Who’s Broke Now?

"Consumer basics" seems to be an outdated term these days, with folks changing their opinion of which retail and consumer products are necessary. Americans have cut their spending across the board, with restaurants and retailers among those fighting for survival amid sales declines. Let's see who's losing money and tackling debt in this month's installment of "Who's Broke Now?"

Is the light on at Krispy Kreme?
I don't know about you, but I find the smell of freshly baked donuts appetizing no matter what time of day it is. However, making tasty treats doesn't necessarily lead to making lots of money. Krispy Kreme Doughnuts (NYSE: KKD  ) is no stranger to financial follies, and it's certainly broken the heart of more than one investor. (And let's not even talk about its contribution to growing obesity rates and higher health-care costs.)

Today, Krispy Kreme is still losing money, but it did deliver almost break-even results for the last quarter. The good news for investors was a 5.9% increase in year-over-year same-store sales for company-owned locations, which beat even McDonald's (NYSE: MCD  ) August same-store sales of 2.2%

And Krispy Kreme is facing pressure from high-performing rivals. Recently, competitor Tim Hortons (NYSE: THI  ) linked up with Cold Stone Creamery to serve a wide range of concoctions in co-branded locations throughout the United States and Canada. Krispy Kreme, trying to fight off the invasion of the Canadian donut giant, has countered with its own launch of donut shops with soft-serve ice cream.

Yes, Krispy Kreme did generate positive free cash flow in three of the last four quarters (but not in the last quarter), while cutting long-term debt. But its cash position also dropped by almost 45% in the previous 6 months, to $19.6 million. With combined current and long-term debt/obligations of $113.5 million, the company doesn't have much cushion if consumers do decide to cut back on tasty treats.

As Starbucks (Nasdaq: SBUX  ) has found out the hard way, consumers don't always drown their sorrows in sugary sweets when times are tough. Sure, Krispy Kreme's net margins have improved to just -1.2% over the last year -- a far sight better than the -15.6% that the company reported for fiscal 2007. Maybe the worst of the recession is over, but if it isn't, Krispy Kreme investors could find themselves with a box full of stale donuts.

Is Pier 1 at the dock's edge?
Well, you know it's bad when a company starts its earnings' "highlights" by touting an improvement in (but not elimination of) operating losses and a 7.6% drop in comparable-store sales. That was the case when Pier 1 Imports (NYSE: PIR  ) announced second quarter earnings last week.

The executive team almost made it worse by talking about "mixed metaphors" and "green shoots" in its earnings synopsis. Rhetoric is fine and progress is good, but it's hard not to improve on last year's $30.2 million quarterly loss. Pier 1 cut the loss to $15.8 million, but cash is also dwindling, decreasing from $191 million last August to $108 million this August. With liabilities of $438 million and inventory of $336 million, Pier 1's financial picture isn't very attractive.

Home-furnishing companies have struggled at all ends of the market spectrum. Monthly sales for the furniture and home sector have declined by almost 13% year-over-year with no indication of improvement. Higher-end competitor Williams-Sonoma (NYSE: WSM  ) must also now battle consumers' non-luxurious tastes, as folks are more apt to head to Target (NYSE: TGT  ) stores for name-brand products at better prices.

Pier 1 has a history of underperforming, with sales declining at an average rate of 8.1% annually over the past 5 years. If you had invested in Pier 1 at that time, your average return over the five-year period would be a loss of 26%. The stock price hit a low of $0.10 this year on bankruptcy fears, and its current price of $3.78 seems way too high, considering the amount of risk the company is carrying.

Now what?
Both Pier 1 and Krispy Kreme have improved over their previous results, but when you're losing money, let's hope that you're showing some glimmer of hope. Loads of debt does increase risk for any company, and it can especially hurt retailers and restaurants subject to constantly changing consumer tastes. As Americans look to cut their own debt exposure, Pier 1 and Krispy Kreme are among the retail companies with not-so-tempting investment prospects.

So, Fools, which bound-for-the-bin companies should I examine next month?

For related Foolishness:

Tim Hortons is a Motley Fool Global Gains pick and Starbucks is a Stock Advisor and Inside Value recommendation. The Fool also owns shares of Starbucks. Hungry for more investing advice? Give the Motley Fool’s newsletters a try via the 30-day free trial.

Fool contributor Colleen Paulson owns stock in Tim Hortons but no other company mentioned in this article. The Fool’s disclosure policy is always fresh and tasty.


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  • Report this Comment On September 25, 2009, at 1:05 AM, thomdd1959 wrote:

    The Federal Reserve Bank is Set Up as a Privately Owned Banking Cartel Controlled by a Small Elitist Group of Powerful International Bankers. This Same Cartel Owns Other Central Banking Systems Worldwide Including the IMF (International Monetary Fund) and World Bank.

    We Don’t Need To Just Audit “The Fed Scam”

    We Need To Cut Off Its Ugly Head Once And For All!

    The National Sovereignty of the Great U.S.A. must never, ever be compromised in any way!

    “We the People” still know Health-care reform is really about Power and Control!

    “Mr. Chairman, we have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks, hereinafter called the Fed. The Fed has cheated the government of these United States and the people of the United States out of enough money to pay the Nation's debt. The depredations and iniquities of the Fed has cost this country enough money to pay the National debt several times over. These twelve private credit monopolies were deceitfully and disloyally foisted upon this country by the bankers who came here from Europe and repaid us our hospitality by undermining our American institutions. Those bankers took money out of this country to finance Japan in a war against Russia. They created a reign of terror in Russia with our money in order to help that war along. They instigated the separate peace between Germany and Russia and thus drove a wedge between the Allies in the World War." --Congressman Louis T. McFadden, Chairman of House Banking Committee 1921 through 1931 (In a speech made before the House in 1934)

    “The essence of Government is power; and power, lodged as it must be in human hands, will ever be liable to abuse.” --James Madison

    “Every government degenerates when trusted to the rulers of the people alone. The people themselves are its only safe depositories.” --Thomas Jefferson

    Our Freedoms, Our beloved Constitution, Our National Sovereignty, “We the People” and the fact that we are a Constitutional Republic is why the United States of America is and will continue to be the Greatest Nation in the World! Americans have Heart!

    http://www.tomdavidd.com/blog/

    “The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.” –Abraham Lincoln

  • Report this Comment On October 12, 2009, at 11:32 AM, erik0203 wrote:

    You guys have predicted the death of Pier One for a loooooonggggggggg time now. I guess if you predict it long enough, you will eventually be right huh??? Good work!

  • Report this Comment On October 13, 2009, at 6:56 PM, Tyrone85 wrote:

    well around ( Jan ,2009) at : .30 cents tyrone 85 , say" buy low sale high. Pir,Aig,C, Fre,Fnm, Gnw, and Leg, if, one pay. .30 cents for : Pir, today high is $5.40. .30 time 1000=$300. dollar //today $5.40 time 1000=$5400.00 dollar // other was Ire. at : $1.07 or less// now // $ 17,500. Tyrone 85 ,"say ' stock will go to low ,on the Avg, every 52 week // proof ,just check at stock ( 52 low / high) . Aig, is a"buy' at $44.00 it "will go : $600 per with in ;'52 weeks/ question " can: cramer/ explain" why" The 'TV: show ' say" sell low? tyrone 85 say" sell " high" reason !!! you will make " money or paper!!! Plus" dollar cost avg// is the " key !!!!!!!!!!!!!!!!!!

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