There probably isn’t a retailer out there that is truly too big to fail, but there are reasons why some hang on longer than others, and some hang on just long enough to ultimately survive. Why? Maybe sheer magnitude is as good a reason as any.
Among those listed above, Rite Aid may have already turned the corner. I used to say that the retail expenditure pie was ultimately only large enough for two players in any one merchandise category to financially thrive. I still stand by that viewpoint, generally - but there are exceptions to every rule.
With CVS and Walgreens battling it out for pharmacy supremacy over the years, Rite Aid was left to dig out of a hole many thought was too deep. Broken inventory and poor store presentation led to declining sales during a period when it was saddled with tremendous debt following the Brooks/Eckerd acquisition in 2007. But in 2012, the chain showed signs of life, with increasing script business and hints of turning a profit. In 2013, the company is expected to net its first profit in years. With an aging US population, increased life expectancy, and the Affordable Care Act, which is expected to provide health care coverage to an additional 27 million people in 2014, Rite Aid may be on the road to recovery.
JCPenney has for the moment lifted itself from the depths of despair (and a potential Chapter 11 filing) and may well be back on the road to mediocrity. Following the disastrous Ron Johnson era, and under the leadership of Myron Ullman, who returns to his former CEO post, that’s probably a best case scenario. The company saw a 0.9% comp store sales gain in October, the first since December 2011. At the same time, online sales grew by 37.6% (don’t get too excited, though - September comps were down 4%). The sales improvement came in part from Penney getting back to its roots and restoring inventory levels of key private label merchandise, something Ron Johnson discarded virtually the minute he arrived.
What is it they say: “You can put lipstick on a pig, but it’s still a pig!”? That’s why I say JCPenney is headed back only as far as mediocrity. Part of the reason is competition, and part of the reason is an aging customer base. Penney’s time has passed, and when a company has 100 years of history behind it, it’s tough to change its image. I think we’ll know a lot more about Penneys’ potential recovery once we get past the 2013 holiday season.
Which leads us to Sears: I could simply say that “I wouldn’t touch this one with a ten foot pole” - but I won’t. It’s inconceivable, however, that a publicly traded retail chain can have 26 consecutive quarters of declining sales and still be around to talk about it. On the heels of the Orchard Supply spin-off in 2011, and still desperate for cash even after receiving $446.5 million from the Sears Hometown and Outlet Store businesses last year, Sears Holdings announced that it is now considering a similar move regarding the separation of its Lands’ End and Sears Auto Center businesses. In addition, Sears is off-loading Canadian real estate, including selling a 50% stake in eight Canadian properties for $300 million, ending the leases on four Sears Canada stores, and closing its flagship store in Toronto, a move the netted another $400 million. The question now is how much more Eddie Lampert can slice off before there is nothing left on the bones. It seems that it’s just a matter of time, but is Sears just hanging on or is it too big to fail?
Are any of these perennial (and perennially troubled) retail dinosaurs - Rite Aid, Best Buy, JCPenney, Sears - truly too big to fail?
Bob Sheehan, Vice President of Research