October 02, 2008
Companies Hit Hardest By Credit Crisis (AAPL)(SIRI)(CC)(DIS)(WMT)(MCD)
Not all companies and industries will be hit equally hard by the consumer credit crisis. Operations such as Procter & Gamble (PG), McDonald's (MCD), and Wal-Mart (WMT) may be safe. They either sell things people can't do without or offer inexpensive goods and services that consumers can afford during a tough period.
If the credit crisis gets substantially worse and only the most stable companies with the highest credit ratings have access to cash, some will not be able to maintain inventory. Other firms will be affected because their target consumers no longer have any discretionary income at all.The head of AutoNation (AN), the largest car dealer chain in the US, said that even his prime customers cannot get bank loans for new cars in many cases. "The banks are looking for every excuse possible to say no and they are saying no to good customers," Reuters quotes him as saying.
Neither set of companies has a bright future, but the ones who cannot finance their operations and inventories face almost immediate consequences
According to USA Today, the Association for Financial Professionals recent survey of several hundred companies with more than $500 million in annual revenue found that 40% said they'd had their credit tightened in recent weeks. Gannett (GCI) and Marriott (MAR) drew down on bank credit lines this week because access to the commercial paper market has become so limited.
Many retailers are faced with financing inventory for the holidays. They may not have the credit to do that and stocking stores could become an issue
Here is a list of two sets of firms likely to be hurt in this current economic crisis. Some will suffer as consumers no longer make discretionary purchases because they have no access to credit or have lost their jobs. In many ways, those companies are the lucky ones because operators in the second group face a complete inability to finance daily operations.
Tiffany (TIF) This company has supplied jewelry and expensive gifts for the upper class since 1837. Tiffany's flagship store sits on Fifth Avenue in New York City, one of the most expensive retail locations in the world. The Wall St. crowd would stream though Tiffany's doors every year with millions of dollars to spend on wives, children, friends, and mistresses. Many of Tiffany's best customers may not be back for a year, if they come back at all, due to the collapse of Bear Stearns, Lehman, and the thousands of additional layoffs in the financial sector. Over the twelve months, the stock has dropped from $57 to $35. Santa is poor this year. The shares are going lower.
Apple (AAPL) The leading consumer electronics firm in the world has been having a tough, tough time in the stock market. Shares fell 50% from $202 to $100. They have barely recovered. Why? A Mac costs more than $1,000, and that is a cheap one. Back-to-school purchases are not going to include Mac laptops which can run over $2,000 -- not when Mom and Dad are worried about the mortgage and overloaded credit card debt. More than 170 million iPods have been sold since the product came out. Many people will hold onto their old ones for another year. The same is true with cell phones. That two-year old Nokia (NOK) may not have a touchpad screen and 3G connection, but it works fine for making calls. Apple could have its worst holiday season in over five years. Expensive electronics are off limits for most people.
Disney (DIS) A lot of investors hoped that Disney theme parks would make it through a recession. The firm's last earnings were okay. But according to The Wall Street Journal, the head of Disney recently said its business is not immune to the economy. Tourists don't have the money for airfare and hotels. Disney's cable, network TV, and studios may be hurt by plummeting advertising budgets, but getting people to theme parks when gas prices are high and credit is low would require more magic than the Magic Kingdom has to spare.
Tuesday Morning (TUES) This retailer specializes in lamps, kitchen accessories, crystal, and silver products. Whether people can afford its products, a modest operation of this size may have trouble coming up with the credit necessary to get inventory into stock for the holidays. Tuesday Morning has very modest cash on the balance sheet, only $6 million at the end of the June quarter. The company had $240 million in assets. To stock what the retailer needs for the holidays requires tens of millions of dollars in credit. If money gets really tight and rates for borrowing spike up, Tuesday morning could hit an inventory wall.
Wynn Resorts (WYNN) Gambling is not just expensive. Unless customers at places like Wynn's casinos are sitting on tons of cash, they often have to borrow to play poker and black jack. In addition, there is the money to fly to Vegas, pay for the hotel, and hit the shows and high-end restaurants. Wynn shares are down by half this year. Some gambling companies will be hit doubly hard. Harrah's, the world's biggest gambling company, is owned by Apollo Advisors and TPG Capital. The LBO of Harrah's in an industry where business is drying up could face debt service problems in the near future. A credit crisis could hit gambling by decreasing revenue and undermining loan repayment.
Sirius (SIRI) could have three sets of credit problems. The first is that most of its new business comes from the car industry. A tight auto loan market is undermining sales. Then, Sirius has over $2 billion in long-term debt, so its ability to refinance that to give it operating room gets harder each day that corporate lending gets worse. But, the biggest near-term problem is whether Sirius can continue to finance inventory. In other words, what if it cannot get financing to cover the costs of a two million or more radio sets each quarter, on top of maintaining and upgrading its satellite and broadcast infrastructure?
Amazon (AMZN) does not have any cash problems of its own. Spending money for inventory is not an issue for a company that has more than $2 billion in cash and short-term investments. Amazon's book business is not likely to be hurt much during the holidays. But, Amazon does a huge business in consumer electronics, jewelry, and PCs. Amazon offers an $1,800 Panasonic HDTV flat screen television. How many of those will get sold this holiday season? The market for GPS products and watches is going to decline significantly as well.
Nintendo has been on a roll for over two years. Recently it was No.2 in market cap of all Japanese companies, behind Toyota (TM). A standard Wii video console still only costs $285, but add popular games and accessories for the new Wii Fit package, and the price tag moves closer to $500. Microsoft (MSFT) may have similar problems with the Xbox 360 and Sony (SNE) may face slower sales of the PS3. But, the Wii is the game for the more casual player. Hardcore gamers may not be willing to go without a new console. The Wii customer is more likely to pass on the latest version.
Under Armour (UA) has had tremendous success selling ultra high-end athletic gear. UA offers underpants for $20. At Wal-Mart the customer can buy four for $9.99. UA has nice polo shirts for $60 and $13 socks. The company will also sell customers $75 training shoes. Under Armour's revenue rose almost 50% last year. With a shopping public looking for bargains, that kind of growth is gone.
Charter Communications (CHTR) might not be able to buy set-top boxes, connectors, and VoIP systems to supply all of its customer demand. The cable company has $20 billion in debt and a $.73 stock. Debt services eats up all of the company's operating income and the principal on some of that paper comes due soon. Charter customers calling in to get new HDTV receivers may find that there will be a delay as the company struggles to finance inventory for customer installations.
Circuit City (CC) just replaced its CEO and has brought in restructuring experts. If there is a large retailer that may not be able to keep inventory moving to its stores it is this consumer electronics operation. Circuit City's shares now trade at $.76. That figure is likely to fall. Circuit City maintains about $1.5 billion in inventory, according to its last quarterly figures. For the same period, it was down to $90 million in cash. How many banks are going to lend money to a retailer which lost $161 million in the quarter ending in May and says it will no longer give financial guidance? Most banks won't even take a call from CC management.
American Express (AXP) in another major company with a share price down 50% over the last year. The company's net income fell 38% in the last quarter. The results included a $600 million ($374 million after-tax) addition to U.S. lending credit reserves that reflected a deterioration of credit indicators beyond management's prior expectations. Even some of the customers that Amex calls "superprime" are not doing well. When the wealthy are struggling, it spells trouble for a whole range of industries across the economy. It also means trouble for AXP as the ability of its customers to pay bills gets worse with each passing month.
Gatehouse (GHS), the newspaper chain, might get to the point where some of its properties can't deliver the morning paper. The company's stock is at $.50, down from a 52-week high of $12.94. It has almost $1.3 billion in debt and lost $429 million in the last quarter. A lot of that was a write-down in assets, but Gatehouse is not able to cover its debt service. Newsprint is expensive. So are the costs of drivers, trucks, and gas. In a horrible credit environment, Gatehouse could become one of the first large newspaper companies that simply can't print and distribute papers at some of its locations.
Safeway (SWY) is one of the largest food retailers. As the AP pointed out, Safeway and its peers are struggling with changing shopping habits and how to price goods. Agriculture-based products are up, but that does not mean they can be passed to consumers. The profit margins at the company are already tiny. Last year, it made only $451 million on over $10.1 billion in sales. As of the last quarter, the firm had $4.6 billion in debt and $326 million in cash. There is some risk that Safeway will not be able to stock all the produce and products that it does today.
Douglas A. McIntyre