by Adam Hartung | Oct 21, 2017 | In the Swamp, Investing, Leadership
In other words, CEO Flannery continues the strategy of making GE smaller, and a less hospitable workplace, that his predecessor Immelt started implementing 16 years ago. That’s the strategy that has seen GE lose ~45% of its value since Immelt took the top job, and lose over 60% of its value since peaking at $60 in 2000. So far, GE just keeps shrinking in size, and value, and leadership gives no indication it has a plan to grow GE revenues and profits in future markets building on major market trends.
What’s most surprising is that people seem surprised by the horrible current performance, and surprised that GE is in such terrible condition. All the way back in
December, 2010 this column highlighted selections for CEO of the year, and CEO of the decade, and in doing so pointed out that GE’s Immelt was on nobody’s list. Even though his predecessor, Jack Welch, was widely lauded.
Immelt inherited one of America’s strongest, fastest growing and most valuable companies. But in the first few years of his leadership the company completely failed to maintain Welch’s gains, and under Immelt’s mismanagement nearly went bankrupt by not preparing for the near-collapse of financial services in the Great Recession. It was obvious then that Immelt was trying to be a “caretaker” of GE, a “steward” of its history. But he was not an effective leader with plans for a growing future, and competitors were beating up GE in all markets. Even upstarts like Facebook, and its CEO Mark Zuckerberg, were far outperforming the stagnating, declining GE.
By May, 2012 it was impossible to miss the mismanagement at GE.
This column selected CEO Immelt as the 4th worst CEO of all publicly traded American companies (beaten in badness by Mike Duke of WalMart who was pushed out during allegations of international bribery and fraud, Ed Lampert of Sears who has now completely destroyed the once great retailer, and Steve Ballmer of Microsoft who over-invested in Windows and Office while missing every major tech development of the last 15 years before being forced out by the board.) By 2012 it was time for the Board of Directors to take action and replace Immelt. But few investors amplified this column’s cries for change, and quiet complacency set in as people simply expected GE to perform better. Just because it was GE, it appeared, as there were no signs the company understood market trends and how to ignite growth.
Of course, performance did not improve at GE. By April, 2015 GE was the victim of a total leadership failure. The company was not developing any major new trends, and Immelt’s focus was on unraveling old businesses, mostly via sales to external parties, in order to increase cash. And the cash was used for share buybacks and dividends, rather than investing in growth. A slow, and badly implemented, liquidation of one of America’s oldest, and greatest, companies was underway.
Which made GE a target for activist investors, and Trian Funds took up the challenge, investing $1.5B in GE stock and taking a seat on the GE board. Finally, it was time for action. Immelt was pushed out and Flannery was put in, and dramatic cuts and re-organizations led the discussions. Current appearances indicate GE will be significantly dismantled, assets will be sold, and in short order GE will look nothing like the great company it once was.
But, the question remains, why did things have to become so bad before the board took action? Why were people surprised? Why didn’t Jim Cramer scream for a leadership housecleaning 7, 5 or 3 years ago? Why didn’t shareholders vote against CEO compensation plans on the “say-on-pay” measures, exerting their voice to change a lackluster board that was allowing an incompetent CEO to remain in the job? Why wasn’t the pension fund, constantly whittling away at retiree benefits, forcing change? Why were so many people, so many leaders, so quiet about what was an obvious business failure? A failure that needed to be addressed, first and foremost, by replacing the CEO?
So GE’s stock value has taken a big hit of late. And now people seem surprised by the admission of how bad things really are. What’s really surprising is that people are surprised. This was not hard to see coming.
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by Adam Hartung | Mar 22, 2017 | In the Whirlpool, Investing, Retail
(Photo by Scott Olson/Getty Images)
Traditional retailers just keep providing more bad news. Payless Shoes said it plans to file bankruptcy next week, closing 500 of its 4,000 stores. Most likely it will follow the path of Radio Shack, which hasn’t made a profit since 2011. Radio Shack filed bankruptcy and shut a gob of stores as part of its “turnaround plan.” Then in February Radio Shack filed its second bankruptcy — most likely killing the chain entirely this time.
Sears Holdings finally admitted it probably can’t survive as a going concern this week. Sears has lost over $10 billion since 2010 — when it last showed a profit — and owes over $4 billion to its creditors. Retail stocks cratered Monday as the list of retailers closing stores accelerated: Sears, KMart, Macy’s, Radio Shack, JCPenney, American Apparel, Abercrombie & Fitch, The Limited, CVS, GNC, Office Depot, HHGregg, The Children’s Place and Crocs are just some of the household names that are slowly (or not so slowly) dying.
None of this should be surprising. By the time CEO Ed Lampert merged KMart with Sears the trend to e-commerce was already pronounced. Anyone could build an excel spreadsheet that would demonstrate as online retail grew, brick-and-mortar retail would decline. In the low margin world of retail, profits would evaporate. It would be a blood bath. Any retailer with any weakness simply would not survive this market shift — and that clearly included outdated store concepts like Sears, KMart and Radio Shack which long ago were outflanked by on-line shopping and trendier storefronts.
Yet, not everyone is ready to give up on some retailers. Walmart, for example, still trades at $70 per share, which is higher than it traded in 2015 and about where it traded back in 2012. Some investors still think that there are brick-and-mortar outfits that are either immune to the trends, or will survive the shake-out and have higher profits in the future.
And that is why we have to be very careful about business myths. There are a lot of people that believe as markets shrink the ultimate consolidation will leave one, or a few, competitors who will be very profitable. Capacity will go away, and profits will return. In the end, they believe if you are the last buggy whip maker you will be profitable — so investors just need to pick who will be the survivor and wait it out. And, if you believe this, then you have justified owning Walmart.
Only, markets don’t work that way. As industries consolidate they end up with competitors who either lose money or just barely eke out a small profit. Think about the auto industry, airlines or land-line telecom companies.
Two factors exist which effectively forces all the profits out of these businesses and therefore make it impossible for investors to make money long-term.
First, competitive capacity always remains just a bit too much for the market need. Management, and often investors, simply don’t want to give up in the face of industry consolidation. They keep hoping to reach a rainbow that will save them. So capacity lingers and lingers — always pushing prices down even as costs increase. Even after someone fails, and that capacity theoretically goes away, someone jumps in with great hopes for the future and boosts capacity again. Therefore, excess capacity overhangs the marketplace forcing prices down to break-even, or below, and never really goes away.
Given the amount of retail real estate out there and the bargains being offered to anyone who wants to open, or expand, stores this problem will persist for decades in retail.
Second, demand in most markets keeps declining. Hopefuls project that demand will “stabilize,” thus balancing the capacity and allowing for price increases. Because demand changes aren’t linear, there are often plateaus that make it appear as if demand won’t go down more. But then something changes — an innovation, regulatory change, taste change — and demand takes another hit. And all the hope goes away as profits drop, again.
It is not a successful strategy to try being the “last man standing” in any declining market. No competitor is immune to these forces when markets shift. No matter how big, when trends shift and new forms of competition start growing every old-line company will be negatively affected. Whether fast, or slow, the value of these companies will continue declining until they eventually become worthless.
Nor is it successful long-term to try and segment the business into small groupings which management thinks can be protected. When Xerox brought to market photocopying, small offset press manufacturers (ABDick and Multigraphics ) said not to worry. Xeroxing might be OK in some office installations, but there were customer segments that would forever use lithography. Even as demand shrunk, well into the 1990s, they said that big corporations, industrial users, government entities, schools and other segments would forever need the benefits of lithography, so investors were safe. Today the small offset press market is a tiny fraction of its size in the 1960s. ABDick and Multigraphics both went through rounds of bankruptcies before disappearing. Xerography, its child desktop publishing, and its grandchild electronic screens, killed offset for almost all applications.
So don’t be lured into false hopes by retailers who claim their segment is “protected.” Short-term things might not look bad. But the market has already shifted to e-commerce and this is just round one of change. More and more innovations are coming that will make the need for traditional stores increasingly unnecessary.
Many readers have expressed their disappointment in my chronic warnings about Walmart. But those warnings are no different than my warnings about Sears Holdings. It’s just that the timing may be different. Both companies have been over-investing in assets (brick-and-mortar stores) that are declining in value as they have attempted to defend and extend their old business model. Both radically under-invested in new markets which were cannibalizing their old business. And, in the end, both will end up with the same results.
And this is true for all retailers that depend on traditional brick-and-mortar sales for their revenues and profits — it’s only a matter of when things will go badly, not if. So traditional retail is nowhere that any investor wants to be.
by Adam Hartung | Aug 29, 2014 | Current Affairs, In the Whirlpool, Leadership
It’s Labor Day, and a time when we naturally think about our jobs.
When it comes to jobs creation, no role is more critical than the CEO. No company will enter into a growth phase, selling more product and expanding employment, unless the CEO agrees. Likewise, no company will shrink, incurring job losses due to layoffs and mass firings, unless the CEO agrees. Both decisions lay at the foot of the CEO, and it is his/her skill that determines whether a company adds jobs, or deletes them.
Over 2 years ago (5 May, 2012) I published “The 5 CEOs Who Should Be Fired.” Not surprisingly, since then employment at all 5 of these companies has lagged economic growth, and in all but one case employment has shrunk. Yet, 3 of these CEOs remain in their jobs – despite lackluster (and in some cases dismal) performance. And all 5 companies are facing significant struggles, if not imminent failure.
#5 – John Chambers at Cisco
In 2012 it was clear that the market shift to public networks and cloud computing was forever changing the use of network equipment which had made Cisco a modern growth story under long-term CEO Chambers. Yet, since that time there has been no clear improvement in Cisco’s fortunes. Despite 2 controversial reorganizations, and 3 rounds of layoffs, Cisco is no better positioned today to grow than it was before.
Increasingly, CEO Chambers’ actions reorganizations and layoffs look like so many machinations to preserve the company’s legacy rather than a clear vision of where the company will grow next. Employee morale has declined, sales growth has lagged and although the stock has rebounded from 2012 lows, it is still at least 10% short of 2010 highs – even as the S&P hits record highs. While his tenure began with a tremendous growth story, today Cisco is at the doorstep of losing relevancy as excitement turns to cloud service providers like Amazon. And the decline in jobs at Cisco is just one sign of the need for new leadership.
#4 Jeff Immelt at General Electric
When CEO Immelt took over for Jack Welch he had some tough shoes to fill. Jack Welch’s tenure marked an explosion in value creation for the last remaining original Dow Jones Industrials component company. Revenues had grown every year, usually in double digits; profits soared, employment grew tremendously and both suppliers and investors gained as the company grew.
But that all stalled under Immelt. GE has failed to develop even one large new market, or position itself as the kind of leading company it was under Welch. Revenues exceeded $150B in 2009 and 2010, yet have declined since. In 2013 revenues dropped to $142B from $145B in 2012. To maintain revenues the company has been forced to continue selling businesses and downsizing employees every year. Total employment in 2014 is now less than in 2012.
Yet, Mr. Immelt continues to keep his job, even though the stock has been a laggard. From the near $60 it peaked at his arrival, the stock faltered. It regained to $40 in 2007, only to plunge to under $10 as the CEO’s over-reliance on financial services nearly bankrupted the once great manufacturing company in the banking crash of 2009. As the company ponders selling its long-standing trademark appliance business, the stock is still less than half its 2007 value, and under 1/3 its all time high. Where are the jobs? Not GE.
#3 Mike Duke at Wal-Mart
Mr. Duke has left Wal-Mart, but not in great shape. Since 2012 the company has been rocked by scandals, as it came to light the company was most likely bribing government officials in Mexico. Meanwhile, it has failed to defend its work practices at the National Labor Relations Board, and remains embattled regarding alleged discrimination of female employees. The company’s employment practices are regularly the target of unions and those supporting a higher minimum wage.
The company has had 6 consecutive quarters of declining traffic, as sales per store continue to lag – demonstrating leadership’s inability to excite people to shop in their stores as growth shifts to dollar stores. The stock was $70 in 2012, and is now only $75.60, even though the S&P 500 is up about 50%. So far smaller format city stores have not generated much attention, and the company remains far behind leader Amazon in on-line sales. WalMart increasingly looks like a giant trapped in its historical house, which is rapidly delapidating.
One big question to ask is who wants to work for WalMart? In 2013 the company threatened to close all its D.C. stores if the city council put through a higher minimum wage. Yet, since then major cities (San Francisco, Chicago, Los Angeles, Seattle, etc.) have either passed, or in the process of passing, local legislation increasing the minimum wage to anywhere from $12.50-$15.00/hour. But there seems no response from WalMart on how it will create profits as its costs rise.
#2 Ed Lampert at Sears
Nine straight quarterly losses. That about says it all for struggling Sears. Since the 5/2012 column the CEO has shuttered several stores, and sales continue dropping at those that remain open. Industry pundits now call Sears irrelevant, and the question is looming whether it will follow Radio Shack into oblivion soon.
CEO Lampert has singlehandedly destroyed the Sears brand, as well as that of its namesake products such as Kenmore and Diehard. He has laid off thousands of employees as he consolidated stores, yet he has been unable to capture any value from the unused real estate. Meanwhile, the leadership team has been the quintessential example of “a revolving door at headquarters.” From about $50/share 5/2012 (well off the peak of $190 in 2007,) the stock has dropped to the mid-$30s which is about where it was in its first year of Lampert leadership (2004.)
Without a doubt, Mr. Lampert has overtaken the reigns as the worst CEO of a large, publicly traded corporation in America (now that Steve Ballmer has resigned – see next item.)
#1 Steve Ballmer at Microsoft
In 2013 Steve Ballmer resigned as CEO of Microsoft. After being replaced, within a year he resigned as a Board member. Both events triggered analyst enthusiasm, and the stock rose.
However, Mr. Ballmer left Microsoft in far worse condition after his decade of leadership. Microsoft missed the market shift to mobile, over-investing in Windows 8 to shore up PC sales and buying Nokia at a premium to try and catch the market. Unfortunately Windows 8 has not been a success, especially in mobile where it has less than 5% share. Surface tablets were written down, and now console sales are declining as gamers go mobile.
As a result the new CEO has been forced to make layoffs in all divisions – most substantially in the mobile handset (formerly Nokia) business – since I positioned Mr. Ballmer as America’s worst CEO in 2012. Job growth appears highly unlikely at Microsoft.
“CEOs – From Makers to Takers”
Forbes colleague Steve Denning has written an excellent column on the transformation of CEOs from those who make businesses, to those who take from businesses. Far too many CEOs focus on personal net worth building, making enormous compensation regardless of company performance. Money is spent on inflated pay, stock buybacks and managing short-term earnings to maximize bonuses. Too often immediate cost savings, such as from outsourcing, drive bad long-term decisions.
CEOs are the ones who determine how our collective national resources are invested. The private economy, which they control, is vastly larger than any spending by the government. Harvard professor William Lazonick details how between 2003 and 2012 CEOs gave back 54% of all earnings in share buybacks (to drive up stock prices short term) and handed out another 37% in dividends. Investors may have gained, but it’s hard to create jobs (and for a nation to prosper) when only 9% of all earnings for a decade go into building new businesses!
There are great CEOs out there. Steve Jobs and his replacement Tim Cook increased revenues and employment dramatically at Apple. Jeff Bezos made Amazon into an enviable growth machine, producing revenues and jobs. These leaders are focused on doing what it takes to grow their companies, and as a result the jobs in America.
It’s just too bad the 5 fellows profiled above have done more to destroy value than create it.
by Adam Hartung | May 8, 2014 | Current Affairs, Leadership
Lots of press this week about Target’s CEO and Chairman, Gregg Steinhafel, apparently being forced out. Blame reached the top job after the successful cyber attack on the company last year. But investors, and customers, may regret this somewhat Board level over-reaction to a mounting global problem.
Richard Clark is probably America’s foremost authority on cyber attacks. He was on America’s National Security Council, and headed the counter-terrorism section. Since leaving government he has increasingly focused on cyber attacks, and advised corporations.
In early 2013 I met Mr. Clark after hearing him speak at a National Association of Corporate Directors meeting. He was surprisingly candid in his comments at the meeting, and after. He pointed out that EVERY company in America was being randomly targeted by cyber criminals, and that EVERY company would have an intrusion. He said it was impossible to do business without working on-line, and simultaneously it was impossible to think any company – of any size – could stop an attack from successfully getting into the company. The only questions one should focus on answering were “How fast can you discover the attack? How well can you contain it? What can you learn to at least stop that from happening again?”
So, while the Target attack was large, and not discovered as early as anyone would like, to think that Target is in some way wildly poor at security or protecting its customers is simply naive. Several other large retailers have also had attacks, include Nieman Marcus and Michael’s, and it was probably bad luck that Target was the first to have such a big problem happen, and at such a bad time, than anything particularly weak about Target.
We now know that all retailers are trying to learn from this, and every corporation is raising its awareness and actions to improve cyber security. But someone will be next. Target wasn’t the first, and won’t be the last. Companies everywhere, working with law enforcement, are all reacting to this new form of crime. So firing the CEO, 2 months after firing the CIO (Chief Information Officer), makes for good press, but it is more symbolic than meaningful. It won’t stop the hackers.
Where this decision does have great importance is to shareholders and customers. Target has been a decent company for its constituents under this CEO, and done far better than some of its competitors. The share price has doubled in the last 5 years, and Target has proven a capable competitor to Wal-Mart while other retailers have been going out of business (Filene’s Basement, Circuit City, Linens & Things, Dots, etc.) or losing all relevancy (like Abercrombie and Fitch and Best Buy.) And Target has been at least holding its own while some chains have been closing stores like crazy (Radio Shack 1,100 stores, Family Dollar 370 stores, Office Depot 400 stores, etc.)
Just compare Target’s performance to JCPenney, who’s CEO was fired after screwing up the business far worse than the cyber attack hurt Target. Or, look at Sears Holdings. CEO Ed Lampert was heralded as a hero 6 years ago, but since then the company he leads has had 28 straight quarters of declining sales, and closed 305 stores since 2010. Kmart has become a complete non-competitor in discounting, and Sears has lost all relevancy as a chain as it has been outflanked on all sides. CEO Lampert has constantly whittled away at the company’s value, and just this week told shareholders that they can simply plan on more store closings in the future.
And vaunted Wal-Mart is undergoing a federal investigation for bribing government officials in Mexico to prop up its business. Wal-Mart is constantly under attack by its employees for shady business practices, and even lost a National Labor Relations Board case regarding its hours and pay practices. And Wal-Mart remains a lightning rod for controversy as it fights with big cities like Chicago and Washington, DC about its ability to open stores, while Target has flourished in communities large and small with work practices considered acceptable. And Target has avoided these sort of internally generated management scandals.
CEOs, and Boards of Directors, across the nation have been seriously addressing cyber security for the last couple of years. Awareness, and protective measures, are up considerably. But there will be future attacks, and some will succeed. It is unclear blaming the CEO for these problems makes any sense – unless there is egregious incompetence.
On the other hand, finding a CEO that can grow a business like Target, in a tough retail market, is not easy. Destroying KMart, while battling Wal-Mart, and still trying to figure out how to compete with Amazon.com is a remarkably difficult job. Perhaps the toughest CEO job in the country. Steinhafel had performed better than most. Investors, and customers, may soon regret that he’s not still leading Target.
by Adam Hartung | Apr 23, 2014 | Current Affairs, Leadership
Every quarter I have to be reminded that “earnings season” is again upon us. The ritual of public companies announcing their sales and profits from recent quarters that generates a lot of attention in the business press. And I always wonder why this is a big deal.
What really matters to investors, employees, customers and vendors is “what will your business be like next quarter, and year?” We really don’t much care about the past. What we really want to know is “what should we expect in the future?”
For example, two companies announce quarterly results. One has a Price/Earnings (P/E) multiple of 12.8 and a dividend yield of 2.05%. The other has a multiple of 13.0, and a yield of 3.05%. For both companies net earnings overall were pretty much flat, but Earnings Per Share (EPS) improved due to an aggressive stock repurchase program. Both companies say they have new products in the pipeline, but they conservatively estimate full year results for 2014 to be flat or maybe even declining.
Do you know enough to make a decision on whether to buy either stock? Both?
Truthfully, the two companies are Xerox and Apple. Now does it matter?
While both companies have similar results and forward looking statements, how you view that information is affected by your expectations for each company’s future. So, in other words, the actual results are pretty meaningless. They are interpreted through the lens of expectations, which controls your decision.
You can say Xerox has been irrelevant for years, and its products increasingly look unlikely to change its future course, so you are disheartened by results you see as unspectacular and likewise see no reason to own the stock. For Apple you could say the same thing, and bring up the growing competitor sales of Android-based products. Or, you might say that Apple is undervalued because you have great faith in the growth of mobile products sales and you believe new devices will spur Apple to even better results. Whatever your conclusion about the announced earnings, those conclusions are driven by your view of the future – not the actual results.
Another example. Two companies have billions in sales, and devote their discussion of company value to technology and the use of new technology to pioneer new markets. Both companies report they continue a string of losses, and have no projection for when losses will become profits. There are no dividends. There is no P/E multiple, because there is no E. There is no EPS, again because there is no E. One company is losing $12.86/share, the other is losing $.61/share. Again, do these results tell you whether to buy either, one or both?
What if the first one (with the larger losses) is Sears Holdings, and the latter is Tesla? Now, suddenly your view on the data changes – based upon your view of the future. Either Sears is on the precipice of a turnaround to becoming a major on-line retailer that will sell some real estate and leverage the balance of its stores to grow, so you buy it, or you think Sears has lost all relevancy and you don’t buy it. Either you think Tesla is an industry game changer, so you buy it, or you think it is an over-rated fad that will never become big enough to matter and the giant global auto companies will destroy it, so you don’t buy it. It’s your future view that guides your conclusions about past results.
The critical factor when reviewing earnings is actually not the reported results. The critical factor is what you think the future is for these 4 companies. No matter how good or bad the historical results, your decision about whether to own the stock, buy the company products, work for the company or join its vendor program all hinges on your view about the company’s future.
Which makes not only the “earnings season” hoopla foolish, but puts a pronounced question mark on how executives – especially CEOs – in public companies spend their time as it relates to reporting results.
Enormous energy is spent by most CEOs and their staff on managing earnings. From the beginning to the end of every quarter the CFO and his/her staff pour over weekly outcomes in divisions and functions to understand revenues and costs in order to gain advance knowledge on likely results. Then, for the next several days/weeks the CFO’s staff, with the CEO and the leadership team, will pour over those results to make a myriad number of adjustments – from depreciation and amortization to deferring revenue changing tax structures or time-matching various costs – in order to further refine the reported results. Literally thousands of person-hours will be devoted to managing the reported results in order to provide the number they think is most appropriate. And this cycle is repeated every quarter.
But how many hours will be spent by that same CEO and the leadership team managing expectations about the company’s next year? How much time do these leaders spend developing scenarios, and communications, that will describe their vision, in order to manage investor expectations?
While every company has a CFO leading a large organization dedicated to reporting historical results, how many companies have a like-powered C level exec managing the expectations, and leading a large staff to create and deliver communications about the future?
It seems pretty clear that most management teams should consider reallocating their precious resources. Instead of spending so much time managing earnings, they should spend more time managing expectations. If we think about the difference between Xerox and Apple, one is quickly aware of the difference the CEOs made in setting expectations. People still wax eloquently about the future vision for Apple created by CEO Steve Jobs, who’s been dead 2.5 years, while almost no one can tell you the name of Xerox’ CEO. If you think about the difference between Sears and Tesla one only needs to think briefly about the difference between the numbers driven hedge fund manager and cost-cutting CEO Ed Lampert compared with the “visionary” communications of Elon Musk.
Investors should all think long term. Investors should care completely about what the next 3 to 5 years will mean for companies in which they place their money. What sales and earnings are reported from months ago is pretty meaningless. What really matters is what is yet to happen.
What we don’t need is a lot of time spent talking about old earnings. What we need is a lot more time spent talking about the future, and what we should expect from our investments.
