Who's Broke Now?

• Email
• Share
• Print

A "Six Dollar Burger" for $3.95? Sounds like a good deal, right? But what if you can make the same thing at home for $2?

That's the value proposition consumers are pondering now, and the reason why many Americans are deciding to stay at home rather than eat out. So it's no wonder that one of this month's "broke" companies is a fast-food hoss who may need to go on a drastic debt diet.

Maybe we can do without 1,000-calorie burgers, but can we really forgo new underwear and socks, even in times of economic crisis? That's what our other financially insecure company is trying to figure out.

Go big or go home
There's only one way that CKE Restaurants (NYSE: CKR) does things: big. Bulky burgers, major milkshakes, and "monster" breakfast sandwiches fill the menu at the Carl's Jr., Hardee's, Green Burrito, and Red Burrito fast-food restaurants CKE owns.

Unfortunately for investors, though, CKE Restaurants also believes in taking on big debt. In the company's August earnings release, balance-sheet cash stood at a scrawny $19.2 million, while long-term debt and lease obligations weighed in at a mighty $343 million. These gargantuan numbers put those Six Dollar Burgers to shame.

Even with a leaner overall economy, and the potential for value-driven restaurants to outperform higher-priced dining venues, folks aren't eating more of what Carl's Jr. and Hardee's are cooking up. Corporate same-store sales were down by 3.3% in September, and they've fallen 3.1% for the year. The company is blaming poor results on the lackluster California economy and aggressive pricing programs by the competition, as CKE Restaurants hunkers down on price to maintain higher profits.

While CKE Restaurants aims for hefty profits, McDonald's (NYSE: MCD) is actually serving up real growth for investors, reporting more-than-respectable quarterly results last week. On the other hand, Burger King (NYSE: BKC) and Yum! Brands (NYSE: YUM) have also delivered mediocre results lately, which makes me wonder whether people are not only eating out less, but also eating healthier, shunning the chunky-style menu offerings some of these companies dish out.

In either case, CKE Restaurants has a lot of room for improvement. With a current ratio at 0.7 and quick ratio of 0.3, Carl and his band of restaurants could have a tougher time paying bills, especially if same-store sales continue to decline.

Is any product recession-proof?
Underwear might seem to be a silly indicator of declining economic performance, but the recent performance of Hanesbrands Incorporated (NYSE: HBI) seems to support the theory.

In its last quarter, Hanesbrands' net sales declined by 8% (the good news is that it wasn't a double-digit decline, as was the case in the previous two quarters). With a long-term debt-to-equity ratio of 8.3 and a quick ratio of 0.6, Hanesbrands certainly isn't saving for a rainy day. The company's cash position is a measly $48 million, with long-term debt at close to $2 billion.

Premium undergarment retailer Limited Brands' (NYSE: LTD) Victoria's Secret stores have generated a 9% decline in same-store sales for the year, although its sales may be steadying with a 1% decrease in comps for September. I wonder if Warren Buffett had picked up on this underwear-as-an-economic-indicator trend when his Berkshire Hathaway (NYSE: BRK-B) scooped up value-priced competitor Fruit of the Loom.

Right now, Hanesbrands' trailing-12-month P/E is 48, so obviously some investors think the company is on its way back to the top. Can America live with holes in its socks for a few more months? Hanesbrands announces earnings later today, so we'll soon see whether folks are restocking their undergarments on the promise of an economic upturn.

Now what?
On the surface, CKE Restaurants and Hanesbrands Incorporated appear to be the kind of companies that should fare OK in a recession. Both companies deliver value-priced products that consumers are looking for in shaky economic environments. However, both companies have also taken on high levels of debt without protecting against revenue declines. As always, long-term debt should be a real consideration when making investment decisions, especially when considering fickle consumer products and retail providers.

Further debt-free Foolishness:

• Will Your Company Go Bankrupt?
• These Stocks Will Burn You
• How to Profit From This Recession