If you've ever watched the show The Biggest Loser, then you've seen folks make miraculous lifestyle changes to improve their health. Within months, these people cut calories and do extreme amounts of exercise to lose hundreds of pounds. Well, Corporate America should take notice of this success, especially those companies with some extra junk in the trunk.
You know who you are out there -- too much debt and not enough cash. This month, we're calling out two consumer-based companies who are carrying way more baggage than they should.
Are we being taken for a ride?
It's always interesting to see the information that companies choose to withhold from their earnings releases. For example, one of this month's "going broke" candidates, Cedar Fair Entertainment Company
I can see why Cedar Fair would like to quietly not acknowledge its current situation. The company did improve its cash position from $13.9 million to $56.2 million over the previous nine months in spite of declining revenue. But Cedar Fair's long-term debt of nearly $1.6 billion can strike greater fear in investors than Cedar Point's famed Demon Drop thrill ride (which, by the way, closed in November).
The company's recent operating results are equally dismal: Net revenue for the first nine months of 2009 plunged by 7.6%, even with 25 additional operating days. Interestingly, group sales with business and schools were a big part of the hit -- companies are apparently cutting the corporate trip to the amusement park just as they've eliminated 40l(k) matches. Cedar Fair is looking to reroute cash flow to cut long-term debt and will most likely slash its dividend to help its cause.
Six Flags' recent filing for bankruptcy protection is proof of how difficult it is to succeed in the fun-park industry these days. Like Cedar Fair, Six Flags was carrying a ton of debt and found itself in a hole when revenue fell by 14% during the first six months of 2009. The leader of all things fun and exciting, Disney
While Great Wolf is carrying a decent amount of debt itself, Cedar Fair's long-term debt-to-equity ratio is about 4.3 times that of Great Wolf's, so it's in a precarious spot if the recessionary economic climate continues. It's good news that the company is planning to slash some of this debt, but if things do get worse in 2010, Cedar Fair investors may find themselves on one of those coaster rides that never ends.
Country cooking on a diet?
What is it with these restaurants that serve large portions of "homestyle" food? They all seem to carry mounds of debt. Last time around, we looked at CKE Restaurants
As of Oct. 30, Cracker Barrel was holding on to about $700 million in long-term debt with overall liabilities of $1.12 billion. Combine this with the company's completely cash-starved pocketbook of $14.8 million, and Cracker Barrel could be holding a recipe for disaster.
Some investors certainly see an upside to Cracker Barrel, since the stock price has increased by 86% since January. In its most recent quarter, same-store sales rose by 0.6% and the average check increased by 2%, so Cracker Barrel certainly hasn't fared as poorly as competitors such as Denny's
The company sports a 460% ratio of debt to equity, but it's continuing to restructure its debt and recently extended the end date of a revolving credit facility and term loan. That certainly will help the company shore itself up in the short term, but Cracker Barrel will need to continue to look for new ways to increase revenue, cut costs, and knock this debt to a more reasonable level.
Now what?
Especially in these economic times, it's important for companies to limit debt to reasonable levels. Companies that rely on consumers, such as Cracker Barrel and Cedar Fair, are at particular risk when the market falls as fickle personal tastes combined with empty wallets can spell doom, especially when lots of debt is involved.
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