One thing to note with all of these stocks is that many value investors look at them as real estate plays. However I see an over-abundance of shopping malls and big box stores. They all can’t be real estate plays.
Best Buy
Best Buy’s troubles have been well documented. Their business is going through a fundamental shift and it isn’t good news for Best Buy. The mobile revolution is hurting Best Buy big time. Fewer people are buying PC’s and instead opting for tablets, and more specifically iPad’s. Instead of being one of the primary resellers of the iPad, they have to compete with the Apple stores which give the consumer a much better shopping experience. The whole Apple “ecosystem” is hurting Best Buy in other ways as well. Very few people buy CD’s anymore and a majority of those that don’t go through iTunes. Video games are also migrating towards online as well.
Take away PC sales, music album sales, and you are left with a TV and appliance store; therein lies the problem. Best Buy has way too much floor space. This creates unnecessary overhead and decreases their margins.
Best Buy needs to be smaller and that could take years to work out of their long term lease’s and sell any real estate that they own into a depressed market. I see Best Buy having a 50/50 chance that it is not in business in the next five years. I would also give it about a 25% chance that it is acquired by someone else but I think there is a glut of commercial real estate on the market but you could see a private equity play.
Radio Shack
This is a little more of an obvious one than Best Buy as Radio Shack’s stock has been pummeled the last couple years by over 75% or so. There have been some big name value investors take a stab at it and fail over the last few years. Really the only thing going for Radio Shack is that they sell mobile phones and service plans for multiple companies. Other than mobile plans, I don’t really see any reason why anyone would ever go into a Radio Shack store. If you’ve been in one of their stores recently I’m assuming you would agree.
This is a company that really has no niche or nothing unique to distinguish itself from other electronics retailers.
I see Radio Shack with an 80% chance that it is out of business in the next two years. I suppose it could be acquired but I’m not sure by whom.
Barnes & Noble
Amazon is taking Barnes & Noble to school. Other than for gifts or last minute shopping, most people buy their books from Amazon for 30% less than going into the store to buy them. Barnes & Noble has way too big of stores with way too much inventory. With Amazon’s cost advantages and presence, this just isn’t a viable business anymore. We’ve already seen Borders bite the dust and it won’t be long before Barnes & Noble has the same fate. Their online presence is there but they rarely beat Amazon on price or shipping affordability and speed. The Nook is inferior to the Kindle and the iPad. While some like it, it just isn’t going to be what saves Barnes & Noble. I’d only give Barnes & Noble 25% chance of staying in business. It may take a few years but they will suffer a slow death. They may be able to keep it going through restructuring and closing some poor performing stores, but eventually the significant advantages Amazon holds over them will drive them out of business.
Sears
The best thing you can say about Sears is that it has Eddie Lampert as the majority owner. Lampert has a long track record of enhancing shareholder value but as of yet a turnaround at Sears has eluded him. Sears has a great brand in Craftsman tools but other than that its department stores offer really no reason to shop there. Their appliance and electronics don’t lead the industry and don’t offer any compelling reason to shop Sears rather than a Home Depot or Lowe’s.
Sears is a stale brand and under Lampert’s reign they have done nothing to enhance the look of the stores or their merchandise.
The biggest claim to value that has been made with Sears is the real estate value. Again I’ll say that there are too many malls and big box stores out there for this to be very credible of a claim. While there are some ideal properties, I doubt there are excited borrowers in this real estate and retail market ready to knock down the doors to pay a premium price for their locations. Sears is just quite simply going to be another in a long line of big department stores that goes the way of the dodo bird. I would give Sears a 100% chance of going belly up in the next five years if it wasn’t for Eddie Lampert at the helm. I still don’t see the long term value in Sears and I could see them disappearing quite easily, especially should we see a further downturn in the economy.
Staples
In my opinion there are way too many office supply stores out there. The Office Depot may go before Staples but I wanted to include one “unthinkable” on this list. Staples caters to small and medium sized businesses but their pricing, to me, seems high and the internet is changing the landscape of the office supply business. Most small businesses I know order their supplies online.
While many of those sales are going to Staples, the stores themselves turn into an expensive way to run a distribution system. While the stores allow them to have quick delivery, same day in some cases, I don’t think delivery time will be what wins business, it will be price.
Like I mentioned, I believe Office Depot will go out of business, but you could give a 15% chance that Staples could be hard pressed to stay the same company that they currently are with a lot of retail stores that never seem to be all that busy. An online company with distribution centers seems a better approach. If they don’t go that route then they could eventually die.
Conclusion
Will all nine of the companies I listed go out of business? No, but a strong case can be made for many of them to disappear within the next 3-5 years.
These companies may appear to be “cheap” either because they are trading at their multi year lows or they are “cheap” on an earnings basis. Either way, I wouldn’t recommend trying to catch a falling knife here. There are much better opportunities out there in the market than these companies.