24/7 Wall St. has been calling for higher and higher prices in the dollar store sector and we have discussed consolidation in the other discount store and close-out stores.  Dollar stores will be a secular winner over the years ahead unless we get a sudden return to a booming economy.  We have even gone as far as to showing that dollar store chains are now where Wal-Mart Stores Inc. (NYSE: WMT) was back in the early 1990s.  Private equity and other savvy investors like Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) have been active in this space. 

Dollar General Corporation (NYSE: DG) remains a Stock to Own for the Next Decade, but we are growing to accept the math here: shares hit a new all-time high of $39.22 today and the consensus price target is only $39.94.  We have chatted this one up over and over since the stock was well into the $20 stock handles.  Kohlberg Kravis Roberts & Co. (NYSE: KKR) continues to sell stock that it still owns and we would just expect that the firm will continue to sell shares.  It is when those price drops occur that you get your chance to enter the stock on the cheap.  Please be advised, we expect that Warren Buffett will have added to this position.

There has also been buyout interest in Family Dollar Stores Inc. (NYSE: FDO), up only marginally at $54.05 versus a 52-week range of $41.31 to $56.92.  Dollar Tree, Inc. (NASDAQ: DLTR) has also been under private equity interest and its shares are up 2% at $80.92 and its stock hit a new high of $80.99 this morning.  Analysts have consensus price targets of $56.87 for Family Dollar and $77.67 for Dollar Tree.

Big Lots Inc. (NYSE: BIG) is a close-out store with many low-priced items but is no dollar store.  There was a while where it was also considered takeover bait but that failed to materialize.  At $34.33, the 52-week range is $27.82 to $44.44.  Tuesday Morning Corp. (NASDAQ: TUES) is another close-out store and it is often overlooked because it has a mere $158 million market capitalization rate.  At $3.71 after a 2.6% drop today, its 52-week range is $3.22 to $5.93.

99 Cents only is up 4.2% at $21.36 this morning. The news and the reaction may seem anti-climactic, but this brings an end to what was a long and arduous buyout process that has been going on since at least March of this year.

The growth of discounters and the growth of dollar stores says something awful about America.  If these trends continue, it simply means we have more and more of the population at the lower-end of the spectrum seeking deals wherever they can be found.  Still, business is business.  If Warren Buffett and private equity giants have so much interest in this sector, ask yourself if there is money to be made. Again: Dollar Stores Are The Next Wal-Mart!

The sad thing is that there is now a market premium in the sector.  Our favorite remains Dollar General, but it now trades at 15-times 2012 (actually January 2013) fiscal earnings estimates from Thomson Reuters.  Another premium is there for Dollar Tree with a forward 2012 ratio of 17.5-times expected earnings.  Family Dollar has a different fiscal year-end (august) but if we blend the estimates we get a stock trading at close to 14-times the same earnings estimate periods of the peers.   

We will start to grow a bit more cautious on the sector of dollar stores if the price appreciates too much more.  The fact that we and others are excited about the dollar store and close-out store sector does not bode for much growth and does not bode well for the middle class.  These stocks now trade at richer multiples than many normal retailers: Macy’s Inc. (NYSE: M) trades at 9-times expected 2012 (January 2013) earnings estimates and Target Corporation (NYSE: TGT) trades at 12-times the same period’s estimates.  Wal-Mart Stores Inc. (NYSE: WMT) trades closer to 11-times next year’s expected earnings and that is after the stock enjoyed a significant pop of late.

For a comparison, 99 Cents Only at $22.00 per share values the company at about 17.5-times what was the expected 2012 (March 2013) fiscal earnings expectations.  This still leaves some room higher for dollar stores, but this is a premium to peers and to the broad market.  The secular trend is what is driving the value of dollar stores and investors are willing to pay a premium for that.  The questions will start to arise if these premiums grow much further.  How much of a premium can a discount sector command?

JON C. OGG

Dollar stores are yet again in the news on reports from the New York Post that 99 Cents Only Stores (NYSE: NDN) is soon to get a $22.00 to $24.00 buyout offer from the private equity outfit Apollo Global Management, LLC (NYSE: APO) to top a prior buyout offer from Leonard Green & Partners at about $19.09 earlier in the year.  This may be the rumor mill at work, but there are reasons that this is the case.  The trick here is that the founding family controls about one-third of 99 Cents Only and our understanding is that a new deal might be complicated but would still probably boil down to the highest price within reason.

Dollar General Corporation (NYSE: DG) is a Stock to Own for the Next Decade!  It just saw a secondary offering where Kohlberg Kravis Roberts & Co. (NYSE: KKR) and private equity affiliates sold stock.  This has risen significantly since its re-IPO and each pullback has only proven to be a bargain-bin buying opportunity.  To prove a point, the stock hit a 52-week and all-time high of $38.33 on Friday and Warren Buffett’s new portfolio manager bought shares for Berkshire Hathaway Inc. (NYSE: BRK-A).

There has also been buyout interest in Family Dollar Stores Inc. (NYSE: FDO) and Dollar Tree, Inc. (NASDAQ: DLTR).  Family Dollar shares are up 4.5% at $54.38 and Dollar Tree is up only 0.3% at $75.46.

Big Lots Inc. (NYSE: BIG) is no dollar store, but it is very close and it has much of the same customer base.  It has also been under some perceived buyout interest as well.  Its shares are up almost 3% at $34.22 today against a 52-week range of $27.82 to $44.44.

Another close-out store is Tuesday Morning Corp. (NASDAQ: TUES) and it is often overlooked because it has a mere $172 million market capitalization rate.  At $4.03, its 52-week range is $3.38 to $5.93.

99 Cents only is trading up almost 10% at $20.50 today and it hit a new year high of $20.90 earlier.  Before 2005, this one was worth $30 and $35 at the peak and it pays no dividend.

Again, you do not have to like what the growth of discounters and the growth of dollar stores says about America.  Frankly, it is not very pleasant and it fits in with the theme of lower median income and higher poverty.  If Warren Buffett and private equity giants have so much interest in this sector, ask yourself if there is money to be made.

The TJX Companies, Inc. (NYSE TJX) may be too large now for private equity buyers to focus on with its $21.5 billion market valuation.  At $56.65, its stock is pennies away from the year high of $56.78 and that Barron’s $60+ target is looking much closer now.

Family Dollar is the only real dividend in the dollar sector with a 1.4% dividend yield.  TJX Companies is roughly the same dividend yield.  Wal-Mart offers the highest yield of most retailers, but again: Dollar Stores Are The Next Wal-Mart!

Here is the funny thing… Dollar stores are no longer cheap against the stock market.  They are expensive for the simplest of explanations: this is a secular trend and the growth rate looks to be continuous for this segment.

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JON C. OGG

Big Lots reported adjusted EPS of $0.52, beating the consensus estimate of $0.44, and revenue of $1.17 billion, barely above an estimate of $1.16 billion. The company also raised its full-year EPS guidance to $2.80-$2.90, the top of which is in-line with a consensus estimate of $2.89. The company’s shares have gained about 7% in the past 12 months.

Several of its competitors, and near-competitors, have posted similar 12-month gains. 99 Cents Only Stores (NYSE: NDN) and Tuesday Morning Corp. (NASDAQ: TUES) fall into the same range. Dollar General Corp. (NYSE: DG) shares have risen about 15%, and Dollar Tree, Inc. (NASDAQ: DLTR) shares have jumped 50%.

Since the beginning of the year though, Tuesday Morning shares are down nearly -30% and Dollar Tree’s gains have grown by less than half as much. The biggest portion of these stores’ 12-months gains came during the 2010 holiday season.

A March buyout offer for 99 Cents Only from Leonard Green & Partners gave the company’s shares a boost in March, and there is a rumored counter-offer coming from Apollo Global Management. Tuesday Morning announced a $5 million share buyback program a couple of days ago to give its share price a needed boost. Seasonal impacts are also having an effect.

As the back-to-school season nears its end, the stores have jumped back from a dive at the beginning of the month related to the downgrade of US debt. Solid back-to-school sales could put these stores in a position to reap even larger benefits for the coming holiday season.

Face it, the US economy is not going to get any stronger between now and the end of the year. The deep discounters aren’t going to lose any customers to pricier competitors like Wal-Mart Stores Inc. (NYSE: WMT) or Target Corp. (NYSE: TGT). If anything, the dollar stores will gain customers.

Big Lots shares are down about -0.25% in the early afternoon, at $32.29, in a 52-week range of $27.82-$44.44. 99 Cents Only shares are down nearly -1%, at $18.25, in a 52-week range of $14.32-$20.75. Tuesday Morning’s shares are off more than -2.5%, at $3.72, in a 52-week range of $3.38-$5.93. The SPDR S&P Retail ETF (NYSE: XRT) is down more than -2%, at $46.10, in a 52-week range of $35.79-$56.44.

Paul Ausick

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. McDonald’s reported earnings today and its same-store sales were up in every region.The stock traded up on a day when the overall market was swamped by selling.

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. 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 recently 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 $25. Santa is poor this year. The shares are going lower.

Apple (AAPL) The world’s leading consumer electronics firm 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 180 million iPods have been sold since the product came out. Many people will hold onto their old ones for another year. Apple recently reported earnings that were strong for the calendar third quarter, but guided well below the Wall St. consensus for earnings in this quarter. Cell phone makers also face a difficult quarter. A two-year old Nokia (NOK) may not have a touchpad screen and 3G connection, but it works fine for making calls. That means a drop in people replacing even inexpensive phones. In that environment, Apple could have its worst holiday season in over five years. Expensive electronics are off limits for most people.

RIM (RIMM) is having its first rough patch in over a year-and-a-half. Apple claims its iPhone outsold the Blackberry in the last quarter. If so, the product which helped push RIMM shares to $48, may have seen its best days. The stock is now down to $51. Most Blackberries are bought by businesses for their employees. With credit tightening at many firms, especially small businesses, funding even modest purchases of new communications equipment may be out of the question. Access to capital has gotten that bad.

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. Wall St. is wise to Disney’s problems. The stock was over $34 in mid-September. It trades at under $24 now.

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. Wall St. is so frightened by the firm’s prospect that it trades below $2 down from a 52-week high of $8.67.

Another retailer that has to finance a lot of inventory is Radio Shack (RSH). Usually going into the holidays it has about $700 million of goods on hand. As of the end of the June quarter, RSH had $577 million of cash. RBC Capital Markets just cut its earnings estimates on the retailer. It stock has fallen from a 52-week high of almost $23 to $13. Radio Shack has two problems now. The first is that it caters to a relatively low-end consumer base, the people who tend to be hurt most by a recession. The other is that because it is a fairly small operation, it larger competitors can squeeze it on price. In this environment, Radio Shake does not want to have to look for money to finance inventory.

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 off by an incredible amount this year trading at $46 compared to a 52-week high of $176.. 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 capital 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? Sirius is now a penny stock, trading at $.33 down from a 52-week high of $3.94. The short interest in the shares is also high. A lot of people believe the company cannot stay in business in world where credit has dried up.

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. Amazon’s shares are down by 50% this year.

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 $.39 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) recently 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 outlets it is this consumer electronics operation. News reports say that the company will either have to close a large number of its stores and cut staff of file for Chapter 11. Circuit City’s shares now trade at $.26. 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. The NYSE recently sent the company a notification that it may be delisted because its stock price is so low. One of CC’s largest shareholders, Classic Fund Management, just cut its stake from 9.5 million to 8.2 million shares.

American Express (AXP) in another major company with a share price down 50% over the last year. S&P thinks things are so bad at the firm that the ratings agency may downgrade its long-term debt.The company’s net income fell 24% in the last quarter. In the company’s U.S. card services business, net write-offs rose to 5.9% of loans, on a managed basis, which includes securitized loans. That’s up from 3% a year earlier. 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 $.16, 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. Prices for 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 lease obligations and $358 million in cash. Safeway now plans to cut its capital expenditures by as much as 5%. Safeway has been spending billions to spruce up stores. It now plans to complete 10 fewer store remodels, putting its renovations at 240 stores for this year.

Some home builders may simply disappear between now and the middle of 2009. Getting capital to pay obligations on the empty homes they have built and the real estate they have financed may simply overwhelm them. Access to money is out of the question.The National Association of Home Builders/Wells Fargo housing market index hit a new low in October. The weakest of the large companies in the industry is Standard Pacific. As Morningstar recenly pointed out "the company entered the downturn with a bloated inventory supply along with the resulting debt needed to carry it. Consequently, several financial covenants are still very tight, if not violated ." JP Morgan recently downgraded the company’s shares. Two-third of its homes are in the weak markets of California, Florida, and Arizona. SPF does not have customers who can get credit to buy its homes. It also may not have access to capital to remain a going concern.

The most tragic of all the large companies which may fail because it does not have access to capital is GM (GM) for years the largest car company in the world and the biggest corporation in America. GM now loses over $1 billion a month. It may be low on capital as early as the middle of next year. If that happens, it will not be able to buy parts and other materials. Production of vehicles out of its plants could actually stop.. GM has already been in the market looking for capital as part of a plan to buy Chrysler. There have been no takers. Most bankers and private equity funds think GM’s sales, which are running off over 20% this year, could get worse in 2009. Part of GM’s problem is that people who do want to buy cars and trucks are having trouble getting credit. GM’s own lending arm, GMAC, which it owns with private equity firm Cerberus, has cut car loans. Most banks do not want take on new vehicle loans when what they get back in a repossession is worth next to nothing.

Douglas A. McIntyre

There are several larger retailers that are in real trouble. Some are at risk for bankruptcy and each of them could have to cut operations so much that their revenue would be a fraction of what it is now.

24/7 Wall St. has reviewed the stocks of a number of retailers that are still operating independently. If  consumer buying power gets worse it could lead to an ugly outcome for retailers that don’t have strong balance sheets and at least modest same-store sales.  Bankruptcy is not at all a pre-determined fate and these retailers may have modest prospects if they can get their houses in order.  But significant risks loom for their shareholders, especially if the economy takes several quarters to recover.

Sears (SHLD) is the most likely candidate for mass store closings. It has the balance sheet to weather a tough period, but not at its current size. Between the Sears and K-Mart brands, SHLD operates in 3,800 locations. The company is losing money and its cash balance fell sharply in the last quarter. In its comments about financial results, Sears said it did not expect that the troubles with a slow economy or rising commodities prices would get better this year. Comparable store sales for the Sears brand dropped almost 10%. The only way to improve that if the current retail recession continues is to close 10% of the company’s outlet, about 350 locations.

Circuit City (CC) has to top the list of retailers that are not likely to make it out of a severe recession.The company’s share price is $2, down from over $25 less than two years ago. Its market cap is only $350 million even though annual revenue runs about $12 billion. The competition in consumer electronics is killing CC margins.The company has almost 700 stores. If a downturn lasts well into next year, CC will have to cut scores of locations or seek court protection for its assets

The cool importers….. You can argue that Pier 1 Imports Inc. (PIR) and Cost Plus Inc. (CPWM) are being thought of as one because of the plan by Pier 1 to acquire its smaller troubled competitor.

Pier 1 is expected to lose money for fiscal Feb-2009 and has posted losses over the last three years.  The good news is that appears to have liquidity enough to get through the storm as long as it can move back to annual profitability in fiscal 2010 as analysts expect.  As of March 1, 2008 it had 1,117 stores and it has already closed some locations and many expect more.  If consumer buying power get worse, at a minimum you could anticipate fewer Pier 1 stores as it reviews its geographic position. If the retail recession lasts into next year, Pier 1′s future starts to get dicey.

Cost Plus is thought of by many as "The Other Pier 1" and it can’t be any secret that its restructuring and turnaround have failed to generate anything of benefit. Its market cap is only $50 million against annual sales of $1 billion  It has just shy of 300 locations and Cost Plus is faced with the prospects of closing more stores or paring down the size of some of the stores on its current leases whether their landlords want that or not.  As it fights a buyout by Pier 1, Cost Plus is faced with management and legal distractions not unlike those which Yahoo! has been up against.  Analysts expect losses for the next two years and loyal customers are likely wondering how long the financial performance can be tolerated. The current market value of the company is astonishing close to nothing

Re-Sellers and Retailers:

Tuesday Morning Corp. (TUES) is another at-risk liquidation retailer that sells many in-home items that overlap products sold at larger retailers.  In fact, it is not infrequent at all that the items on their shelves still have the original large store’s price and retail tag on them with the lower-priced Tuesday Morning tag over the original price.  The company is expected to be profitable by analysts but it doesn’t take a genius to realize that the company has had enough earnings warnings to bring the stock down from $30 in 2005 down to $4 today.  Bankruptcy isn’t an immediate possibility, but it would be easy to imagine that with 800+ locations the company may start lopping off some under-performing units.

Gap Inc. (GPS) is such a damaged brand that you have to be amazed that it has remained profitable during a period of declining sales.  The "dead money stock" classification for investors has been in effect for almost this entire decade.  It shuttered its Forth & Towne brand and has been restructuring under new management.  It has announced that it is closing many locations of the Gap, Banana Republic, and Old Navy brand stores, and it is really consolidating the Gap locations of Baby, Kids, and "Us."  The problem is that GPS has to fight so much brand damage that even in the current economy the restructuring could go on for years.  Added economic pressure will drive more store closures.  The good news here is that this could always be a break-up stock or a a perpetual "re-org" for investors.  Analysts are still expecting profits for the coming years, so don’t lose too much sleep about whether or not the company will be there.  How many locations of each store brand is another question entirely. With same-store sales at Old Navy in particularly bad shape, the entire division may be closed. The Gap will make it, but its weakest brand will not

Blockbuster Inc. (BBI) has been a perpetual saga which many would have to call a race to Zero. Netflix is only one of its problems, but it is amazing that Blockbuster has managed to do well as it has.  Many market pundits believe it is only WHEN rather than IF it disappears.  But there is hope and amazingly enough it is expected that the company will be profitable for each of the next two years and it is even expected to grow earnings.  Whether or not this happens depends on both the economy and the rate at which consumer move to digital downloads.  The company has sliced store counts already but it still has 7,800 locations when combining the U.S. overseas.  Competition and a changing consumer are elements BBI has had to adapt to and Wall Street would seemingly not be in a position to blame management if they decided to close more stores. While consumers may still rent DVD’s, the risk that internet delivery of content will grows as a formidable alternative every day puts an endpoint on physical stores are a primary delivery system. At some point Blockbuster cannot support its own infrastructure.

Rite Aid Corp. (NYSE: RAD) has been another turnaround stock that just never turned around.  The company was a huge growth engine for investors for much of the 1990′s, but it has been under $10 this whole decade and sits close to a $1 now.  It has lost money in the last two years and Wall Street expects losses to continue for the next two years. It has over 5,000 stores and yet it doesn’t cover the entire U.S.  When a company keep losing money, has sporadic to negative sales growth, and faces much more dominant competition, the market begins to wonder if or when the day will come when it disappears.  A turnaround is always possible and it has many investors holding out for that day.  But competing against Walgreen’s, CVS, Wal-Mart, and Target is a tough space to be in.  If the trends of the last decade continue and if you include an economy where stronger companies can undercut Rite-Aid day in and day out, then store traffic is likely to fall very sharply.  Management’s purchase of shares recently can’t change the economy.

Some of these companies will not make it, at least not without a Chapter 11 filing. Others may survive, but in terms or size and store count, they will likely look nothing like they do now.

Jon C. Ogg and Douglas A. McIntyre

• Applied Materials (NASDAQ: AMAT) Cut to Hold from Buy at Citigroup.
• Cisco Systems (NASDAQ: CSCO) Removed From Goldman Sachs Conviction Buy List, although the rating was maintained as Buy.
• Emulex (NYSE: ELX) Cut to Hold from Buy at Needham; cut to Neutral from Outperform at Baird.
• Tuesday Morning (NASDAQ: TUES) Cut to Sell from Hold at Deutsche Bank.
• Universal Health (NYSE: UHS) Cut to Sell from Neutral at Goldman Sachs.

Jon C. Ogg
July 11, 2008

Martha Stewart Living  (MSO) A lot of bad news in print advertising today. Shares move down to $9.38 from 52-week high of $23.21.

Tuesday Morning (TUES) Retailer warns on profits. Falls to $4.41 from 5-week high of $18.50.

Coherent  (COHR) Company taken out of the S&P SmallCap 600. Drops to $24.85 from 52-week high of $33.38.

Douglas A. McIntyre

Jon C. Ogg
December 18, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he produces the SPECIAL SITUATION newsletter and he does not own securities in the companies he covers.

When this appeared on this list, it was almost sort of a snicker with "gee, no wonder" response.  Big Lots finds itself in a strange retail spot.  It isn’t Wal-Mart, but it competes for the same dollars from much of the same customers.  It isn’t a dollar-store, although it competes for those same dollars.  It’s really a hodge podge store that buys clearance or maybe close-outs in bulk, but there store merchandise changes and isn’t really static.  It’s basically like a Tuesday Morning, but messier and less organized and full of the stuff Tuesday Morning wouldn’t want to stock. 

I researched this one before for a Wal-Mart comparison before a planned CNBC visit.  It isn’t even in that league, and frankly it’s need to exist is something to consider.  The good news is that it does have customers who still go there looking for deals, even if they don’t always know what they are going to look for.  It’s also quite profitable and is expected by all to remain that way.  It’s even expected to see some growth in 2008 and a low P/E ratio of under 15 won’t scare anyone away.  So my personal opinion about the place is immaterial, although if a company could use some store re-habs it is Big Lots.

Stocks hitting 52-week lows do so for a reason.  It noted last week that its same store sales were down 0.5% for October, but total sales were down 1.6% year over year.  The company posts its earnings on Friday, November 20, 2007, so it is hard to imagine any miraculous recovery here before then.  At least not on its own.

Jon C. Ogg
November 16, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Jon C. Ogg
November 5, 2007