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 have picked up greatly in 2014. While some of the companies on this list may disappear because they remain at the bottom of their industry due to weak products and poor management, many may disappear because they are attractive to buyers.
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 and Nike’s aggressive moves into the athletic-leisure wear 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 towards consolidation by American internet and TV providers.
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 Web 2.0 businesses has also pushed some companies onto 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 Facebook Inc. (NASDAQ: FB).
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.
Since we first produced this list, two brands that we included have been acquired. Both are in the packaged foods sector and will likely disappear in some form in 2015. Russell Stover, the third largest chocolate company in America, was acquired by Swiss chocolate maker Lindt & Sprüngli. Hillshire Brands was sold this year. When we first included the company, it had already signed an agreement with Tyson Foods Inc. (NYSE: TSN). While Tyson had to outbid Pilgrim’s Pride Corp. (NYSE: PPC), and ultimately shed assets to satisfy regulators, the deal has now closed.
Reviewing last year’s list, we have had some winners and some bad calls. We called Nook and Leap Wireless correctly. Over the summer, 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 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, the WNBA continues 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.
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.
These are 24/7 Wall St.’s 10 brands that will disappear in 2015.
1. Lululemon
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 number of its yoga pants because they were too sheer and, as a result, too revealing. The problems did not end there and led to management changes, revenue drop offs and a collapse of the company’s share price.
The fallout cost CEO Christine Day her job a few months later, and the founder and chairman, Chip Wilson, announced that he would step down in December of 2013. Wilson briefly returned earlier this year to solicit interest from investors in taking the company private. However, in August Wilson sold half of his shares to a private equity company, Advent International, likely ending the threat of such a bid.
Lululemon’s latest quarterly earnings show the extent of the company’s decline. While revenue rose by 13%, total comparable sales — composed of direct-to-consumer and comparable store sales — were flat. Also, net income fell from $56.5 million to $47.8 million from the second quarter of 2013 to the second quarter of 2014.
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2. DirecTV
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 TV product has only been modestly successful. It has 6.1 million customers as of the most recent quarter, versus DirecTV’s 20 million in the U.S. and over 32 million globally.
The deal, worth $48.5 billion, excluding net debt acquired at the time it was announced, still needs federal regulatory approval. Some members of Congress have sharply questioned AT&T’s management about the consumer benefits. While the two companies have argued that their marriage would lower consumers’ costs, some consumer groups believe that prices would actually go up and the new company would 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 in 2011.
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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, itself, and triggered a bidding war among the largest food packagers in the country, Tyson Foods and Pilgrim’s Pride.
Hillshire accepted Tyson’s final offer of $63 per share, or over $8.5 billion including debt. To close the Tyson deal, Hillshire had to terminate the Pinnacle agreement. Despite regulatory concerns regarding the deal, the Department of Justice cleared the acquisition after Tyson agreed to sell its sow-buying business. The deal closed in late August.
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4. Zynga
Zynga 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 one billion users (at the time) 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 the recent struggles of mobile gaming rivals, such as Candy Crush Saga maker King Digital and Angry Birds maker Rovio Entertainment, show that continued success in casual gaming can be elusive.
Zynga reported daily active users in the third quarter of 2014 had fallen to 26 million, down from a high of 72 million in the second quarter of 2012. Zynga lost $57 million in the most recent quarter of the year, bringing its total yearly losses to over $190 million. So far this year, shares are down by more than 28%, which could make Zynga cheap enough for a takeover.
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5. Alaska Air
Alaska Air Group Inc. (NYSE: ALK) is one of the few remaining independent airlines in the U.S. that is not owned by one of the largest industry players. Even larger airlines have been acquired: Northwest was bought by Delta, Continental merged with United and U.S. Airways joined with American Airlines. Alaska Air, with its profits and customer service reputation, is the last real prize left.
Alaska Air is particularly strong in the busiest western 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 few years. And Alaska Air often ranks highest in customer satisfaction among traditional carriers.
There has been speculation in the past that Delta would buy Alaska Air for its West Coast routes. Currently, Delta is looking to dramatically expand its presence at Seattle-Tacoma International Airport, often considered Alaska Air’s home turf, in order to support more flights to Asia.
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6. Russell Stover
Earlier this year, we noted Russell Stover was on the auction block. We also indicated that the third largest candy maker in America could sell for as much as $1 billion. While a purchase price was not disclosed, Russell Stover was, in fact, acquired by Swiss chocolate giant Lindt & Sprüngli.
One of the rumored buyers earlier this year was Hershey’s, itself a massive player in the chocolate industry. With a market cap of $21.6 billion and trailing 12-month revenue of nearly $7.4 billion, Hershey’s would not have had much trouble swallowing up Stover. According to estimates, Stover had around $600 million in revenue with 10% operating margins as an independent company.
7. Shutterfly
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 native to mobile, where Shutterfly falls short.
Shutterfly had a modest 2.52 million customers in the third quarter of 2014, compared to 2.38 million the same quarter last year. Even though revenue rose 16% year-over-year in the most recent quarter, Shutterfly remains a small business compared to the massive reach of image-sharing social media sites.
Shutterfly shares are down over 17% so far this year, against an 11% gain in the S&P 500. But with shares down, Shutterfly could become an attractive acquisition target for an online sharing or storage business. In July, the company hired investment bank Qatalyst Partners, which focuses on tech deals, to help it find a buyer. However, Shutterfly recently expressed its intent to remain independent.
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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 U.S. with a combined total of 30 million subscribers, the companies announced in a joint February press release. The deal is valuable because there is very little market overlap. Many, however, oppose it, including 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, Federal Trade Commission, and Federal Communications Commission will have to render their verdicts before a deal is approved. Some members of Congress have also expressed doubts about whether the transaction would be fair to consumers.
The deal would be one in a series of anticipated mega-mergers that would leave wired and wireless broadband in just a few hands.
9. BlackBerry
BlackBerry may be about to run out of chances. As recently as 2008, the company, then operating as Research In Motion, had 19.5% of the global smartphone market. However, since the introduction of the iPhone in 2007 and Google’s release of the Android mobile operating system in 2008, BlackBerry’s market 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 as an independent business.
Revenue has continued its multiyear slide, suggesting that BlackBerry may not be able to survive on its own. In the most recently reported six months, revenue totalled $1.9 billion, down from $4.6 billion a year earlier.
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10. Aeropostale
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 fast fashion 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 13% to $396 million from the same period last year. Same-store sales were off 13%. The retailer’s loss also widened to $63.8 million from $33.7 million in the same period a year earlier. The company’s stock price has dropped by about 85% in the past five years.
Following poor first-quarter results, the company announced that it had secured $150 million in financing from private equity firm Sycamore Partners, which is expected to keep Aeropostale — which has had serious cash flow problems — afloat at least until the end of the year.
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