The following are products and companies which are on our Failure Watch
The following are the reasons I put these products and companies on the Failure Watch list, for those not familiar with Altman’s z-score, it is a formula that helps to predict the likelihood that a company will be facing bankruptcy within a 12 month period by looking at some key ratios such as its working capital and sales, a score below a 1.8 means it is very likely it will go bankrupt unless these underlying drivers change:
- American Apparel: its negative z score of -3.8 and inability to raise cash puts it on the road to bankruptcy unless something changes dramatically. The ouster of its salacious CEO Dov Charney combined with it’s advertising frequently accused of sexualizing children (which led it ads to be banned in England and a few other countries) have translated into image that is less edgy and more trashy. Perhaps due to Dov’s obsession with the lack of clothing on people, the American Apparel clothing line has remained lackluster along with its store decor.
- Angie’s List- Another victim of a poor z-score gets Angie’s on our Death Watch list, it’s -6.73 z-score makes it a likely candidate for bankruptcy. A 2014 investor class action law suit about dubious financial statements put a ding into Angie’s wholesome image. Its stock price went from a high of $25 to $4 in a 2 year period. Moreover, a business model based on paying for reviews is something that those under 30 find difficult to comprehend–making its long term growth prospects dim.
- BlackBerry-from approximately a 20% market share to less than a 1% smart phone market share, the Blackberry is definitely in trouble with revenue dropping to $966 million from $3.1 billion in the same quarter the year before. Its failure to see the emerging consumer market and app ecosystem doomed the company. Moreover it has yet to do anything to significantly change direction. Unless it gets bought up soon or launches a new product line for an under-served niche market, the company is likely to go under.
- Groupon-after rejecting the $6 billion purchase offer from Google, Groupon just never got its groove-on again, with its stock down to $4.20 from its $26 high. More troublesome is that its cash flow went from $31 million in 2013 to a negative $168 million by the end of 2014. Their small businesses customers often realize that most of the Groupon customers they attracted were there for the deal but gone tomorrow– and as a result a large percentage have not signed up again for Groupon-making vendor repeat purchase rates an issue. Moreover, many companies that are still using the service either have a cheap product that can retain those bargain hunters or offer inflated regular prices. An example is Jiffy Lube’s $52 price for an oil change which is discounted with the Groupon offer to $25 which is what any mail coupon will usually get you and what most non-dealership oil changes cost.
- Jamba Juice– this one also gets tripped up royally with Altman’s z-score which gives Jamba Juice a -13.61 score; that score is about as bad as it can get. Compare that to Sear’s z-score of -1.48. As with any franchise built around a fad, eventually the fad fades away along with the profits.
- K-mart: while it achieved $12 billion in sales in 2014 , this is still 67% less than a decade ago; they also went from 2,165 stores to 979 and the number continues to fall. Moreover, management, and its key investor Eddie Lampert, have not made any effort to revive the brand as seen by the lack of the capital reinvestment needed to remodel and improve the decaying stores.
- McDonalds: it’s slow response to the organic and healthier lifestyle trends and consumer attitudes; it’s bewildering (from ribs to salads), contradictory and extensive menu (it’s menu has grown 42.4% in the past seven years, from 85 items in 2007 to 121 items today, according to the Wall Street Journal coupled with its often dirty restrooms has put McDonalds on the slippery slope. Overall revenue for McDonald’s last year fell 2%, to $27.44 billion, and net profit dropped 15%, to $4.76 billion. The golden arches are tarnished and that perception is a hard thing to overcome.
- Sears: this iconic brand has sadly gone from one strategic and positioning blunder to another, e.g., the purchase of Land’s End and K-mart to the Kardashian Collection (stop by after you buy Kim Kardashian’s latest blouse and pick up a DieHard battery or Craftsman power tool on your way out). After closing some 200 stores last year, Sear’s is planning to close an additional 235 stores this year. Despite the closings, Sears currently has over $1 billion of negative cash flow….what more can one say.
- Shutterfly-intense price competition on what has become a commodity product—digital photography services such as those offered by Walmart and Walgreen’s along with the free sharing or online storage sites such as Instagram and Dropbox have come together to dampen future growth. The 10% decline in its customer base in 2014 vs the previous year is symptomatic of this and reflected in its stock price falling from $48 to $38 per share this year-all in all, the prospects look blurry for Shutterfly.
- Sprint-despite struggling to increase market share and profitability, Sprint decided to purchase the bankrupt Radio Shack locations, apparently many will re-open as Sprint-RadioShack locations selling the usual RadioShack products and approx. 1/3 of the store will be dedicated to Sprint products. I haven’t bought a phone at a retail store in at least 4 years…. Instead of focusing on its key drivers-like better network performance and simpler pricing plans–Sprint has paired up with a recent failure. Sprint is also running out of cash with a z-score of -.08 which while not as catastrophic as some of the others on the list, combined with its RadioShack purchase, push Sprint into the Top 10 list.