As the recession deepens and stretches out quarter after quarter, more companies will close or will shut divisions. More brands will disappear because their parents firms fold or can no longer afford to support them. Other brands will be obliterated by mergers.

24/7 Wall St. examined 100 large brands that are facing troubled futures. The analysis included records for those brands that are public companies or part of public companies. We considered sales information, information from industry experts, and brand histories. We also looked at the level of competition in each brand’s market and the extent to which that competition is growing. We examined the likelihood that a brand could be sold or spun off in cases where parent companies are in financial trouble.

We have compiled a list of 12 brands that will we believe will not survive until the end of next year. Each brand and the major reasons for its demise are listed along with some of the public information 24/7 Wall St. examined.

1. Avis/Budget (CAR) operates two car rental businesses. The primary competition for the company is Hertz (HTZ). Both firms are facing significant problems paying down their debt. Barclays Capital analyst Brian A. Johnson said the companies are “facing an almost perfect storm, with increasing pressure on both revenues and costs, coupled with very large risks on the liquidity and operational side.” There is real risk that Avis may violate its credit facility covenants. As the travel industry continues to falter, problems at Avis/Budget are going to get worse. The company has said that it plans to operate both brands. Their financial statements indicate that will become increasingly difficult. Avis is the larger operation with 5,100 locations to Budget’s 2,750, according to the company’s 10-K. Avis/Budget lost money each of the last three years and in 2008 lost $1.1 billion on revenue of $6 billion. As sales drop through 2009, Avis/Budget will find it impossible to support the costs of maintaining two brands. The Budget brand will have to be eliminated. CAR trades for $1 down from a 52-week high of $18.

2. Borders (BGP) has struggled for several years as the No.2 operator of book store behind Barnes & Noble. When Border’s released its last set of earnings it said it would cut the number of Waldendbooks stores from about 300 to 50 or 60. With Border’s losses, that won’t be enough. The pressure from online book operations led by Amazon (AMZN) and new e-book readers is overwhelming Borders. In the fourth quarter of last year, sales at Border’s branded stores dropped 15.3%. For the full year 2008, Borders lost $157 million on revenue of $2.8 billion. Borders recently extended its $42.5 million senior secured term loan with Pershing Square Capital Management, moving the due date to April 1, 2010. That may be the day that Borders goes away. Border’s shares trade at $1.47, down from a 52-week high of $8.02.

3. Crocs (CROX) sold the fastest growing footwear in America at one point. In late 2007, the company’s shares traded at more than $72. Now they change hands at well below $2. At the end of March, Crocs got a six-month extension of a critical credit facility. According to Reuters, “Crocs Inc averted a cash crunch by winning an 11th-hour credit facility extension with a California bank, but analysts say the jury is still out on whether the struggling brand can turn around.”  Two weeks before the credit extension, the company’s auditors gave the firm a “going concern” letter, an indication that there would be reasonable chance that Crocs would make it another year. In the fourth quarter of 2008, Crocs lost $43 million after making $55 million in the same period the year before. Revenue fell from $225 million in the last quarter of 2007 to $126 million. Crocs won’t make it through the year.

4. Saturn was created by former GM (GM) CEO Roger Smith to be the company’s platform for manufacturing and marketing innovation. GM, now faced with bankruptcy, will almost certainly close its poorly performing brands. In the first quarter, Saturn sales dropped 59% to 19,843. GM can’t afford to support a brand with poor sales that are falling at such a rapid pace.

5. Esquire Magazine is published by Hearst which is having substantial problems in both its newspaper and magazine divisions. Hearst recently threatened to close The San Francisco Chronicle after losing tens of millions of dollars during the last several years. It kept the paper open after the staff agreed to huge cuts. At about the same time, Hearst closed its paper in Seattle. The collapse in print advertising has pushed revenue at most of Hearst’s large magazines down by double digits after a bad year in 2008. Flagship titles such as Good Housekeeping and Cosmopolitan have been hit especially hard. Hearst is going to have to cut some of its anemic magazine titles. Esquire is among the weakest of the major men’s magazines on the basis of advertising page performance. Through April, ad pages at the magazine dropped 27% to 206. Men’s magazines are one of the most crowded categories in the industry. Esquire is up against GQ, Details, Men’s Journal, Maxim, and a number of men’s fitness and health publications. The men’s magazines which are performing the most poorly will not last long. Big publishers such as Hearst and Conde Nast have already proven that they will cut what they have to in a brutal environment.

6. Gap (GAP) Old Navy and Banana Republic. Gap is a three-brand company living in a two-brand body. In March, same-store sales for the Gap North America flagship brand were off 14% following a 14% drop in the same month in 2008. Sales at Old Navy were flat for the same month but dropped 27% in March 2008.  Sales at Banana Republic were off 16% this year and 8% last year. Gap announced that year-to-date net sales were $2.08 billion for the nine weeks that ended April 4, 2009, a decrease of 9% compared with net sales of $2.28 billion for the nine weeks that ended April 5, 2008. Old Navy has more stores than Banana Republic, 1,067 compared to 573. In the fourth quarter of last year, Gap had less than a 6% operating margin on $4.1 billion in revenue. In other words, if same-store sales at the company continue to drop 15% month after month, Gap is going to run into problems. Old Navy is still the weakest brand of the lot. Gap will have to close it down.

7. Architectural Digest Magazine has lost 47% of its ad pages this year. The magazine is owned by Conde Nast which is controlled by the Newhouse family. Newhouse is having significant financial problems with both its newspaper operations, which used to be very profitable, and its magazine group. Architectural Digest is operating in an environment where high-end home sales and expensive redecorating have been driven out of the market. It is also up against a number of other home and shelter magazines. Publications which are losing nearly half of their ad pages are almost certainly not going to make it for another year no matter what subjects they cover. Conde Nast has already closed or cut back several of its magazines.

8. The Chrysler brand of Chrysler LLC faces a problem similar to the one that GM faces with its weakest brands. As the company filed for bankruptcy with government support, the automaker knows that it cannot support product design, manufacturing, and marketing for all of its brands. An analysis of Chrysler LLC sales by division shows that the Chrysler brand has substantially worse sales than Dodge or Jeep. Through the first quarter, Chrysler sales dropped 61% to 45,706. The only nameplate within the brand that sold more than 20,000 vehicles was the Town & Country which could almost certainly be moved to the Dodge division. Dodge and Jeep both sold substantially more cars than the Chrysler brand even thought their sales were down 40%. When the company is restructuring Chrysler will be gone.

9. Eddie Bauer (EBHI) stock trades at $.38 now. Just last September it changed hands at more than $8. The company has said that it may violate debt covenants this year. According to the AP, the company also has severe competitive problems. “The retailer is facing an uphill battle because its merchandise doesn’t stand out among competitors such as outdoor retailer Recreational Equipment Inc., according to Janet Hoffman, managing partner of the global retail practice of Accenture.” In the fourth quarter of 2008, Bauer lost $128 million on revenue of $369 million. The company’s current S&P rating is about as low as it could be—CCC-. Eddie Bauer could be out of business by mid-year.

10. Palm (PALM) has been at death’s door for some time. It prospects have improved recently and the company has one last chance to become viable when it launches its new “Pre” product. Recent research shows that almost no one who owns an Apple (AAPL) iPhone or RIM (RIMM) Blackberry will switch to the new smartphone, so Palm will have to essentially expand the market to get share for its new device during a recession.  The “Pre” will also be sold exclusively though Sprint (S), the No.3 cellular carrier in the US which has been losing subscribers consistently for more than two years. The launch of the “Pre” is a disaster in the making. Palm’s results for the quarter that ended on February 27th were awful, failing to meet Wall St’s modest expectations. Palm sold only 482,000 handsets for the period, down 42% from the same quarter the year before. Revenue dropped from $312 million to $91 million, and Palm lost $95 million. Palm brought in just over $100 million with the help of its largest shareholder, Elevation Partners, in a recent financing. The bottom line is that Palm has no chance of getting an even modest part of the smartphone market in a severe economic downturn since it competes with two of the premier technology companies in the world—Apple and RIM. Palm won’t be in business in a year.

11. AIG (AIG) may be the only large company in America that both the management and federal government want torn apart. If AIG succeeds in selling most of its divisions it will be able to repay more than $100 billion in government loans and investments. The figure may be closer to $150 billion depending on how the federal money is accounted for. Uncle Sam also owns 80% of AIG’s shares. There are two reasons that the AIG brand, once the premier insurance brand in the world, will disappear. The first is that most of the companies owned by AIG do not bear its name. AIG owns ten general insurance companies with names such as New Hampshire Insurance Company and The Hartford Steam Boiler Inspection and Insurance Company. Several of AIG’s life insurance companies do not have AIG in their titles. AIG’s most valuable financial services company is probably the aircraft leasing operation, International Lease Finance Corporation. AIG is now a “toxic” brand. Its operating groups will do their best to distance themselves from the company even while they are owned by AIG. Once they become independent of part of other companies, these operations will end whatever attachment they have had with AIG even if it means changing their names. AIG may be the one large brand in America which almost everyone would like to see disappear.

12. The travel industry has been so badly damaged by the economy that the airline industry faces substantial overcapacity. There is almost no question that two of the large US flag carriers will have to merge to avoid the bankruptcy of another American airline. United Airlines (UAUA) is among the three weakest carriers in the US. AMR (AMR) and US Air (LCC) complete the list. The stocks of all three companies are down more thank 40% so far this year as concerns mount that passenger traffic declines will accelerate as the recession gets worse. The sales loses are being partially offset by a drop in fuel prices and cuts in routes and airplanes, but the benefit of those reductions has already mostly occurred. When the economy or fuel prices are bad for a prolonged period, airlines turn to the two behaviors which have been their modes operandi in the past—mergers and bankruptcy. If the revenue problems facing the industry get worse, a stronger carrier such as Continental (CAL) is almost certain takeover one of its weakened peers. At United, total consolidated revenue passenger miles (RPMs) decreased in March. Not only are the numbers of passengers dropping, but as BusinessWeek pointed out two weeks ago, airlines are cutting ticket charges sharply because “there are relatively strong indications that bookings for the spring and summer — especially for business-class tickets — may be far softer than carriers had expected.” And, United has indicated that the quarter that just ended will not be as good as Wall St. had hoped. Avondale Partners analyst Bob McAdoo recently wrote “Despite the deepest capacity cuts in the industry, UAL expects declines in [first-quarter unit revenue] that are slightly worse than what other legacies have recently guided to.” In the fourth quarter of last year, United generated negative $989 million in operating cash flow and negative $1.1 billion of free cash flow, defined as operating cash flow less capital expenditures. United cut a deal with its largest credit card processor in terms of the cash balances it needs to maintain. The card company gets a security interest in some United aircraft in exchange. The deal extends until January of next year. United needs a way out of all this trouble. It has already been through a bankruptcy recently. A “merger” is a much more likely alternative now. As TWA learned when it was bought by AMR, the company being bought gets to keep its brand around but fairly quickly a new logo gets painted on the planes.

Douglas A. McIntyre

Will a 'going concern' note burn your money?

We are still in the midst of “annual report season” as companies have been submitting their 10-K filings with the SEC. Or in some cases delaying those filings.  There is one theme that has been much stronger during this recession than during any recent years, and that is the dreaded “GOING CONCERN” notice from auditors in the amount of companies which are well known.  And this year’s round of GOING CONCERN notes has a host of names that were formally great stocks.

A going concern is the ability of a company to continue to operate as things are now and not go out of business or have to liquidate its assets.  The out is of course that the company must be able to raise enough capital or exit certain operations to stay operational.   Here are some of the big names with the notes that have come out this week:

Aventine Renewable Energy Holdings, Inc. (NYSE: AVR) has already been in trouble for some time.  The former high-flying ethanol sector is now junk.  Aventine warned that it might have to file for bankruptcy protection and it has the going concern note attached.  And ethanol is still viable?

Blockbuster Inc. (NYSE: BBI) posted a loss after items, and the company’s CEO said that many other companies are also facing the same challenges.  The auditor’s note of a going concern is said to be in place until its financing is complete and its liquidity is assured.  The good news is that this one rose this week on the financing discussions.  It seems that video rental stores are still like smokers, the numbers keep declining each year yet they still exist.

Crocs, Inc. (NASDAQ: CROX) said that its annual report will have a going concern note from independent registered public accounting firm, Deloitte & Touche, that raises doubt about the company’s ability to continue as a going concern.  The company had more than $51 million in cash and equivalents and $22.4 million in credit facility borrowings which mature next month.  Ugly shoes that were meant for gardening couldn’t stay mainstream for too long.

Eddie Bauer Holdings Inc. (NASDAQ: EBHI) was also hit hard this week on its massive losses.  The company’s report will have a going concern note because of the current economic situation and restrictions under amendments to its term loan agreement.  It looks like the company was in compliance at the end of 2008 but 2009 looks like it will be a different story.  The preppy retailer has not gone without a troubled history.

MGM Mirage (NYSE: MGM) posted a fourth-quarter net loss after recording a $1.2 billion write-down.  This reflects a difficult environment, but it has also prompted the MGM’s auditor to raise doubts about its ability to continue as a going concern.  Can people afford to go to casinos in a recession when they know that the odds are stacked against them when they walk in the doors?

There were many others over the last week, namely in the auto parts sector and in speculative companies.  But these companies above either have household names that have been there for some time or were not that long ago traded as great growth stocks.  What a difference a year makes.

JON C. OGG
MARCH 20, 2009

The most astonishing fact about the retail industry now is that the environment has gotten much worse than it was when each of these businesses began to fail. Sales at stores across the country will be down this holiday season. Some analysts believe that the numbers will be as bad as for any fourth quarter in thirty-five years.

Adding to the problem of slow consumer spending brought on by the recession is an unprecedented liquidity crisis. Retailers who need access to capital for inventory, rent, and personnel costs are finding that it is nearly impossible to get access to funds without a pristine balance sheet and a history of substantial positive cash flow.

These troubles point to a number of other retail chains going out of business between now and early next year. Sales on Black Friday, the day after Thanksgiving, which is considered the bellwether of holiday sales, will determine the fate of several companies which are now viewed as the weakest operators in the industry.

Here is a list of ten companies which may well not make it if their sales drop by double digits this holiday season compared to last:

1. Bon-Ton Stores (BONT) trades at $1.13, down from a 52-week high of $15.06. That probably says all that needs to be said, but there is more. Over its last three fiscal quarters BONT has lost $82 million. In the latest quarter, same-store sales were off over 8% and total revenue was down 7% to $725 million. The company has interest expense of $25 million. BONT says that its revolving credit facility will get it through any cash crunch. Maybe. With long-term debt of $2.5 billion and $374 million in accounts payable, there is not much margin for error. The company needs an outstanding holiday season.

2. Dillard’s (DDS) is a retail operator that really is in trouble. It has 318 stores, which makes it a relatively small operation in a world dominated by outfits like Sears (SHLD) which has more than 3000 locations. Dillard’s stock is at $3.75, down from a 52-week high of $23.11. S&P dropped the company’s credit rating recently and said, "The rating change reflects our belief that the company will be more challenged than previously expected by the current weak economic environment in the U.S., and that credit metrics will deteriorate more than we had originally projected." In October, the firm’s sales dropped more than 9% to $406 million. Dillard’s points to its revolving credit facility with JP Morgan as its lifeline. In the last quarter, the company lost $38 million. It made $45 million in debt services payments and has long-term debt of $807 million. In other words, no dry powder. It recently cut staff.

3. Talbots (TLB) is another struggling operator. It recently announced that it would try to sell its J. Jill brand. This operation has 383 of Talbots 878 stories. It would be an understatement to say a company would part with that much of its operation if it did not need the money. And, TLB does. Its shares are at $2.68, down from a 52-week high of $17.97. Research house Friedman, Billings, Ramsey recently predicted that the chain would cut its dividend to save money. In the last quarter, TLB lost $15 million. Revenue fell from $414 million in the period a year ago to $357 million in the most recent quarter. Talbots has $212 million in long-term debt. It can’t afford to have sales fall another $50 million this holiday quarter. Recently, it improved working capital agreements.

4. Pier 1′s (PIR) shares are on sale for $.50.  A little less than a year ago they would have cost $8.25, making this a remarkable write-down. PIR said its Q3 same-store sales would be down as much as 18%. The firm says it has a $325 million credit facility, but the stock market clearly thinks that is inadequate. The company’s guidance for the quarter sent shareholders running for the exits. In the last quarter, revenue fell 7% and the company lost $30 million. Pier 1 pulled its guidance because it believes it cannot predict how much the retail market will deteriorate. With $183 million in debt, it won’t take much to tip Pier 1 into insolvency. UBS recently cut its price target on the shares.

5. Cost Plus (CPWM) recently released earnings, and they looked grim. Among other things, the chain said same-store sales could drop 6% in the current quarter. The 296-store retailer predicted poor revenue of as little as $356 million for the period. In the quarter just past, revenue was flat at $213 million and Cost Plus lost $26 million. The firm has $146 million in long-term debt and obligations. Cost Plus pointed out that its credit line borrowings peaked at $125 million in November, well under the limit of the $200 million credit facility. But, that does not leave much room for the company to miss its numbers. The stock trades at $1, down from a 52-week high of $6.22.

6. Williams-Sonoma (WSM) operates 600 stores. The company is doing badly enough that Barclays Capital recently said that it may violate financial covenants on its $300 million credit facility. The retailer made a sharp downward revision in its forecasts. It said it would lose as much as $.12 a share in the third quarter against its previous projection of as much as a $.04 profit. It took its revenue forecast down as low as $732 million. The earlier projection had sales as high as $820 million.  WSM also made extremely sharp cuts in its projections for the fourth quarter. Lenders take loan covenants more seriously in a recession than during other periods. WSM has to beat its numbers or face a chance of its lenders pushing for remedies. The CEO recently forced to sell over 60% of shares due to financial obligations.

7. Chico’s FAS (CHS) trades fairly close to its cash value, a sign that the market thinks that operations are going to burn into that nest egg. The company’s stock trades at $2.58, down from a 52-week high of $11.68, showing that the market does not have many believers in the company. In October, the chain’s same-store sales were off over 13%. For the month, revenue dropped 5% to $394 million. In the last quarter, revenue dropped 5% to $394 million. Net income was $2 million, down from $24 million in the same quarter a year ago. The company had $278 million in cash and securities. But, it cannot sustain double-digit drops in same-store sales indefinitely. The company recently entered into a new credit agreement to help its capital position.

8. Fitch recently cut its ratings on Saks (SKS) to "B" from "B+", hardly investment grade. The retailer has debt of $649 million. In the last quarter, Saks same-store sales were off almost 12% and got progressively worse as each month in the period went by. Like other weak retailers, Saks is in a race to improve sales and earnings before its debt catches up to it. The firm’s stock has dropped to $3.56 from a 52-week high of $22.19. In the last quarter, Saks lost $43 million. In its statement about its financial situation, the company said it believes it has ample flexibility under its existing debt facilities. If Saks’ drop-off in revenue continues from last quarter’s rate of 12% or gets considerably worse over the holidays, the chain could have a very difficult time keeping all of its stores open.

9. Eddie Bauer’s (EBHI) shares trade for $.97, down from a 52-week high of $8.72. The company recently reported an operating loss of $17 million. Revenue dropped slightly to $207 million. The firm has almost 400 stores and outlets. The worst bit of news is that, as of the end of the last quarter, EBHI had only $3 million in cash. It has a $192 million senior term note and $27 million in short term borrowing. It would be nearly impossible to convince investors that EBHI will make it well into next year if sales are poor this holiday season

10. Rite Aid (RAD) is an example of a company that proved the old maxim, "what can go wrong, will go wrong". Its shares are at $.41, down from a 52-week high of $4.72. Rite Aid is bloated with over 5,000 stores, some of which are certainly losing money. The pharmacy company has competition from huge operators including Wal-Mart (WMT). The firm has a massive debt load of $6.1 billion. Rite Aid says that refinancing the load may help its prospects. A Raymond James analyst recently said, "Rite Aid has the worst balance sheet of any company I follow." In the quarter ending August 30, the company’s loss rose to $222 million and its integration of its Brooks and Eckerd drugstore chains appears to be going very badly. Rite Aid also cut forecasts due to "economic weakness". This kind of weakness usually leads to death.

Merry Christmas