Well, so much for the reinvention of J.C. Penney (NYSE:JCP). Shares are off 35% since January as the not-so-magical turnaround plan of former Apple (NASDAQ:AAPL) retail guru Ron Johnson has fallen flat.
JCP earnings were ugly. The retailer posted a wider-than-expected loss on a 23% plunge in sales. At stores open a year or more, sales fell 22%. And that’s not even the worst news — Penney actually withdrew its guidance for 2012.
That’s right, things are so bad that the company wants to just stop talking about it and hope you forget.
Perhaps the most cutting article out there is an ugly review of false promises and excuses at Penney from blogger Jeff Matthews. This wraps up not only the horrible earnings but also the painful past of this flailing retailer.
The stock has clawed back some of its losses recently, and Dan Burrows of InvestorPlace was right on the money when he told investors to get out while the getting is good after this dead-cat bounce. Simply put, don’t touch JCP with a 10-foot pole.
More important, investors should take the cautionary tale of Penney to heart. Typically, a “turnaround” plan is greeted with a fresh-faced — and highly compensated — CEO and silly promises that sound like a bad Mad Lib. They simply fill out this vapid sentence:
“We are excited for the future, becoming a new class of _________ creating a new category for ______ and refocusing on our customers with competitive pricing and innovative _________. Obviously we don’t sweat the week-to-week or month-to-month numbers, because this kind of reinvention takes time. But we are confident in our long-term goal to become the leader in ________.”
Obviously, this is all a load of hooey.
So aside from JCP, here are three listless companies that investors shouldn’t dare hope for a turnaround in. That’s not to say a reinvention can’t happen … but given the track record of Wall Street turnaround failures, you don’t want to bet your money on a change in direction in these companies.
I know Marissa Mayer is everyone’s favorite CEO now that she has jumped ship from Google (NASDAQ:GOOG) to Yahoo (NASDAQ:YHOO). But how many turnaround plans do investors have to suffer? And even if Mayer is more capable, the organic trend is down as “portal” traffic continues to see headwinds at sites like Yahoo, AOL (NYSE:AOL) and Microsoft (NASDAQ:MSFT) media network MSN. The rise of social media and a diverse network of specialized Internet sites leaves digital media’s big names in the same boat as newspapers — an inch deep and a mile wide, with no cohesive readership.
We’ve seen this movie play out for some time at Yahoo, so don’t bet on a surprise ending. Shares are down about 40% from 2008 and 60% from 2005 for a reason.
I won’t go so far as to say that ALL bricks-and-mortar retail is dead, since some outfits do provide good customer service and cater to a niche. However bricks-and-mortar retail of any media — movies, books, music or games — has been diagnosed with a terminal disease for some time.
So, don’t believe any of the crap about a GameStop (NYSE:GME) turnaround. This stock is down 60% since pre-recession valuations for good reason. Yes, it has no debt and a bunch of cash. Yes, it pays a 3.4% dividend. Yes, it has a P/E of under 6.
But no, the talk about buyouts (most recently in Barron’s) is a bunch of silliness. Nobody bought Blockbuster or Borders before they went under, and nobody is coming to save GameStop. And without a white knight, the company’s evolution to a provider of downloadable games from a peddler of used copies of last year’s Madden titles is too little and too late.
Another turnaround in digital media that may never happen is Netflix (NASDAQ:NFLX). After a pummeling in 2011 following its ill-advised Qwikster scheme and the hubris of CEO Reed Hastings, you might think that this movie streamer has stabilized. That’s true, to some extent. Revenue growth has flattened, but it’s still expanding at a respectable 10% to 15% annual clip.
However, profits have evaporated on charges from the strategic stupidity of this company — and the fiscal 2012 forecast at Netflix isn’t much better than break-even. Worse, the fiscal 2013 estimate is for the lowest profit since 2008. Not a good sign. And despite a 75% drop, NFLX stock is still saddled with a nosebleed forward P/E of above 60 right now.
This alone is reason for concern, and when you examine the rise of Hulu and the pervasiveness of streaming competition in including Prime membership from Amazon (NASDAQ:AMZN) … well, it’s hard to imagine Netflix will ever return to its former glory. And there’s a good chance it may never overcome the setbacks of last year.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.