by Adam Hartung | Jun 30, 2015 | Current Affairs, In the Swamp, In the Whirlpool, Leadership
24×7 Wall Street just released its fourth annual analysis of the worst companies to work for in America. By looking across all four reports it is possible to identify likely problems which will be valuable for investors, employees (current and prospective,) suppliers and communities to know.
Trend 1- Low minimum wages & “Wage gap” issues remain a big deal
The lists are dominated by retailers. Of the 30 unique companies identified, exactly half (15) were retailers. A handful were on the list 2 or more years. Consistently these employees complained about low wages.
By paying minimum wage, and often refusing to hire employees full time, the companies keep costs of brick and mortar store operations lower.
However, this takes a toll on employee morale as overall pay does not meet minimum living standards. Further employees feel heavily overworked and stressed, while having no job security. Often this leads to employee unhappiness with senior management, frequently offering low evaluations of the CEO – who makes 1,000 times their annual earnings.
As employees fight for higher wages, and a reduction in the “wage gap,” it will apply pressure to the sustainability of these retailers who rely on very low pay to maintain (or enhance) profits. The trend to a higher minimum wage will challenge profit growth – or maintenance – in these companies.
Trend 2 – Employees often “see change coming” and become negatively vocal
Jos. A Banks jumped onto the list as #4 in 2013. Just before a major shake-up and being acquired by Men’s Wearhouse. Family Dollar also appeared on the list in 2014 (#9,) only to be embroiled in a takeover battle with Dollar General, and finally aquired by Dollar Tree within 7 months. Office Max appeared on the list (#5) in 2012, and was acquired by Office Depot 8 months later. And, of course, Radio Shack made the list in 2012 (#3,) 2013 (#5) and 2014 (#11) only to file bankruptcy in 2015.
Employees can see when something bad is impending, likely jeopardizing their livelihoods, and start talking about it.
Similarly, growing internet threats are often picked-up by employees. hh Gregg employees started complaining loudly in 2014 (#8) as their 100% commission compensation became threatened by a growing Amazon.com. And that same year Books-A-Million was #1 on the list, as part time staffers saw the same advancing Amazon. And in 2012 Game Stop (#10) employees could see how the advancing Netflix and Hulu threatened the “core business” and started to light up the complaint section.
Trend 3 – Ignoring employee unhappiness while focusing on earnings can portend a disaster
Sears and KMart (collectively Sears Holdings) made the list in 3 of the 4 years. The stock was $66 in June, 2011, and $55 in 6/12 when it made #6. By 6/13 it had declined to $39, and made the list at #7. Starting 6/14 the stock was reasonably flat, and missed the list. But then in 6/17 the stock fell to 27 and reappeared twice – as both Sears and KMart.
Employees have consistently expressed their dismay with CEO Ed Lampert, and 80% actively dislike his leadership. After the Radio Shack experience, there is ample reason to listen more to these employees than the CEO who keeps promising a turnaround – amidst a long string of large quarterly losses and declining sales.
But this also opens the door for looking at some stocks that have defied employee unrest. Dillard’s made the list all 4 years. In 2012 the stock rose from $54 to $66, yet appeared #2 on the list. In 2013 the stock rose to $85 as it made the list #3. 2014 the stock made it to $119, and was sixth. In 2015 the stock peaked at $149, but has recently declined to $111 as it made the list #2.
Similarly Express Scripts rose from $53 in 2012 to $62 in 2013 when it appeared on the list in position #2. In 2014 it rose to $71 as it remained #2. And it 2015 the stock is at $85 as it topped the list #1.
It would be worthwhile to look at the clues employees are sending. Express Scripts employees are loudly complaining (louder than literally any other company) across multiple years of being overworked, overstressed, underpaid and without any job security. As are Dillard’s employees, who are the most outspoken in retail. How long will profit improvements be sustainable in these companies?
While the data is less clear on Dollar General, it appeared on the list as #4 in 2013. Then Family Dollar appeared on the list as #9 in 2014. Dollar General subsequently tried buying Family Dollar, and reappeared on the list as #10 in 2015. What are employees saying about the sustainability of the “dollar store” segment in a very tough retail market with growing internet competitors?
Any CEO can slash employee costs and payroll for a few years, but at some point the model simply collapses – aka, Sears Holdings and Radio Shack. Or there is a loss of identity as suffered by Office Max, Jos. A Banks and Family Dollar. It would be worthwhile for anyone to listen carefully to the feedback of these employees before investing in company equity, investing one’s livelihood as an employee, investing one’s resources to be a supplier, or investing one’s tax base as a community official.
There are a number of “one off” issues on the list. Companies appear once primarily due to bad CEO performance (Xerox, #5 this year, HP #8 in 2012 as the revolving door on the CEO office reached a high pitch.) Or due to some change in market competition.
But it is possible to look through these issues – which could become future trends but show limited insight today – to see that an aggregated employee view of leadership offers insights not always found in the P&L or management’s discussion of earnings. If you choose to put your resources into these companies, be aware of the risks warnings being sent by employees!
Please refer to the 24x7WallStreet.com site for deeper information on how the list was compiled, who is on each list, and their editor’s opinions of employee comments. 24×7 list in 2015 – 24×7 list in 2014 – 24×7 list in 2013 – 24×7 list in 2012
by Adam Hartung | Mar 9, 2015 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership
Best Buy, the venerable electronics retailer, is hitting 52 week highs. Coming off a low of $24 in April, 2014 the current price of about $40 is a 67% increase in just 10 months. Analysts are now cheering investors to own the stock, with Marketwatch pronouncing that the last bearish analyst has thrown in the towel.
If you are a trader, perhaps you want to consider this stock. But if you aren’t an investment professional, and you buy and hold stocks for years, then Best Buy is not a stock you should own.
The bullish case for owning Best Buy is based on recovering sales per store, and recovering earnings, after a reduction in the number of stores, and employees, lowered costs. Further, with Radio Shack now in bankruptcy sales are showing an uptick as customers swing over. And that is expected to continue as Sears closes more stores on its marches toward bankruptcy. Additionally, it is hoped that lower gasoline prices will allow consumers to spend more on electronics and appliances at Best Buy.
But, this completely ignores the trend toward on-line retail sales, and the long-term deleterious impact this trend will have on Best Buy. According to the U.S. Census Bureau, on-line sales as a percent of all retail have grown from less than 2.4% in 2005 to over 7.6% by end of 2014 – more than tripling! But more critical to this discussion, all retail sales includes automobiles, lumber, groceries – lots of things where there is little or no online volume.
As most folks know, the number one category for online sales is computers and consumer electronics, which consistently accounts for about 20% of ALL online retail. In fact, about 25% of all consumer electronics are sold online. So the growth in online retail is disproportionately in the Best Buy wheelhouse. The segment where Best Buy competes against streamlined online retailers such as NewEgg.com, ThinkGeek.com and the ever-dominant Amazon.com.
So while in the short term some traditional retail customers will now shift demand to Best Buy, this is not unlike the revenue “bounce” Best Buy received when Circuit City failed. Short term up, but the long term trend continued hammering away at Best Buy’s core market.
This is a big deal because the marginal economic impact of this shift is horrific to Best Buy. In traditional retail most costs are “fixed,” meaning they can’t be changed much month to month. The cost of real estate, store maintenance, utilities and staff cannot be easily adjusted – unless there is a decision to close a gob of stores. Thus losing even a few sales, what economists call “marginal” sales, wreaks havoc on earnings.
Back in 2010 and 2011 Best Buy made a net income (’12 and ’13 were losses) of about 2.6% – or about $2.60 on every $100 revenue. Cost of Goods sold is about 75% of revenue. So on $100 of revenue, $25 is available to cover fixed costs. If revenue falls by just $10, Best Buy loses $2.50 of margin to cover fixed costs. Remember, however, that the net income is only $2.60. So losing 10% of revenue ($10 out of the $100) means Best Buy loses $2.50 of contribution to fixed costs, and that is deducted from net income of $2.60, leaving Best Buy with a meager 10cents of profitability. A 10% loss of revenue wipes out 96% of profits!
Now you know why retailers who lose even a small part of their sales are suddenly closing stores right and left.
Looking forward, online retail sales are forecast to grow by another 57%, reaching 11% of total retail by 2018. But, as we know, this is disproportionately going to be driven by consumer electronics. Which means that while sales for Best Buy stores are up short term, long term they will plummet. That means there will be more store closings, and layoffs as sales shrink. And, increasingly Best Buy will have to compete head-to-head online against entrenched, leading competitors who have been stealing market share for 10+ years.
If you want to trade on the short-term uptick in revenue, and return to slight profitability, then hold your breath and see if you can outsmart the market by picking the right time, and price, for buying and selling Best Buy. But, if you like to invest in strong companies you expect to grow for another 5 years without having to be a market timer, then avoid Best Buy.
Quite simply, it is never a good idea to bet against a long term trend. Short term aberrations will happen, and it may look like the trend has changed. But the trend to online commerce is picking up steam, not reducing. If you want to invest in retail, you want to invest in those companies that demonstrate they can capture the customer’s revenue in the growing, online marketplace.
by Adam Hartung | Jan 29, 2015 | Current Affairs, In the Whirlpool, Leadership, Web/Tech
This week Yahoo announced it is spinning off the last of its Alibaba holdings. This is a big deal, because it might well signal the end of Yahoo.
Yahoo created internet advertising. Yahoo was once the #1 home page for browsers across America. But the company has floundered for years, riddled with CEO problems, a contentious Board of Directors and no strategy for dealing with Google which overtook it in all markets.
To much fanfare the Board hired Marissa Mayer, a Google wunderkind we were told, in July, 2012 to mount a serious turnaround. And during her leadership the company’s stock value has tripled – from about $14.50/share to about $43.50. You would think investors would be thrilled and the company would be on the right track.
Only almost all that value creation was due to a stock investment made in 2005 – when Jerry Yang invested $1B to buy 40% of Alibaba. And Alibaba in 2014 became the most valuable IPO in history.
Yahoo today is valued at about $46B. The Alibaba shares being spun out are valued at between $40B and $44B. Which means that after adjusting for the ownership in Yahoo Japan (valued at $2.3B) the core Yahoo ad and portal business is worth between $2B and $4.7B. With just over $1B shares outstanding, that puts a value on Yahoo’s core business of between $2.00-$4.70/share – or about 1/6 to 1/3 the value when Ms. Mayer became CEO.
A highest value of $4.7B for the operating business of Yahoo puts it on par with Groupon. And worth far less than competitors Google ($347B) and Facebook ($212B). Even upstart, and often maligned, social media companies Twitter ($24B) and LinkedIn ($27B) have valuations 5 times Yahoo.
Unfortunately, this latest leader and her team haven’t been any more effective at improving the company’s business than previous regimes. Under CEO Mayer Yahoo used gains from Alibaba’s valuation to invest about $2.1B in 49 outside companies – with $2B of that being acquisitions of technology companies Flurry ($200M), BrightRoll ($640M) and Tumblr ($1.1). Under the most optimistic view of Yahoo, leadership spent 40% of the company’s value in acquisitions that have made no difference to ad revenues or profits.
In fact, Yahoo’s business revenues, and profits, have declined for 6 consecutive quarters. Despite the CEO’s mandate that employees could no longer work from home. A kerfuffle that proved yet another management distraction, and apparently an effort to cut staff without it looking like a layoff.
Meanwhile there have been big efforts to boost people going to the Yahoo portal. Such as hiring broadcaster Katie Couric to beef up the news section, and former New York Times tech columnist David Pogue to deepen tech coverage and New York Times Magazine political writer Matt Bai to draw in more readers. But these have done nothing to move the needle.
Consistently declining display advertising has left search ads a bigger, and more profitable, business. And while Yahoo’s CEO has been teasing ad agencies that she might begin another big brand campaign, including TV, to bring Yahoo more attention – and hopefully more advertisers – there is no evidence anyone cares as more and more dollars flow to “programmatic” ad buying where Google is king. In the digital ad marketplace Google has 31% share, Facebook 7.75% share and Yahoo a meager 2.36% share.
Soon there will be little left of the once mighty Yahoo. It has pretty much lost relevancy. Large investors are crying for a merger with AOL, whose inability to grow its portal, ad and media businesses has left its market cap at a mere $3.7B. But combining two companies that are market irrelevant, and declining, will probably have the same outcome as happened when merging KMart and Sears. The Yahoo growth stall remains intact, and revenues will decline along with profits as the market continues shifting to powerful and growing competitors Google, Facebook and other social media companies. Only now Yahoo’s leaders won’t have the Alibaba value mountain to hide behind
by Adam Hartung | Jan 14, 2015 | Investing, Retail, Trends
Retail sales fell .9% in December. Even excluding autos and gasoline, retail sales fell .3%. Further, November retail sales estimates were revised downward from an initial .7% gain to a meager .4%, and October sales advances were revised downward from a .5% gain to a mere .3%. Sales were down at electronic stores, clothing stores and department stores – all places we anticipated gains due to an improving economy, more jobs and more cash in consumer pockets.
Whoa, what’s happening? Wasn’t lower gasoline pricing going to free up cash for people to go crazy buying holiday gifts? Weren’t we all supposed to feel optimistic about our jobs, higher future wages and more money to spend after that horrible Great Recession thus leading us to splurge this holiday?
There were early signals that conventional wisdom was going to be wrong. Back on Black Friday (so named because it is supposedly the day when retailers turn a profit for the year) we learned sales came in a disappointing 11% lower than 2013. Barron’s analyzed press releases from Wal-Mart, and discerned that 2014 was a weaker Black Friday than 2013 and probably 2012. Simply put, fewer people went shopping on Black Friday than before, despite longer store hours, and they bought less.
So was this really a horrible holiday?
Retail store sales are only part of the picture. Increasingly, people are shopping on-line – and we all know it. According to ComScore, on-line sales made to users of PCs (this excludes mobile devices) were up 17% on Cyber Monday, in stark contrast to traditional brick-and-mortar. Exceeding $2B, it was the largest on-line retail day in history. The Day after Cyber Monday sales were up 27%, and the Green Monday (one week after Cyber Monday) sales were up 15% (all compared to year ago.) Overall, the week after Thanksgiving on-line sales rose 14%, and on Thanksgiving Day itself sales were up a whopping 32%. The week before Christmas (16th-21st) on-line sales surged 18%. According to IBM Digital Analytics the on-line November-December sales were up 13.9% vs. 2013.
The trend has never been more pronounced. Regardless of how much people are going to spend, they are spending less of it in traditional brick-and-mortar retail, and more of it on-line.
So, what about Wal-Mart? The chain remains mired in its traditional way of doing business. Even though same-store sales have been flat-to-down most of the last 2 years, and the number of full-line stores has declined in the USA, the chain remains committed quarter after quarter to defending its outdated success formula. Even in China, where Alibaba has demonstrated it can grow on-line ecommerce revenues more than 50%/year, Wal-Mart continues to try growing with a physical presence – even though it has been a tough, unsuccessful slog.
Yet, despite its bribery scandal in Mexico undertaken to prop up revenues, lawsuits due to over-worked, stressed truck drivers having accidents on double shifts killing and injuring people, and an inability to grow, Wal-Mart’s stock trades at near all-time highs. The stock has nearly doubled since 2011, even though the company is at odds with the primary retail, and demographic, trends.
On the other end of the spectrum is Amazon.com. Amazon is still growing revenues at over 20%/year. And introducing successful new publishing and internet service businesses, expanding same day delivery (and even one hour delivery) in urban markets like New York City, as well as expansion of its Prime service to include more original programming with famed director Woody Allen after winning the Golden Globe award for its original series Transparent.
However, several analysts were trash talking Amazon in 2014. 20% growth has them worried, given that the company once grew at 40%. Even though Amazon’s growth is a serious reason companies like Wal-Mart cannot grow. And there is the perennial lack of profitability – including a larger than expected loss in the second quarter ; a loss which included a $170M write-off on FirePhones which never really found a customer base. The latter item led to a Fast Company brutal lambasting of CEO Jeff Bezos as a micro-manager out-of-touch with customers.
This lack of analyst support has seriously hurt Amazon.com share performance. From 2010 to early 2014 the stock quadrupled in value from $100 to $400. But over the past year the stock has fallen back 25%. After dropping to $300/share in April, the stock has rallied but then retrenched no less than 3 times, and is now trading very close to its 52 week low. And, it shows no momentum, trading below its moving average.
Which is why investors in Wal-Mart should sell, and reinvest in Amazon.com.
All the trends point to Wal-Mart being overvalued. Its revenues show no signs of achieving any substantial growth. And, despite its sheer size, all retail trends are working against the behemoth. It has been trying to find a growth engine for 10 years, but nothing has come to fruition – including big investments in offshore markets. The company keeps trying to defend & extend its old success formula, thus creating a bigger and bigger gap between itself and future market success.
Simultaneously, Amazon.com continues to invest in major developing trends. From publishing to television programming to cloud/web services and even general retail, everything into which Amazon invests is growing. And even though this is a company with $100B in revenues, it is still growing at a remarkable 20%. While some analysts may wish the investment rate would slow, and that Amazon would never make mistakes (like Firephone,) the truth is that Amazon is putting money into projects which have pretty good odds of making sizable money as it helps change the game in multiple markets.
Think of investing like paddling a canoe. When you are investing against trends, it’s like paddling up the river. You can make progress, but it is hard. And, one little mistake and you easily slip backward. Lose any momentum at all and you could completely turn around and disappear (like happened to Circuit City, and now both Sears and JCPenney.) When you invest with the trends it is like paddling down the river. The trend, like a current, keeps you moving in the right direction. You can still make mistakes, but the odds are quite a lot higher you will make your destination easily, and with resources to spare. That’s why the sales results for December are important. The show traditional retailers are paddling up river, while on-line retailers are paddling down-river.
I don’t know if Wal-Mart’s stock value has peaked, but it is hard to understand why anybody would expect it to go higher. It could continue to rise, but there are ample reasons to expect investors will figure out how tough future profits will be for Wal-Mart and dispose of their positions. On the other hand, even though Amazon.com could continue to slide down further there are even more reasons to expect it will have great future quarters with revenue gains and – eventually – those long-sought-after profits that some analysts seek. Meanwhile, Amazon is investing in projects with internal rates of return far higher than most other companies because they are following major trends. Odds are pretty good that in a few years the trends will make investors happy they own Amazon, and dropped out of Wal-Mart.
by Adam Hartung | Sep 17, 2014 | Current Affairs, Disruptions, In the Whirlpool, Leadership, Lock-in
Sony was once the leader in consumer electronics. A brand powerhouse who’s products commanded a premium price and were in every home. Trinitron color TVs, Walkman and Discman players, Vaio PCs. But Sony has lost money for all but one quarter across the last 6 years, and company leaders just admitted the company will lose over $2B this year and likely eliminate its dividend.
McDonald’s created something we now call “fast food.” It was an unstoppable entity that hooked us consumers on products like the Big Mac, Quarter Pounder and Happy Meal. An entire generation was seemingly addicted to McDonald’s and raised their families on these products, with favorable delight for the ever cheery, clown-inspired spokesperson Ronald McDonald. But now McDonald’s has hit a growth stall, same-store sales are down and the Millenial generation has turned its nose up creating serious doubts about the company’s future.
Radio Shack was the leader in electronics before we really had a consumer electronics category. When we still bought vacuum tubes to repair radios and TVs, home hobbyists built their own early versions of computers and video games worked by hooking them up to TVs (Atari, etc.) Radio Shack was the place to go. Now the company is one step from bankruptcy.
Sears created the original non-store shopping capability with its famous catalogs. Sears went on to become a Dow Jones Industrial Average component company and the leading national general merchandise retailer with powerhouse brands like Kenmore, Diehard and Craftsman. Now Sears’ debt has been rated the lowest level junk, it hasn’t made a profit for 3 years and same store sales have declined while the number of stores has been cut dramatically. The company survives by taking loans from the private equity firm its Chairman controls.
How in the world can companies be such successful pioneers, and end up in such trouble?
Markets shift. Things in the world change. What was a brilliant business idea loses value as competitors enter the market, new technologies and solutions are created and customers find they prefer alternatives to your original success formula. These changed markets leave your company irrelevant – and eventually obsolete.
Unfortunately, we’ve trained leaders over the last 60 years how to be operationally excellent. In 1960 America graduated about the same number of medical doctors, lawyers and MBAs from accredited, professional university programs. Today we still graduate about the same number of medical doctors every year. We graduate about 6 times as many lawyers (leading to lots of jokes about there being too many lawyers.) But we graduate a whopping 30 times as many MBAs. Business education skyrocketed, and it has become incredibly normal to see MBAs at all levels, and in all parts, of corporations.
The output of that training has been a movement toward focusing on accounting, finance, cost management, supply chain management, automation — all things operational. We have trained a veritable legion of people in how to “do things better” in business, including how to measure costs and operations in order to make constant improvements in “the numbers.” Most leaders of publicly traded companies today have a background in finance, and can discuss the P&L and balance sheets of their companies in infinite detail. Management’s understanding of internal operations and how to improve them is vast, and the ability of leaders to focus an organization on improving internal metrics is higher than ever in history.
But none of this matters when markets shift. When things outside the corporation happen that makes all that hard work, cost cutting, financial analysis and machination pretty much useless. Because today most customers don’t really care how well you make a color TV or physical music player, since they now do everything digitally using a mobile device. Nor do they care for high-fat and high-carb previously frozen food products which are consistently the same because they can find tastier, fresher, lighter alternatives. They don’t care about the details of what’s inside a consumer electronic product because they can buy a plethora of different products from a multitude of suppliers with the touch of a mobile device button. And they don’t care how your physical retail store is laid out and what store-branded merchandise is on the shelves because they can shop the entire world of products – and a vast array of retailers – and receive deep product reviews instantaneously, as well as immediate price and delivery information, from anywhere they carry their phone – 24×7.
“Get the assumptions wrong, and nothing else matters” is often attributed to Peter Drucker. You’ve probably seen that phrase in at least one management, convention or motivational presentation over the last decade. For Sony, McDonald’s, Radio Shack and Sears the assumptions upon which their current businesses were built are no longer valid. The things that management assumed to be true when the companies were wildly profitable 2 or 3 decades ago are no longer true. And no matter how much leadership focuses on metrics, operational improvements and cost cutting – or even serving the remaining (if dwindling) current customers – the shift away from these companies’ offerings will not stop. Rather, that shift is accelerating.
It has been 80 years since Harvard professor Joseph Schumpeter described “creative destruction” as the process in which new technologies obsolete the old, and the creativity of new competitors destroys the value of older companies. Unfortunately, not many CEOs are familiar with this concept. And even fewer ever think it will happen to them. Most continue to hope that if they just make a few more improvements their company won’t really become obsolete, and they can turn around their bad situation.
For employees, suppliers and investors such hope is a weak foundation upon which to rely for jobs, revenues and returns.
According to the management gurus at McKinsey, today the world population is getting older. Substantially so. Almost no major country will avoid population declines over next 20 years, due to low birth rates. Simultaneously, better healthcare is everywhere, and every population group is going to live a whole lot (I mean a WHOLE LOT) longer. Almost every product and process is becoming digitized, and any process which can be done via a computer will be done by a computer due to almost free computation. Global communication already is free, and the bandwidth won’t stop growing. Secrets will become almost impossible to keep; transparency will be the norm.
These trends matter. To every single business. And many of these trends are making immediate impacts in 2015. All will make a meaningful impact on practically every single business by 2020. And these trends change the assumptions upon which every business – certainly every business founded prior to 2000 – demonstrably.
Are you changing your assumptions, and your business, to compete in the future? If not, you could soon look at your results and see what the leaders at Sony, McDonald’s, Radio Shack and Sears are seeing today. That would be a shame.
