By Mitchell Schnurman
mschnurman@ star-telegram.com
Julian Day leaves RadioShack next month having accomplished what he was hired to do. Alex Smith, staying the course at Pier 1 Imports, is showing how much more is possible.
Day and Smith, who are both 58-year-old Brits, came to Fort Worth at about the same time, for the same reason. Almost five years ago, RadioShack and Pier 1 were in deep trouble and desperate for a turnaround artist.
RadioShack went with a finance man, and Pier 1 chose a lifelong merchant.
Day, who helped restructure Safeway, Kmart and Sears, was named CEO in July 2006, and RadioShack's stock price jumped 23 percent the first day. Six months later, Pier 1 tapped Smith, who oversaw operations at Home Goods, Marshalls and TJ Maxx. Pier 1's stock gained 49 cents.
As a finance specialist, Day was relentless about cutting costs, generating cash and eventually buying back company shares. Within a year, cash flow improved sharply, and RadioShack was lean and mean when the recession struck.
But its recovery and stock price hit a wall, because sales never took off.Smith was always a merchant first, and his strategy focused on adding unique, low-priced items that would restore the treasure-hunt feel at Pier 1. He promptly doubled the number of buyers and invested in more planners, even as Pier 1's survival was in doubt. At one point, the stock price dropped to a dime, and annual operating losses persisted until the company finally broke through last year.
After Smith arrived, same-store sales continued to decline in nine of the next 10 quarters, and then all the merchandising work took hold. For the past six quarters, same-store sales at Pier 1 have risen sharply, often by double-digits.
Last year, RadioShack's same-store sales grew 4.4 percent; at Pier 1, this key metric gained 10.9 percent.
Bear in mind that Pier 1 operates in the home decor business, a niche still reeling from the monumental housing bust. RadioShack is in consumer electronics, and hot products like iPhones and iPads ensure demand. The question is whether RadioShack can capture its share.
It would be simplistic, and inaccurate, to say that Day didn't care about merchandising or that Smith wasn't interested in financial matters. Top executives have to worry about everything, and each has some success on both parts of the ledger. But make no mistake about which is more difficult and which has the more enduring impact.
"Just about everybody can do the financial stuff -- closing stores, laying off employees, reworking debt," said Howard Davidowitz, chairman of Davidowitz & Associates, a New York retail consultant.
"But all that does is buy you time. In retail, nothing's going to really work unless you can excite the customer."Smith brought an eye for fashion and a sixth sense for what fits at Pier 1, and he never wavered about the most important factor.
"Merchandise is where it all starts," Smith said in his 2009 letter to shareholders.
His No. 1 priority was to develop a best-in-class buying organization. Next in line was a buildup of the planning and allocation department, so the right products arrived at the right time and were displayed in the right place. Making the business leaner and more efficient was on Smith's list, but it came in at No. 4.
Like RadioShack, Pier 1 closed scores of stores, laid off workers, sold its new headquarters building in Fort Worth and reworked leases. It also bought back debt on the cheap, when investors had little confidence in its prospects, and the move helped to nearly eliminate its long-term borrowings.
While Pier 1 has firmly re-established itself, Davidowitz says that the book is still out on RadioShack. Its financials are strong, but it's struggling to generate more sales, even in a fast-growth industry.
Wall Street has drawn a sharp distinction between the two companies, with Pier 1 stock trading at a P/E multiple of more than 16, compared with 9 at RadioShack. Since Smith arrived in late January 2007, Pier 1's market value has grown from $588 million to $1.45 billion. The company issued a third more shares, but investors still gained more than 83 percent under Smith.
Since Day arrived, RadioShack's market cap has actually declined a bit. But after the company bought back $400 million worth of company stock and paid out dividends, investors saw a total return of 25 percent.
Both companies performed better than the Standard & Poor's 500 index during the CEOs' tenure.
Under Day, RadioShack was rebranded as The Shack and, more important, concentrated revenue growth on the surging smartphone market. Last year, wireless accounted for almost 48 percent of sales, compared with less than 32 percent when Day took over.
He joined RadioShack in the wake of Dave Edmondson's exit, but the company's problems went deeper than a CEO-résumé scandal. Spending had become bloated, and same-store sales were falling rapidly.
In the quarter before Day arrived, RadioShack's cash flow fell to $36 million, down from $123 million a year earlier. That was a shocking downturn for a company known as a cash cow.
RadioShack closed 481 stores, laid off more than 1,000 employees, including hundreds in Fort Worth, and even sold off office plants to cut expenses. In one year, RadioShack cut $272 million in overhead.
Within Day's first 12 months, cash flow for the second quarter had almost tripled. By the fourth quarter of 2009, it peaked at $155 million.
How important is that measure? Three-fourths of annual cash bonuses for RadioShack executives are based on cash flow, while sales growth accounts for a quarter of the formula. In 2010, that was good for an extra $1 million in pay for Day, after he received $3.2 million from the same category in the previous two years.
So Day walks away knowing that he hit the board's key goals.
In contrast, Smith recently unveiled a new three-year growth plan. He wants to boost sales to $200 a square foot at Pier 1, a level not seen since the housing boom.Mitchell Schnurman's column appears Sundays and Wednesdays. 817-390-7821
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