Classic Gift Companies Hurting

[HenryTo]

From the Motley Fool - nothing new here but it is interesting to keep track of this continuing trend of these specialty retailers getting cannibalized (on one side from internet retailers and on another side by Wal-mart, Target, etc.). Such is business and life!
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Motley Fool
Classic Gift Companies Hurting
Friday April 1, 3:02 pm ET
By W.D. Crotty


April Fool's! How's this gift? Gift industry competitor Russ Berrie & Co. (NYSE: RUS - News) is down 16% today and is the largest percentage loser on the NYSE.
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After the stock market closed yesterday, the company reported extremely poor operating results. Fourth-quarter sales sank 22.4% (yikes!) for the comparable quarter last year, and net income went from a profit of $0.43 to a loss of $0.34 a share.

In the company's SEC 10K filing, Berrie attributes the loss in sales in its gift segment (74.6% of total sales) to three factors. First, there is retailer consolidation and a declining number of independent retail outlets. Put another way, the Wal-Marts (NYSE: WMT - News) and Targets (NYSE: TGT - News) of the world are putting the mom-and-pops out of business. Given their substantial clout and relative size in markets, the aforementioned possess the ability to significantly influence supply and demand curves in retail markets, dictating prices at the peril of independent competitors such as Russ.

Second, the company cited increased competition from entities that "offered lower pricing and achieved greater acceptance of their products." Competition manifests itself quite simply in retail environments -- decreased pricing power in the absence of a clearly differentiated product.

Investigate competitor Boyds Collection (NYSE: FOB - News), and you will find their year-over-year sales declined 8% and net income declined 50%. So it is not a case of one classic competitor stealing market share from the others. The classic competitors are all hurting. Yet again, I'd look to Wal-Mart as the likely culprit.

Finally, the company sites "changing buying habits of consumers, marked by a shift from independent retailers to mass market retailers." The emergence of Internet retailers such as Hidden Gems recommendation RedEnvelope (Nasdaq: REDE - News) and Rule Breakers newsletter recommendation Overstock.com (Nasdaq: OSTK - News) mark a fundamental change in consumer behavior, as a larger proportion of consumers move to Web shopping instead of traditional brick-and-mortar stores. Additionally, outlets of this sort generally incur accordingly lower distribution costs and shorter supply chains, given the elimination of warehouses, store properties, and associated costs -- allowing considerable savings on the part of retailers. These savings might well equate to increased lower prices for consumers, as retailers pass savings to consumers in an increasingly competitive retail environment.

The company has been downsizing ("right sizing" in their words), making acquisitions, and entering licensing agreements with such companies as Motley Fool Stock Advisor recommendation Marvel Enterprises (NYSE: MVL - News) to help create unique products. It all sounds good, but it will take time to see whether the new CEO can help them overcome more significant structural issues.

Given the changing competitive landscape and reasonable expectation of similar challenges going forward, Russ Berrie's fall is justified.

Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see the Motley Fool's disclosure policy.