All retailers go to zero

David MoonBlog

by David Moon

Electronics and appliance retailer hhgregg last week announced it would be liquidating its assets, closing all of its stores and laying off its 3,700 employees. Days later Payless ShoeSource submitted its own bankruptcy filing.

Investors should not be surprised. My personal, long-held theory is that the stock price of every retailer eventually goes to zero. Retail is a hard business, with few barriers to entry, large working capital requirements and almost no ability to maintain trade secrets. Champs always knows what shoes Dick’s has on its shelves.

It is common to blame 20 years of retail bankruptcies and closures on Wal-Mart. Businesses such as Kmart, Montgomery Ward, Circuit City, Computer City, Woolworth’s and Heilig-Meyers all attributed part of their demise to the low prices and vendor bargaining power of the Bentonville behemoth. So did local and regional stores like Miller’s, Profitt’s, Parisian, Caster-Knott and Cain-Sloan. And so did thousands of mom-and-pop businesses.

The problem with that convenient theory is that retailers failed long before Wal-Mart. The retail giant wasn’t the core cause of those retailers’ downfall; failure is part of the natural rhythm of the retail industry.

Before Wal-Mart, failing retailers blamed their problems on Kmart.

Kmart filed for bankruptcy in 2002.

After bankruptcy, Kmart purchased Sears, a textbook example of throwing bad money after bad. Sears was another future financial failure whose time had passed. For much of the 20th century, Sears was the envy of the retail world. The company’s 500-page catalogue was effectively a mail-order version of Amazon. Sears is now on the brink of its own bankruptcy.

The retail industry is tough, especially for a company with a significant seasonal apparel business. It only takes one wrong guess about this fall’s popular fashions to put a company onto an inventory liquidation treadmill that can ruin its results for a year.

Be wary if a company’s excuse for poor results is repeatedly illogical. Goody’s Family Clothing repeatedly blamed disappointing results on poor weather. Weather was not its problem. When Lululemon recently announced disappointing earnings, it blamed the results on a lack of “depth in color” in its spring assortment. I thought the whole appeal of Lululemon leggings was their lack of depth in color.

I once believed Wal-Mart was the exception to my retail rule. The company’s products are widely diversified, creating a non-seasonal magnet that attracts 140 million shoppers weekly. But even Wal-Mart realizes it can no longer ignore the more diversified and convenient Amazon. To restart its online business with a more robust infrastructure, Wal-Mart spent $3.3 billion last year to purchase the online retailer Jet.

If the move doesn’t stem Amazon’s pressure on Wal-Mart, don’t blame Amazon. It was going to be somebody.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN)