played a role in decreased top line figures for SHLD—for the quarter ending October 29, revenues decreased approximately $721 million to $5.0 billion. However, despite the closing of what the company deems “under-performing stores,” same store sales continue to take upper-single-digit hits, declining by 7.4% overall in the most recent fiscal quarter.
So poor is the retailer’s performance of late that it has almost become trite in retail circles to criticize CEO Eddie Lampert—who loaned $125 million to Sears Holdings in April and another $300 million in August. The company has indicated the possibility of exploring alternatives for Kenmore, Craftsman, and DieHard brands, as well as the Sears Home Services portion of their business.
The lone positive news for Sears Holdings is their REIT (Seritage Growth Properties), which saw it’s market cap rise to $1.42 billion in 2016. For reference, Sears Holdings’ market cap hit an all-time low of just under $830 million during December. SHLD shares are down to around $8.50 at year’s end, from around $20.00 per share in January 2016. Most retail analysts (ourselves included) don’t see a way out for the highly debt-leveraged company, and so unlike the other retailers on this list, it’s possible that Sears Holdings will not exist—at least as it is currently constructed—by the conclusion of 2017.
In a few days, we’ll release our list of the five most successful retailers in 2016. Until then, we discuss the same topic in the latest Retail Focus Podcast, available on iTunes, PodBean, or any other podcast delivery service.