10 Retail Stock Losers of 2011: Which Will Recover in 2012?

NEW YORK ( TheStreet) - Retail stocks have been unimpressive in 2011. While the overall space didn't get any worse than the year prior, there weren't remarkable improvements either.

The S&P Retail Index has increased 4.4% so far in 2011 to 536.34. Out of 83 top retail stocks, 37 saw their share price decline, with 31 of those declining by more than 10%.

The office supply space saw some of the biggest selling pressure in 2011, with all three of the major players in the space coming in at the top of the biggest decliners list. This doesn't come as a surprise as the office supply sector continues to be hurt by weak consumer spending and business trends.

Women's apparel retailers also continued on their downward trajectory, with all five major companies seeing their stock tumble during the year.

For the most part, the biggest stock decliners are being hurt not by the macro-environment, but by their own internal issues. This makes 2012 a critical year for these companies to get back on track or risk a serious shakeup in their business.

Here's a look at the biggest retail stock decliners of 2011, as compiled by I-Metrix, and the outlook for recovery in 2012.

10. Staples

Staples ( SPLS) doesn't foresee a monumental change in the economy in the near-term, which doesn't bode well for 2012.

"I think we remain in a slow growth economy for business in North America and that's really driven by high unemployment and fear of the future," CEO Ron Sargent said during a conference call with analysts following third-quarter results.

Its international business, specifically Europe, also remains a concern.

"Softness in Europe is not surprising, and it is unlikely to change as debt issues morph into weaker and weaker economies," Janney Capital Markets analyst David Strasser wrote in a note. "Staples will aggressively cut G&A general and administrative expenses in Europe, but we believe this division will remain a problem child for the foreseeable future."

Staples cut its outlook for the full year, now expecting a profit of $1.35 to $1.39 a share from its prior forecast of $1.39 to $1.45 a share.

"When I look at our business going forward, I think we're making all of the investments we can make," Sargent said on the call. "But if you look at our fourth-quarter guidance, I think it reflects our best thinking at this point. We want to be conservative on the top line given the environment that we are operating in. We certainly don't expect the European economy to get a lot better in the next 90 days. And if sales do get better ... you can expect us to be at the higher end of guidance. But I think we're spending appropriately given the results we are getting."

Still, Staples has been outperforming rivals Office Depot ( ODP)and OfficeMax ( OMX) during the year.

Staples now plans on repurchasing $600 million of its stock for the year, up from prior expectations of $300 million to $500 million.

Shares of the company lost 36% for the year.

9. The Pantry

The Pantry ( PTRY), which operates convenience stores and gas stations predominantly in the Southeast U.S., took a 38% nosedive in 2011.

The company's CEO Terrance Marks resigned in August after just two years at the company to head up Hooters. He was replaced on an interim basis by Chairman Edwin Holman.

The Pantry has been grappling with higher gas prices and a slowdown in consumer spending. For the full-year, the company lowered the upper end of its merchandise gross margins and merchandise sales.

The company competes with Couche-Tard's portfolio of stores, including Seven Eleven.

8. Guess?

The fears surrounding Guess? ( GES) are expected to perpetuate into 2012. Shares of the apparel retailer have fallen 38% for the year, weighed down by uncertain economic conditions in Europe.

Guess? generates more than 40% of its sales from Europe, and management noted that it posted negative same-store sales in Italy and France during the third quarter.

The company is expecting a weak holiday season, as consumers are responding negatively to a slowdown in discounts and promotions. "It's typically a good thing when a retailer pares back on discounting, but Guess? won't be successful because the rest of the specialty space is still highly promotional," says Brian Sozzi, RealMoney contributor and chief business development officer at Nothing But Gold Productions.

As a result, analysts expect Guess? will lose market share to rivals like True Religion Apparel ( TRLG) (one of the top performing stocks of 2011).

For the fourth quarter, Guess predicts earnings in the range of $1.03 to $1.09 a share on revenue of $780 million to $795 million. Wall Street was calling for a profit of $1.21 a share on revenue of $816 million.

But Jefferies analyst Randal Konik says the company is not in that bad of a position, as its women's business is improving in the U.S.

7. RadioShack

Shares of RadioShack ( RSH) took a big hit in October after reporting disappointing third-quarter earnings and a disappointing outlook for the remainder of the year.

The electronics' retailer blamed the lackluster results on its transition in September out of T-Mobile wireless products and services and into Verizon Wireless. Mobile sales, which make up about 50% of RadioShack's total sales, rose 1.3% in the quarter, growing more slowly than expected. Sales of traditional consumer electronics also declined, tumbling 21%.

"The third quarter continued to be a challenging, continued to be a transitional period for us," said CEO Jim Gooch on a call with analysts at the time. "Our shift to a broader, more compelling wireless portfolio is definitely still a work in progress, I think both because of the carrier transitional issues as well as a continued difficult trend in the economy."

Looking ahead, RadioShack expects a drop in fourth-quarter profit from a year earlier because of a challenging economy and pressure on consumer spending.

Fitch Ratings recently downgraded the company's debt to "B+" from "BB" and said its outlook is negative. According to Fitch, RadioShack is saddled with $666 million in debt.

"The recent declines in (earnings before interest, taxes, depreciation and amortization) are more pronounced than expected, and Fitch believes there is greater uncertainty in the business," the ratings agency said.

The company is now working on increasing the visibility of its Verizon Wireless products and services, but analysts believe sales may take longer to build than originally anticipated.

RadioShack recently doubled its dividend and also approved a $200 million share repurchase.

Year-to-date, the stock is down 40%.

6. Office Depot

This is the second year that Office Depot ( ODP) is one of the biggest retail decliners. In 2010, the office supply retailer lost about 16% of its value. This year, the stock took an even bigger hit, tanking 59% during the year.

But analysts believe the company is showing signs of a turnaround.

During the third quarter, earnings more than doubled, but its adjusted profit still fell short of consensus estimates, as revenue slipped.

"Office Depot's third-quarter results show that the company is making meaningful internal strides despite the external environment offering no help," Credit Suisse analyst Gary Balter wrote in a note. "Office Depot is benefiting from the process improvements that have been underway for the past several quarters... In addition, under Neil Austrian's leadership, a rigorous re-examination of each business segment seems to be driving positive change on top of ongoing initiatives."

Austrian assumed the position of chief executive this year after former CEO Steve Odland resigned in October 2010.

While its weak top-line is holding back margin expansion, Office Depot is doing well with the elements in its control.

5. American Apparel

American Apparel ( APP), which was the biggest retail loser of 2010, lost 68% in 2011.

Last month, Tom Casey resigned as acting president just one year after he was hired to turn around the company. There's been no indication if American Apparel is searching for a replacement.

This is one of several management changes of 2011. Chief Business Development Officer Marty Staff resigned from the company in October and John Luttrell was appointed chief financial officer earlier in the year.

American Apparel has closed more than 30 stores over the past year and has reported positive same-store sales during the fourth quarter. It is also expanding internationally, striking deals to expand distribution of its apparel at department stores in Europe.

Same-store sales increased 10% in November from a 7% increase in retail sales and a 32% increase in online sales.

The company also narrowed its loss in the third quarter to $7.2 million or 7 cents per share from $9.5 million or 13 cents in the year-ago period. Sales grew 5% to $140.9 million.

"We are pleased with the momentum that is building in our core businesses," said CEO Dov Charney, in a statement. "Our retail channels, both in store and online, are seeing sales growth indicating a revitalized connection to our customer. We are excited about this trend, we feel it is long-lasting, and it is one we can meaningfully build upon. Other positive signs include improved efficiency at our manufacturing facilities, stabilization of world cotton prices and improved profitability at our average retail store."

4. Coldwater Creek

Coldwater Creek ( CWTR) once again makes the list of retail losers, with shares sinking 70% for the year-to-date.

The company reported its sixth consecutive quarterly loss in October, with its loss more than doubling from last year. But revenue came in slightly ahead of Wall Street's estimates and management lifted its fourth-quarter outlook.

Coldwater Creek now expects a fourth-quarter loss in the range of 13 cents to 21 cents per share, narrower than its prior outlook of a loss between 17 cents and 36 cents. Analysts are calling for a loss of 23 cents.

The women's apparel retailer has been grappling with inventory issues and merchandise misses, resulting in weaker traffic by its core shopper.

CEO Dennis Pence said he is confident in the company's holiday offerings, which mark the first line that was fully developed under Coldwater's new merchandising team.

3. Talbots

Up until 24 hours ago, Talbots ( TLB) originally topped the list as the largest decliner for the year, but that all changed after the women's apparel retailer received (and subsequently rejected) a private equity offer from Sycamore Partners.

Shares of Talbots soared 70% on Tuesday to $2.65. Nonetheless, the stock is still off nearly 70% in 2011 from its 2010 close at $8.52.

Talbots received a bid of $205.2 million, valuing the stock at $3 per share. This is a 92% premium over Talbots' closing price of $1.56 on Tuesday. Sycamore Partners is Talbots' largest shareholder with a 10% stake.

Talbots has met with Sycamore, but the firm said that Talbots' managers have rejected attempts to discuss any "value-enhancing transaction."

"Given the extended period of negative trends, rapidly deteriorating performance, current liquidity issues and heavily strained balance sheet and cash flow at Talbots, we cannot argue with an all-cash premium offer presented by Sycamore," Janney Capital Markets analyst Adrienne Tennant wrote in a note. "While a full-blown turnaround would likely yield a far higher valuation, there is tremendous uncertainty surrounding such a turn, and a new management team will likely take another 12 months to execute a new strategy and impact the business in any material way."

This comes just days after the women's apparel retailer announced its Chief Executive Officer Trudy Sullivan intends to retire once the company finds her replacement.

Sullivan was brought on board four years ago to turn around the company, but she will leave Talbots in just as precarious a position as when she started.

Talbots reported a wider-than-expected loss in its third quarter, weighed down by heavy discounting. The company has posted a loss in three of the last four years.

The holiday period doesn't look much merrier, as Talbots is forced to continue to promote heavily and November revenue was down more than 5%.

Following its quarterly report, the company announced it will lay off about 9% of its workforce, or about 100 employees. It will also suspend national advertising and TV campaigns and cut inventory levels.

Talbots has been shuttering underperforming stores and throwing its money into remodeling "premium" locations.

Sycamore said that it is frustrated with the company's "rapidly deteriorating situation" during the all-important holiday shopping season and decided quick action was needed. '

"We do not believe Talbots has the balance sheet and cash flow to sustain another failed attempt at a turnaround," Janney's Tennant wrote. "Given the uncertain state of the turnaround strategy, we note that it could be some time before the stock itself were to rise back about $2 on the fundamental merits of a turnaround. Although investors might think they could get more with a solid long-term turnaround, we think investors should get paid in the immediate term, with the potential for a higher bid upon Sycamore's due diligence."

2. OfficeMax

The worst for OfficeMax ( OMX) could be over.

Moody's Investors Service upgraded its outlook on the company last week to stable from negative and affirmed its "B1" corporate family and probability of default ratings. The ratings agency said the change in outlook is due to expectations that OfficeMax' operating performance is likely to improve under management's new strategic plan.

OfficeMax has been cutting the fat, announcing plans last month to shutter 20 more stores this year and close 15 to 20 locations each year for the next few years. It is also looking to divest its wholesale business in New Zealand.

"CEO is building a new management team and implementing multiple initiatives such as cutting square-footage, restructuring international operations, using more sophisticated analytics to negotiate contracts, expanding services, and enhancing e-commerce - that will help earnings in the fourth quarter and into 2012," Janney Capital Markets analyst David Strasser wrote following the company's third-quarter earnings report. "The company is trading like it's going out of business, but it's not going anywhere."

During the third quarter, OfficeMax's earnings rose nearly 8% to $21.5 million, or 25 cents per share, topping Wall Street's forecast. But revenue slide 2.2% to$1.77 billion, below analysts' estimates of $1.81 billion.

Looking ahead, OfficeMax foresees fourth-quarter sales to be slightly higher from last year.

Shares of OfficeMax tumbled 73% for the year-to-date period.

1. Pacific Sunwear of California

Pacific Sunwear of California ( PSUN) needed to do something fast or it was facing its demise, and the company answered the call somewhat after Wednesday's closing bell, revealing plans to close as many as 200 underperforming stores and obtaining a loan from private equity firm Golden Gate Capital.

As of Wednesday's close, the stock was down 76% for the year. In after-hours action, the shares gained more than 40%.

The company has suffered with teens choosing to go to Zumiez ( ZUMZ) for their action sports apparel and gear and American Eagle Outfitters ( AEO)or Abercrombie & Fitch ( ANF) for fashion.

Even prior to Wednesday's news, Needham analyst Christine Chen was saying merchandise assortment and store environment have improved at PacSun in recent months. But while its girls business finally turned positive, its guys segment turned negative and inventories are high versus sales trends.

"We would like to see more evidence that a margin recovery is underway or stronger sales momentum, before we become more positive on the stock," Chen wrote in a note.

Wednesday's news may be the beginning of a turnaround but significant challenges remain.

>>To see these stocks in action, visit the 10 Retail Stock Losers of 2011 portfolio on Stockpickr.

- Reported by Jeanine Poggi in New York.

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