A little over a year ago, Destination Maternity and its then-CEO, Marla Ryan, announced a multiyear strategic plan meant to cut costs, beef up its digital capabilities and boost product development and margins.
A management presentation projected positive increases of comps and potentially positive earnings by 2019. Ryan, who had been on the job a few months by then, said at the time that the plan, "Destination -> Forward," would "help us return the business to a sustainable growth trajectory and drive shareholder value."
It didn't work out that way. In less than a year, Ryan left through the company's revolving door of CEOs. By October, Destination Maternity was so short on liquidity it stopped paying landlords and vendors, and soon filed for bankruptcy with plans to close half its stores and sell itself. As for shareholder value, shares of the bankrupt company's stock were worth about 5 cents at the time of this writing. (By publication time the stock was de-listed.)
Put simply, Destination Maternity's turnaround failed. But turnarounds — however you define them — are hard. That's especially true in retail, where tastes and the markets change quickly. If you are a retailer whose sales trends have turned negative, chances are your path back to greatness, or even stability, is steep.
"A lot of people think of retail as this boring business. But it's not boring at all. It's incredibly exciting and it's changing all the time," said Joel Bines, managing director of consulting firm AlixPartners' retail practice.
"Exciting" is how he describes a constantly fluctuating market that has sunk numerous retailers in recent history. But turnarounds can be done. And the chances are much better for retailers that have a few key ingredients at hand.
"Money equals time, and time equals options. It's a very simple equation," Bines said. "The more money you have, the more time you have; the more time you have, the more options you have. That's like E=mc2 for turnarounds."
Dennis Cantalupo, president of Pulse Ratings, said retailers need three things for a successful turnaround. "They have to have a strong balance sheet, to give them time to turn the business around," he said. "They have to generate strong cash flow to give them some money to reinvest back into the business. And then, not least is a strong management team that has a vision and understands what they're currently doing that is not working and a really great sense of what's going to work in the future."
Sometimes one of the biggest challenges is the company's management. "We don't come in on day one of the challenge," said Steve Agran, a managing director who does restructuring consulting with Carl Marks Advisors. "We're coming in months or even years after the challenge has been there, and management or ownership has been working to figure out what's going on. When I show up, if you want to take the position of, 'Oh, well, we've always done it that way' — yeah, but it hasn't worked."
Bines contends that pragmatism is one of the most crucial elements to a turnaround. "Absolutely, positively, the very first thing that you do when you're engaging in a turnaround situation is you have to have a ruthlessly realistic view of where you are and where you are going," in order to create a properly conservative, risk-adjusted business forecast, he said.
"And most companies are unable to do that," he adds. "And the reason is that is usually so unbelievably distressing to retail executives and boards that they just would rather pretend like it doesn't exist."
In recent years, the number of bankrupt, distressed retailers and those companies struggling with declining sales trends may well exceed those that have shifted their trajectory. But there are retailers that have changed the narrative around them. Here's a look at some of the success stories, as well as retailers in turnaround mode now that may be litmus tests for the industry:
The success stories
"Poster child" might not be a strong enough term to describe what Best Buy means to retail turnaround lore. The electronics retailer may be closer to a patron saint. It is the company others look to for guidance, if not salvation itself.
Best Buy's sales declined in four out of the five years between 2013 and 2017, while comparable sales were negative or grew less than 1% in that time. As then-CEO Hubert Joly told Bloomberg Businessweek last year, "Everyone thought we were going to die."
Since 2017, sales have been increasing, to $42.9 billion in its most recent fiscal year. The retailer has successfully answered Amazon and other challenges of the day by building out its omnichannel capabilities and focusing on services. The company has also held down prices, invested in its employees to boost its customer service, saved $2 billion in costs since 2013, partnered with Apple on repair services, dived into home fitness tech and home medical devices, and spent $800 million acquiring its way into healthcare services, among other moves. Sales have slowed this year, and the company had to lower its guidance on tariff woes, but the growth trends are still positive.
In April, the retailer named its strategic transformation officer and CFO, Corie Barry, as its new CEO following Joly's transition to executive chairman of the company's board. Barry, who has served in various financial and operational roles at Best Buy since 1999, shows no signs of letting up on the gas. Since taking over, she and her team have unveiled a plan to hit $50 billion in sales by 2025.
"Best Buy's transition has been very remarkable," said Bruce Kaser, head of equity research at New Generation Research. "Not only have they made a number of changes to the cost structure and so forth, but they've really transformed themselves into being at the leading edge of omnichannel and service, and really all the trends that have made retailing continue to be relevant for people."
Cantalupo pins Best Buy's strong cash flows relative to its debt as giving it a strong advantage in effecting a lasting turnaround. "You might have a vision, but if you don't have the other two things [i.e., strong cash flow and balance sheet], you really can't invest in a turnaround," he said. "And that's what I think hurts a lot of companies."
In February of 2017, Target placed a big bet on its future after sales had declined the year before. Executives unveiled a plan to speed up investment in the company's stores, digital infrastructure, private label brands, wages and prices. In a year when Amazon was the byword for retail's present and future, the investments into Target's physical operations seemed counterintuitive to Wall Street, even if they made perfect sense to Target executives. The company's stock fell more than 10% on the announcement. As CEO Brian Cornell later recalled to Fortune, one investor asked him that day, "'Brian, how long do you think you'll be in this job?'"
Cornell still has his job, and this year Target is posting quarterly numbers that are the envy of the industry. Credit has gone to its past investment blitz. As Moody's Vice President Charlie O'Shea said of the mass merchant's Q2, "Every measurable demonstrates continued acceleration and validates the company's strategic shift articulated in February 2017, proving that short-term pain can generate long term gains if the strategy is well executed."
And Target is another example of a company that was already fairly healthy financially being able to engineer a turnaround thanks to that health. "Other than investors abandoning the stock, the company was not fundamentally in any real balance sheet problem, and that gave them years to turn around," Kaser said.
Walmart's appearance on this list may well be both comforting and depressing to smaller, distressed retailers looking to turn things around.
Comfort in that even the biggest, strongest retailers can find themselves against the ropes. While Walmart — not to mention Target and Best Buy — were not anywhere near facing imminent existential problems, all of them faced troubling sales trends that signaled retail malaise. But Walmart was able to shift gears so ably in part because it was so big, with lots of money to throw at its problems.
In the middle of the decade, top-line sales at the retail giant's U.S. business had stagnated, while comparable sales declined or barely ticked forward and operating profit wavered. Walmart responded by ploughing money into its stores, employees, technology and digital platform, including through the acquisition of Jet.
Cantalupo noted Walmart's tepid and negative comp sales early in the decade, a period also marked by Amazon's rapid ascendance. "And what did Walmart do? They either could have continued to cede market share … or you fight back," he said. "Walmart did one of the smartest moves: They invested in talent and technology. And to turn around a ship of that size is not easy."
Even for a retailer Walmart's size, though, no turnaround is fully secure. Multiple media outlets have reported internal clashes over the company's spending on its e-commerce unit, which has already sold off one recent acquisition in ModCloth.
Turnarounds to watch
Analysts also pointed to some ongoing retail turnarounds in different states — from recently undertaken to seemingly eternal. These are worth following closely, as they serve as litmus tests for the industry and also reveal some of the difficulties in turnarounds generally and in retail specifically.
Kohl's may be the true poster child for the modern retail turnaround, in that it shows just how tenuous even a string of good quarters can be in the current environment.
After a year and a half of negative comp sales in 2016 and early 2017, Kohl's put together three quarters of positive comps and estimate-beating performances last year. To drive customers to stores, Kohl's experimented with and then expanded a partnership with Amazon, hosting the e-commerce giant's products and accepting returns. It struck numerous deals with brands, including emerging brands. It tweaked its loyalty program.
This year has been rocky, though. In March the retailer cut its guidance after Q1 sales declined. Comps and top-line sales declined in Q2, as well, though Kohl's beat expectations partly thanks to a strong back-to-school showing.
While one of the strongest in its sector, Kohl's is still a department store and faces many of the same existential issues, including a market that is bifurcating between shoppers who seek value and convenience on the one hand, and those seeking luxury and aspirational lifestyles on the other.
"They're doing a lot of the right things, but their problem is that they're kind of too narrow. They don't have the breadth of a Target," Kaser said of Kohl's. "So they miss a little bit of that convenience. And certainly nobody aspires to the lifestyle that Kohl's offers. It's really just OK stuff at pretty good prices."
Bed Bath & Beyond
Bed Bath & Beyond's sales and profits have fallen recently as TJX Cos., Target, Williams Sonoma, Amazon and online specialists, among others, have siphoned off the retailer's customers. Its foot traffic has dipped the past two years, largely because of store closures, according to analytics firm Placer.ai. Sales declines recently prompted dozens of more store closures. Meanwhile, the retailer has become a target for activist investors.
One silver lining for the home retailer: It just poached Target's chief merchant, who was one of the architects of the mass merchant's turnaround. Also, Bed Bath & Beyond's balance sheet is fairly healthy, and pays out more than $80 million dividends to shareholders — money that could be capital used toward a turnaround in a pinch.
Ultimately, the retailer's biggest challenge may be it's broader proposition as its market fragments and changes. "There's really not much there you can't get somewhere else more easily," Kaser said. "Maybe people go to Bed Bath & Beyond as a destination, but I don't know how big that the population is."
The retailer does have an audience with a larger income relative to some competitors, and customers spend more time there than they do in Home Goods, for example, according to Placer.ai data. Those two trends could be areas of opportunity for Bed Bath & Beyond, according to the analytics firm.
Penney, not unlike a lot of department store and apparel retailers, has been in turnaround mode for years. When the company issued a public statement reassuring investors and other stakeholders that it specifically was not working on a Chapter 11 filing, it was as clear as ever just how high the stakes are for CEO Jill Soltau and her team.
The company is working to control inventory overages and bring its merchandising and layouts up to date with reimagined stores. These are all good, necessary things. But working against the retailer is its balance sheet. Penney pays more than $300 million a year on interest and carries more than $3.5 billion in long-term debt. Soltau has acknowledged the "urgency" hanging over her team's work. Improvements in profits, and eventually in the top-line, would be a major win for the company and the sector as a whole. But if money is time the clock is ticking.
"Their balance sheet is leveraged, so they have that strike against them, and their cash flow just turned positive," Cantalupo said. "So they don't have all that much money to reinvest back into the business."