The 24/7 Wall St. “America’s Worst Run Companies” story is less than five weeks old. Already the CEOs of two of the eight companies on the list have either resigned have been fired. The head of Mattel Inc. (NYSE: MAT) and McDonald’s Corp. (NYSE: MCD) are both gone.
The 24/7 Wall St. analysis should make the other six CEOs very anxious. Their boards probably look at them the same way the Mattel board looked Brian Stockton and McDonald’s board did at Don Thompson. This is particularly true at companies where revenue performance is by far the primary issue: International Business Machines Corp. (NYSE: IBM), Avon Products Inc. (NYSE: AVP) and GameStop Corp. (NYSE: GME). GameStop shares have underperformed the S&P 500 over the past year. The share prices of IBM and Avon have completely collapsed over the same period.
A look at the original story posted on December 19, 2014:
What makes a company truly poorly run? Businesses make mistakes almost daily, and industries can transform rapidly, eroding even a market leader’s competitive advantage.
Companies that are struggling may have declining fundamentals, such as revenues and earnings. Ultimately, however, it is the market that determines how well, or poorly, a company is run. All of the eight businesses identified by 24/7 Wall St. as America’s worst run companies declined in three key measures — earnings per share, revenue, and share price — in the last year.
In order to be considered truly poorly run, a company must have a track record of missed opportunities, mismanaged risks, poor operational decisions, or executive malfeasance. In short, a company must demonstrate a pattern of decision making that calls into question the ability of its management and directors to adequately provide returns to shareholders.
While the U.S. stock market has enjoyed a rally in the past five years, the worst run companies reviewed by 24/7 Wall St. failed to match the S&P 500 rise of 82% during that time. Some of these companies have actually lost market value over that stretch. Avon Products (NYSE: AVP) is the most notable example. Avon’s share price tumbled nearly 74% over the last five years, as its China business transformed from a huge growth opportunity into a boondoggle.
Some of the poorly managed companies have missed opportunities on which others capitalized. Among the best examples is McDonald’s (NYSE: MCD), which did not follow fast-casual rivals in creating a menu that was simplified and customizable. GameStop (NYSE: GME), too, missed a major opportunity to make a name for itself in digital distribution for video games, a market that game maker Valve entered over a decade ago when it launched Steam.
In other instances, companies have made poor operational decisions. An example is the slow pace at which Staples (NASDAQ: SPLS) has closed locations. Staples built an online business without adequately downsizing its brick-and-mortar locations, even though sales did not justify the large number of stores.
In some cases, management decisions may not have had shareholders’ best interests at heart. Freeport-McMoRan’s (NYSE: FCX) acquisition of two oil producers in 2012 immediately raised questions of self-dealing and led to a shareholder lawsuit. The lawsuit alleged that, with six board members holding seats on one of the companies involved, Freeport directors were effectively using company funds to bail out their own investment.
Many of these companies are not without hope. McDonald’s could outperform if it is able to again draw in customers with an improved menu. Mattel (NYSE: MAT), too, might surge if kids rediscover the appeal of Barbie. And IBM (NYSE: IBM) may rise if the company becomes more competitive in cloud computing.
1. International Business Machines
> Industry: IT consulting and other services
> Revenue (last 12 months): $97.4 billion
> 1-year share price change: -8.9%
IBM, which continues to be a market leader in IT consulting and hardware, has struggled to respond to the shift to cloud computing, as businesses moved from maintaining servers and mainframes to using cloud storage and software. While IBM continues to rely heavily on its legacy businesses, competitors, including Amazon and Rackspace, are well ahead in providing cloud infrastructure services.
In the first three quarters of the year, revenues of the company’s hardware unit declined by 16%, and the unit’s profitability has continued to erode — its pretax loss grew to $354 million. And although IBM’s cloud computing sales are expanding rapidly, the company’s annualized $3.1 billion in cloud services revenue are a fraction of its nearly $100 billion in total revenues.
The struggling hardware business hurts IBM’s other segments, because the company’s units are often dependent on each other — hardware is often sold with software and services attached to it, for instance. IBM’s global services external revenue declined by 2.7% in the third quarter from the same time a year ago.
One of the company’s biggest problems in recent years was also largely self-induced — IBM wanted to simultaneously grow the lower margin cloud business and raise adjusted earnings to $20 per share by 2015. Following the company’s recent poor quarter, however, IBM said it would ditch that goal.
> Industry: Restaurants
> Revenue (last 12 months): $28.0 billion
> 1-year share price change: -4.3%
For decades, McDonald’s was the model for how to build a global fast food brand. Recently, however, the company has been struggling. In November, the company announced that global comparable sales fell 2.2% year-over-year. In the United States, top-line performance was even worse, with comparable sales down 4.6%.
One regularly cited problem for McDonald’s is young customers increasingly favoring fast-casual brands such as Chipotle and Panera Bread. These chains offer fresher food and straightforward, yet highly-customizable, menus. Notably, McDonald’s once owned Chipotle before spinning off the brand in 2006.
Recently, McDonald’s announced plans to pare down its menu in order to address frequent criticism that it is too complex. However, investors may want to ask why McDonald’s did not take action sooner, especially since in early 2014, executives at McDonald’s admitted that “we over-complicated the restaurants.”
> Industry: Specialty supplies
> Revenue (last 12 months): $22.7 billion
> 1-year share price change: -10.3%
Staples appears to be making the transition from a brick-and-mortar chain to an online retailer. The company has been closing stores across the country to reduce their drag on earnings, which fell 13% over the last three years on a trailing 12 month basis. Staples announced at the start of the year plans to cut just over a 10th of its stores, or 225 in all, by the end of fiscal 2015.
Although online sales have increasingly made up a larger portion of the company’s revenues, shareholders would like to see an even faster pace of store closures.
Another problem is that Staples also faces fierce competition from huge retailers such as Amazon.com and Walmart. Recently, activist fund Starboard Value disclosed a major stake in Staples and in rival Office Depot. The fund is expected to push for the two to merge — a move that could be in the company’s best interest. Office Depot itself merged with rival OfficeMax last year and continues to close stores at a rapid pace.