This is a lesson for all investors; no matter how well-known a brand might be, or entrenched a product is in the retail sector, if the management thinks they can sit back and relax, then they’re dead wrong. The business environment is so full of competition that, unless management isn’t always preparing for the future, they’re falling behind.
This is crucial when you’re doing your stock analysis, whether it is in the retail sector or any other industry. If management is sure of their strategy, almost to the point of arrogance, this is a huge warning flag. Sears is well-known to pretty much everyone in the U.S. retail sector. Starting out in the 19th century, the store had encountered tough times when Edward S. Lampert in 1994 bought a controlling stake through a merger with Kmart, another firm he bought under stress. He thought that, by combining the two, he could make it work.
This was a huge undertaking, especially for someone who isn’t from the retail sector. Lampert comes from the world of finance, buying and selling companies. When he did his stock analysis, he saw two companies that were cheap and generating cash, a good recipe for a finance guy. He also hoped to sell the real estate assets to free up some cash. Too bad he didn’t plan on the U.S. real estate crash. There haven’t been any store improvements or changes to the format; same old Sears. There were no bold initiatives or new products and there was a real estate market that crashed and a recession killing the retail sector and his stock analysis.
Research In Motion (RIM) was the opposite back in 1994; the kings of the smartphone and controlling a huge portion of that retail sector. They basically invented and made popular the “BlackBerry” and smartphones in general. Then RIM’s management made the mistake of sitting back and enjoying the company’s perch at the top. The view is nice from the top of the mountain, but the fall down is very painful. They didn’t see others in the cell-phone retail sector moving up the food chain. Either they ignored firms like Google Inc. (NASDAQ/GOOG, $628.00) or thought so little of their competitors that they thought no one can touch them. They are the kings! The king is dead my friends. Last reports have RIM phones at under 10% of the smartphone market and falling fast. Even as recently as 2008, RIM had an almost 40% market share and Google had two percent. Today Google has over 53% and rising.
The lesson: when doing your stock analysis, pay close attention to the management. Are they arrogant and aloof or are they constantly searching for new ideas and products? Firms that always seem to be in the news with new inventions and innovations are the ones to be considered for investments; not just in the retail sector, but every part of the economy.
A great example is Apple Inc. (AAPL), which over the last decade has introduced new innovations seemingly every year. This unquenchable thirst has paid off, as the shares, on a split-adjusted basis, have gone from $20.00 in 2003 to over $420.00 today.
Find the innovators in your stock analysis! That’s the only long-term method of creating shareholder value!