Each year, 24/7 Wall St. identifies 10 American brands that we predict will disappear before the end of the next year. This year’s list reflects the fact that mergers and acquisitions are at unprecedented levels. While some of the companies on this list may disappear because they continue to be at the bottom of their industry due to weak products and management, many may disappear because they are doing so well.
Retail continues to be one of the sectors with several troubled companies that may have to be sold to survive. The 24/7 Wall St. list includes Lululemon Athletica Inc. (NASDAQ: LULU) and Aeropostale Inc. (NYSE: ARO). Both specialty retailers are in highly competitive spaces. While Lululemon is battling Gap’s aggressive move into the yoga pants space, Aeropostale’s teen line of branded clothes is losing out to low-cost, fashion-forward brands like Forever 21 and H&M.
The consolidation of the broadband industry may also cause some companies to disappear. Time Warner Cable Inc. (NYSE: TWC) will likely be sold to Comcast Corp. (NASDAQ: CMCSA). DirecTV (NYSE: DTV) will likely be bought by AT&T Inc. (NYSE: T). These transactions are part of a much larger movement to become the exclusive providers of entertainment to American homes.
While telecom companies interested in increasing market share have the option to install a fiber network to take market share from cable, that comes at a great cost. Merger trends in the industry indicate it may be better to buy than to build. Comcast and AT&T certainly believe so. Having a larger market share could also allow these companies greater price leverage with content providers like Netflix and premium cable channels.
Adoption of mobile and the massive size of some of Web 2.0 companies has also contributed to the list. Zynga Inc. (NASDAQ: ZNGA) was well positioned when it was able to market Farmville to Facebook’s users. But it is doing poorly after failing to come up with another hit, moving slowly on mobile and losing its special relationship with the social networking giant.
While Shutterfly Inc. (NASDAQ: SFLY) makes a tidy profit selling photos for greeting cards and calendars, it is also up against free photo sharing services such as Instagram and Facebook Inc. (NASDAQ: FB). The photo printing site is currently looking for a buyer.
A number of the biggest food packaging companies are also in the market. Russell Stover is the third largest chocolate company in America. However, third place is miles behind the leaders, particularly Hershey Co. (NYSE: HSY). Stover’s management has decided to give up operating on its own and has put itself on the market.
Hillshire Brands Co. (NYSE: HSH) will also almost certainly be sold this year. It has already signed an agreement with Tyson Foods Inc. (NYSE: TSN). But Tyson did not get the prize without an expensive fight with Pilgrim’s Pride Corp. (NYSE: PPC), which gives a sense of the value of food companies to their rivals.
In 2012, we predicted that Research In Motion would disappear. Last year, the company changed its name to BlackBerry Ltd. (NASDAQ: BBRY). The company is on the list again this year under the new name. The company continues to be in serious trouble after being wildly successful for many years.
Reviewing last year’s list, we have had some winners and some bad calls. We called Nook and Leap Wireless correctly. Last month, Barnes & Noble announced it would spin off its Nook e-reader as sales continue to plunge. Leap Wireless was acquired by AT&T late last year.
We have yet to be proven right — or wrong — about the balance of the list. Revenues for Martha Stewart Living and Road & Track magazines continue to be weak, but they also remain in the business. Sales of Mitsubishi and Volvo are among the lowest in the auto industry, but you can still buy their cars. Similarly, LivingSocial continues to offer deals, WNBA to sell tickets and Olympus to make cameras. While these calls haven’t proven right yet, we have until the end of the year.
After five years of making predictions, we are proud of our record. Out of the 49 companies that have made our list, 24 have disappeared. Given that these brands were chosen from a universe of thousands, we think it’s an impressive record.
We continue to use the same methodology in deciding which brands will disappear. The major criteria include:
- Declining sales and losses;
- Disclosures by the parent of the brand that it might go out of business;
- Rising costs that are unlikely to be recouped through higher prices;
- Companies that are sold;
- Companies that go into bankruptcy;
- Companies that have lost the great majority of their customers; and
- Operations with withering market share.
Each brand on the list suffers from one or more of these problems. Each of the 10 will be gone, based on our definitions, within 18 months.
This is 24/7 Wall St.’s 10 brands that will disappear in 2014.
It is not hard to identify when the fortunes of the women’s athletic apparel company changed. On March 18, 2013, Lululemon recalled a large portion of its yoga pants because they were too sheer and as a result too revealing. The problems did not end there and resulted in management changes, revenue drop offs and a collapse of its share price.
The fallout cost CEO Christine Day her job in June 2013. Founder and Chairman Chip Wilson announced that he would step down in December of last year. Wilson has since returned as the potential leader of a buyout to take the company private. Wilson believes he can find a private equity backer. He will likely be able to buy Lululemon at a discount price, at least based on what its shares traded for at their peak.
Lululemon’s last quarterly financial statement shows the extent of the company’s troubles. Revenue at the previously fast growing company was up only slightly to $385 million from $346 million in the same period a year ago. However, net income collapsed from $47 million to $19 million. The stock is down 50% from its peak set at the start of June 2013.
AT&T’s plan to buy satellite TV giant DirecTV is an example of a broadband carrier trying to extend its reach into American households. AT&T’s U-verse fiber to the home broadband and TV product has only been modestly successful. It has 5.7 million customers to DirecTV’s 38 million.
The $49 billion deal has to clear federal regulation. Some members of Congress have sharply questioned AT&T’s management about the consumer benefits. While the two companies argued their marriage will lower consumers’ costs, some consumer groups believe that prices will go up and the new company will be able to control access to popular programming like NFL games.
AT&T has reason to fight for the deal and make sure it closes. Its attempted bid to add wireless broadband capacity via a buyout of T-Mobile was blocked by the government. Beyond that, increasing customers by more than six times makes the business case for the deal even more compelling.
3. Hillshire Brands
Hillshire Brands, which markets Ball Park hot dogs and Jimmy Dean sausages, the top-selling products in their categories, has been on the radar of several food packagers. The company reached an agreement to buy Pinnacle Foods in May for $4.23 billion. But the agreement sparked interest in Hillshire and triggered a bidding war for the company among the largest food packagers in the country, Tyson Foods and Pilgrim’s Pride.
Hillshire accepted Tyson’s final offer of $8.5 billion including debt, a nearly $1 billion premium over Pilgrim’s offer and a 50% premium over its share price prior to the bidding war. To close the Tyson deal, Hillshire had to terminate the Pinnacle agreement. Tyson expects the Hillshire buyout to close before the end of its fiscal year, but that does not mean the fight is over. Pilgrim’s Pride may not go away and might still offer a higher bid.
Zynga can be considered the single greatest social media failure among recent IPOs. The leading provider of games on Facebook has been unable to match the success of Farmville, its first hit. Facebook also ended its relationship with the gaming company in 2012, effectively limiting Zynga’s access to the social network’s 1 billion users and making it harder for the company to promote its games.
The company moved slowly into the mobile platform, and after it failed to create big hits of its own, it acquired popular titles such as Draw Something and Words With Friends. But new rivals like King Digital, maker of popular mobile game Candy Crush, continue to crowd the market. Similarly, traditional game companies like Electronic Arts have also begun to migrate their titles to mobile devices, challenging the social gaming company’s position.
The question is whether Zynga has enough demand for its products to support it as an independent public company. The company reported daily active users in the first quarter of 2014 were down nearly 50% to 28 million, compared to 52 million in the first quarter of 2013. Zynga lost $61 million in the first quarter of the year, against a profit of $4 million in the same period a year ago. Since early March, Zynga stock has dropped 45%, which while indicative of its troubles, also makes it a more attractive takeover target.
5. Alaska Air
Alaska Air Group Inc. (NYSE: ALK) is one of the few remaining independent airlines in the United States that is not owned by one of the four larger carriers. Even larger airlines have been acquired: Northwest was bought by Delta, Continental merged with United and U.S. Airways joined with American Airlines. The recent consolidations in the industry have been successful, leading to significant cost cuts. Alaska Air, with its profits and customer service reputation, is the last real prize left.
There has been speculation that Delta might buy Alaska Air for its West Coast routes. The rumors have pushed Alaska Air shares higher.
Alaska Air is particularly strong in the busiest West Coast markets, especially in Salt Lake City, Los Angeles and Seattle. It has also begun to challenge carriers in East Coast markets, including several cities in Florida. Revenue and net income have risen steadily over the past five years. And Alaska Air often ranks highest in customer satisfaction among traditional carriers.
6. Russell Stover
Russell Stover is on the auction block. The third largest candy maker in America may sell for as much as $1 billion. Though once publicly traded, the company known for its boxes of assorted chocolates, is now privately held.
One of the rumored buyers is Hershey, which would use the acquisition to further increase the size of its chocolate business. With a market cap of $21.6 billion and revenue of $7.1 billion, Hershey would not have much trouble swallowing up Stover. According to estimates, Stover makes around $600 million in revenue with 10% operating margins.
However, the list of possible buyers is much longer than that. Large multinational food companies have shown an interest in chocolate companies. Kraft paid about $20.6 billion for Cadbury in 2010. Mars, which owns M&Ms and Milky Way, could also be interested. International food giant Nestlé would also almost certainly take a look at Stover. As is often the case in auctions, private equity companies will consider Stover to see whether they can get a better return than current management.
Shutterfly is a Web 1.0 business in a social media world. While it continues to dominate the online photo printing industry, the emergence of free sharing and online storage sites such as Instagram, Facebook and Dropbox has compromised the company’s future ability to attract customers. Many of these services are optimized or native to mobile, where Shutterfly falls short.
Shutterfly had a modest 2.55 million customers in the first quarter of 2014, compared to 2.25 million the same quarter last year. Even though revenue rose 22% year over year to more than $783 million, it remains a small business. While Facebook does not generate revenue directly from this service, its users uploaded 350 million photos a day last year.
Shutterfly shares fell 18% over the past 12 months, against an almost 20% gain in the S&P 500. But with shares down it has become an attractive acquisition target in the online sharing or storage business with limited exposure to paying customers for printed photos, cards or calendars. The deal frenzy in the tech space has public companies such as Amazon and Apple, which have huge cash hordes, looking for new complementary businesses. The company has retained an investment bank to look for a buyer.
8. Time Warner Cable
Time Warner Cable accepted an offer from Comcast for $45.2 billion at the beginning of this year. The acquisition would create the largest cable company in the United States with a combined total of 30 million subscribers. The deal is valuable because there is very little market overlap. Many, however, oppose it, including wireless carriers, online video providers like Netflix, and consumer advocacy groups that believe the combination will create a monopoly and result in higher rates.
The single biggest hurdle to the deal is federal government approval. The Justice Department and Federal Trade Commission will lead the government’s assessment of the deal. Some members of Congress have also expressed doubts about whether the transaction would be fair to consumers. In 2011, the Justice Department blocked a similar deal involving AT&T’s buyout of T-Mobile because of antitrust concerns.
The deal would be one in a series of anticipated mega-mergers that would leave wired and wireless broadband in fewer hands. The market has speculated for some time that Sprint will buy out T-Mobile to better compete with industry leaders AT&T and Verizon. Most experts believe Time Warner Cable will be gone by the end of 2014.
BlackBerry is about to run out of its nine lives. As recently as 2008, BlackBerry, then operating as Research In Motion, had 19.5% of the global smartphone market. However, following Apple’s introduction of the iPhone in 2007 and Google’s release of the Android mobile operating system in 2008, that figure fell to less than 1% by late 2013.
Despite the fanfare surrounding the release of two new phones last year, sales of the Z10 and Q10 were abysmal. At the end of last year, BlackBerry outsourced its hardware to Foxconn to focus on its software offerings.
The company has positioned its QNX platform as the most secure operating system for mobile communication, and it is now a leading OS in the auto and health care industries. While these are attractive businesses for potential buyers, they are inadequate on their own to make the company viable.
Revenue has continued its multiyear slide, confirming the belief that BlackBerry cannot survive on its own. In the most recently reported quarter, revenue dropped to $966 million from $3.1 billion in the same quarter the year before.
Aeropostale competes with Abercrombie & Fitch and American Eagle Outfitters. Like those competitors, Aeropostale makes and markets inexpensive, casual clothes for teenagers, which it sells through company stores. The entire category is in trouble because teens are choosing inexpensive fashion-forward retailers like Forever 21 and H&M over branded apparel.
Out of the three largest teen-retailers, Aeropostale is in the most trouble. In the most recently reported quarter, revenue fell 12% to $396 million from the same period last year. Same-store sales were off 13%. The retailer’s loss also widened to $77 million from $12 million in the same period a year earlier. The company’s stock price plunged by more than 85% in the past five years.
The company ended its first quarter with only $24.5 million in cash, its lowest since 2000, according to Cowen and Co. analyst John Kernan. Following the first quarter’s results, the company announced that it had secured $150 million in financing from private equity firm Sycamore Partners, which is expected to keep it afloat at least until the end of the year.
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