Retail Firms at Risk for Bankruptcy

Below is an excerpt from an article posted today at About.com.

There are two different groups of experts who agree with that position and are predicting that a second wave of economic fallout will impact the retail industry in the not too distant future.

Audit Integrity, a Los Angeles research services company, released the results of an independent corporate bankruptcy study which identified 20 major U.S. corporations that are at risk for filing bankruptcy in the next 12 months. If the Audit Integrity numbers are correct, the retail operations of Macy’s, Oshkosh, Rite Aid, Sprint Nextel, and Goodyear are in danger of following in the footsteps of Circuit City, KB Toys and Linens ‘n Things.

A different assessment done by commercial real estate investment firm Madison Marquette identified a separate list of U.S. retail chains at risk for bankruptcy in the not too distant future. The retailers at biggest risk on that list include Chico’s, Cost Plus World Market, Dillards, and Talbots.

Though both firms used different criteria that yielded different results, they both did reach one conclusion that is the same. More aftershocks of the Great Recession will be rumbling through the retail industry, and the magnitude of those aftershocks will probably not be minor. Though retail Chapter 11 activity has been relatively quiet in the past couple of weeks, it is likely that some well-known retail players still have a trip to bankruptcy court in their future.

Here is Audit Intergity’s list as published by Reuters:

* Advanced Micro Devices, Inc. (AMD)
* Amkor Technology, Inc. (AMKR)
* AMR Corporation (AMR)
* Apartment Investment and Management Co. (AIV)
* CBS Corporation (CBS)
* Continental Airlines, Inc. (CAL)
* Federal-Mogul Corporation (FDML)
* Hertz Global Holdings, Inc. (HTZ)
* Interpublic Group of Companies, Inc. (IPG)
* Las Vegas Sands Corp. (LVS)
* Liberty Media Corporation (Capital) (LCAPA)
* Macy's, Inc. (M)
* Mylan Inc. (MYL)
* Oshkosh Corporation (OSK)
* Redwood Trust, Inc. (RWT)
* Rite Aid Corporation (RAD)
* Sirius XM Radio Inc. (SIRI)
* Sprint Nextel Corporation (S)
* Textron Inc. (TXT)
* The Goodyear Tire & Rubber Company (GT)

I have highlighted the companies whose bankruptcies would have obvious impacts on the world of retail commercial real estate.

I don’t see this news upping investor demand for all of those Rite Aid’s on the market. There are tons of them listed at LoopNet right now – I get a few in my email every day as well. Come to think of it, there are quite a few Goodyear Tire stores on the market as well.

On another note, I am glad to have my instincts confirmed with Sirius XM Radio. They have been hounding me for months about renewing subscriptions for both of my cars. I asked the salesperson why I would consider renewing with a long-term contract when they (Sirius XM) were not going to be in business long enough to fulfill the contract. The salesperson had no answer for that one. They definitely need better sales training (and DVR-like functionality for radio programming) if they are going to stay alive.

Comments

[ZenInvestor:]

What a load of crap! Audit Integrity has an awful record of 'predicting' anything, and Sirius XM has had two debt offerings oversubscribed in the last quarter (and rated by S&P, who does do analysis), and they have no significant debt repayments until 2012. The mathematics used by Audit Integrity make NO attempt at analysis of the balance sheet. The 'non-cash' write downs taken at the time of the merger skewed their numbers, and since all they had was a spreadsheet it was GIGO.

Now, look at three analyst upgrades this quarter with targets over a buck, and EBITDA projected (and on target) of over 400MM this year, positive cash flow, and an operating profit, and you have a picture that any objective observer would say indicates a successful merger, and with Liberty and John Malone as substantial (40%) owners, a winning strategy for a secure future.

As for 'not being there', Sirius XM service would survive any Bankruptcy you fool, no matter how remote that possibility is, and my service will be there without interruption. In short, your statements regarding SIRI are a joke! Please tell me you money is in certificates of deposit and NOT the stock market!

Sep 29 09:21 AM

[notsosmart:]

just more nonsense..waste of time.

Sep 29 09:31 AM

[an american:]

lol ...

Sep 29 09:39 AM

[an american:]

get this douche off of here. i wasted time last week reading this audit integrity BS.

Sep 29 09:41 AM

[Jas1:]

Oshkosh Corp (OSK) has not retail operations. It is a truck, military vehicle, and construction equipment manufacturer.

Sep 29 10:53 AM

[LilBob:]

Goodyear's retail operations should go the way of the dinosaur. Goodyear makes great tires but their service centers are lousy. They should focus on their core business and get out of retail completely.

Rite Aid should go out of business because-from what I've seen-they are not cost competitive. It appears the company expanded their real estate portfolio too rapidly and then had to try to make up the difference by jacking up their prices. You can frequently find the same or comparable products in other drug stores for 10 to 20% less.

Sprint Nextel is another one that should focus on their core business: telephone service, and stop hemorrhaging money on those little mall kiosks.

Macy's should have stayed in New York City. The existence of Macy's as a nationwide chain was based upon suburbanites who thought their endlessly appreciating homes would support a lifestyle of cheap chinese crap with stick on designer logos.

I'll leave my comments at those four. This is pure market evolution. Unless those four companies can come up with some damn fine restructuring plans, the marketplace is better off without them. Just because something exists right now doesn't mean it should always exist.

Sep 29 11:22 AM

[satyr:]

As has been noted in many other places and on various blogs, Audit Integrity's approach to analysis appears to lack... integrity. Nobody knows quite for sure how they arrived at their list, other than some reference to "fundamental analysis". Uh huh. What investors would do well to do is to take the time to look at individual financial statements for these companies and draw their own conclusions.

One company on the list that I follow closely is RAD. They have no major debt coming due this or next year, and have net positive cash flow. In fact, they have announced that they will begin reducing debt beginning February 2010. How that translates to BK is beyond comprehension. As Chris Rodriquez notes, they do have real estate on the market. But, when you have around 5,000 locations, it is not unusual to be shifting footprint, as well as closing under performing stores while newer, better located stores are opened. This is part of an ongoing and well-documented effort by RAD management.

Quickly, regarding LilBob's comments about RAD pricing - while I can believe that they are selling items for 10% or 20% more than other stores, you do have to remember to compare apples to apples. 7-11 gets a lot for a can of tuna when compared to Wal-mart. But, when you want to stop make a quick purchase, it is still worth it. Most of the front-end product in drugstores is more about impulse and convenience than trying to compete with large grocers and discounters. If you compare RAD prices to Walgreen or CVS, I think you will find them to be similar. But don't take my word for it. Independent research has proven this out. In an individual market this may or may not be true. However, none of us can visit 15,000 stores to determine the true mean, so we rely on independent samples to tell us the story.

As for the rest of the list, I have no specific opinion, other than to say that the outfit that produced it does not have a good track record.

Sep 29 12:32 PM

[perremon:]

Rubbish. Hater.

Sep 29 01:18 PM

[amdman:]

AMD is on the list because Lack of Audit Integrity says AMD has 5 billion in debt, only they dont. AMD sold its fabs to the Arabs for a billion and assumption of 2 billion in debt.
The AMD roller coaster is going back to $35 for the third time.

Sep 29 02:08 PM

[bsharvy:]

This article just repeats another article that was "published" last week. Sometimes I wonder what the SA editors do.

The list appear to be nothing but the results of a screener. It's really kind of silly to treat screener results as news.

A few days after this list, which includes MYL, was published, S&P boosted its rating of MYL:

"NEW YORK (AP) -- Standard & Poor's Ratings Services upgraded ratings on Mylan Inc., citing the drug developer's move to repay debt and improved margins.

S&P boosted its corporate credit rating on the Canonsburg, Pa.-based company to "BB" from "BB-." S&P also raised the senior secured rating to "BB+" from "BB," both of which are non-investment grade. The senior unsecured rating was raised to "BB-," from "B+." Also, the preferred stock rating moved up to "B" from "B-." All of the ratings are non-investment grade.

S&P said the outlook for the company is stable, based on improving operating performance that will likely be sustained.

"The upgrade of Mylan reflects its improved operating performance over the past year, success in integrating the Merck KGaA's generic business, significant reduction in leverage, and strong liquidity,"

Sep 29 02:12 PM

[Kinabalu:]

It is amazing that this list isonce again propagated with no details about how it is compiled. Audit Integrity has no analysts that actually look at companies, only quants that prepare and review statistical data. To repeat: Audit Integrity does only quantitative analysis using proprietary ratios and algorithms. This technique provides a lot of comparative detail which can be correlated across industries to historical events like bankruptcy. However, it fails utterly when the company has unusual features that do not fit the templates Audit Integrity uses.

A specific example in the list provided is Redwood Trust. RWT is an unusual mortgage REIT that uses equity capital to make unleveraged investments. The company balance sheet appears highly leveraged but most of the Debt is non recourse securitizations. Audit Integrity’s mechanistic approach can not distinguish between recourse and non recourse debt and assumes incorrectly that RWT is highly leveraged.

These types of screens have value, but only as a starting point for further investigation.

Sep 29 06:57 PM

[shookoff:]

you dont have nothing better to do ???

Sep 30 08:28 AM

[connorport:]

Check your list there genius. There are several companies in no way shape or form close to BK. Where are your banks? Banks like CIT that are teetering on the edge every second. Most of these will see a slump but will recover stronger after the recession due to their abilities to trim costs and reduce staff. Some hold Govt contracts and have proprietary patents that our Govt would not allow to pass on to foreign suiters looking to grab a bargain company. Add some banks and you may have some credibility.

Sep 30 08:03 PM

[Ralph Hunkey:]

Ill stick with RAD..........I think you have your shorts on backwards....

Sep 30 08:38 PM

[ZenInvestor:]

Looks like Hertz stopped talking and started suing these jerks!
www.law.com/jsp/articl...

Oct 01 10:59 AM

[multi007:]

Audit Integrity? Never heard of them. Should I know who they are?

Oct 03 02:56 PM