America’s Worst Run Companies
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.