24/7 Wall St.

Updated: 31 October 2008

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