The Retail Death Watch Continues

It's an ugly time for the ravaged retail industry. And while investors shouldn't completely avoid the entire sector, they should definitely be extremely discriminating when it comes to the stocks they invest their hard-earned cash in. There are a lot of sick retailers out there, and many of them are going to be winnowed out as the economy continues to sink.

I was recently called out by some Foolish readers for too often using Talbots (NYSE: TLB  ) and Borders as examples of debt-heavy, beleaguered businesses whose stocks investors should avoid. Come to think of it, yes, I have called out these stocks many, many times; they just seemed like good examples of stocks that we may have to kiss goodbye in the ugly economic climate.

Point well taken, though -- let's take a look around for some other retailers that are having a tough time staggering through the current economic crisis.

Scary stocks abound
In good times, ailing businesses can mask their problems. When times are terrible, though, the weak are weeded out, and the current economic climate has reminded us all why too much debt is dangerous for corporations as well as consumers. Based on several metrics, I've accumulated a list of retail stocks I think investors should think twice about.

Company

Debt/Equity

Earnings from continuing operations Margin

Quick Ratio

Rite-Aid (NYSE: RAD  )

571.3%

(6%)

0.3

Dillards (NYSE: DDS  )

61.3%

(0.6%)

0.1

Bon-Ton (Nasdaq: BONT  )

465.3%

(0.2%)

0.0

Saks (NYSE: SKS  )

59.1%

(0.5%)

0.0

Pier 1 (NYSE: PIR  )

107.2%

(6.3%)

0.5

*All data from Capital IQ as of Jan. 15, 2009. Figures reflect trailing 12 month data.

Granted, these are priced in penny-stock territory now, but investors shouldn't let the "low" prices fool them -- these companies have deep troubles to contend with, not least of which is the fact that they've got way too much debt. (Read up on these terms in "How to Read a Balance Sheet: Current and Quick Ratios," "Using the Debt-to-Equity Ratio," and "Foolish Fundamentals: Margins.")

Rite-Aid competes not only with strong pure-play drug store rivals, but also with supermarkets and discounters. That was plenty of competition even when times were better; can this struggling company make it through when times are this tough? I'd be skeptical. Check out its crazy high debt-to-equity ratio, too. Meanwhile, a quick ratio under 1.0 is generally a red flag for investors.

We've already heard department store companies are suffering, and Saks, Dillards and Bon-Ton appear to be in particularly rough shape. And Pier 1 has been struggling for years, but one might wonder if this deep and ugly recession will finally sound the death knell, much as it recently did for long-suffering KB Toys.

All of these companies aren't turning a profit in the last 12 months (Pier 1 hasn't made an annual profit since 2005), and note that none of these can cover their interest expenses with operating income from continuing operations in the last 12 months. Ouch.

Cash is still king
The current financial crisis has really made me think a great strategy for investors is to seek out very high-quality companies with plenty of cash and very little or no debt. Even if those companies are pressured by the current economic storm and suffer near-term drops in profitability, they still have the means to weather the storm, and maybe even make strategic acquisitions.

For example, even though Google (Nasdaq: GOOG  ) has lost some of its luster recently, and it stands to reason that its advertising business will take a hit in such bad times, the 51% decrease in its stock price and a price-to-earnings ratio of 18 -- and this is a tech company -- make it look increasingly cheap for long-term investors. Meanwhile, remember, Google has a ton of cash -- $14.4 billion, or $45.80 per share -- and no debt.

Don't get depressed, look for opportunities
I know I'm being a bit of a prophet of doom, but unfortunately, with a serious economic correction needed after such a massive debt-fueled bubble, it's simply inevitable that the retail industry's going to get ravaged. This is part of the economic cycle, although it's admittedly not very pleasant.

On the other hand, it stands to reason that investors who choose companies that survive and pick up the remaining market share will end up with some pretty nice gains in their portfolios. So beyond the dark clouds and violent storminess that's currently at work, there's a silver lining.

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Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (38)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 15, 2009, at 7:34 PM, dmb4ever wrote:

    I have been a store manager at Pier 1 for the past 7 years and even though the economy has struggled since 9/11(not many has prospered), Pier 1 is a company that I would never turn my back to! They have very loyal customers and loyal employees and upper management that cares about the future of this company. The company has been heading in the right direction under president Alex Smith since he took on his role and I think fiscal 2010 will be a solid year, no matter what rumors or bad press might be out there.

  • Report this Comment On January 16, 2009, at 9:58 AM, jad1725 wrote:

    You have a lot to learn! You lack the ability to see that the hand writing is on the walls in front of you. A few loyal customers and upper managment caring about the company has nothing to do with $$$ coming in the doors. No sales no company.... Again, NO SALES NO COMPANY NO EMPLOYEES NO MANAGERS NO UPPER MANAGEMENT!

  • Report this Comment On January 16, 2009, at 1:19 PM, bdrummer1005 wrote:

    I joined the Pier One sales staff in December 2008 and I've been a loyal customer for years (same store). The majority of our customers are looking for sales merchandise at deep discount. A store can not make money when customers wait for 75% off, then buy. What is the management thinking? I love the merchandise but will the business model and current management practices survive the downturn? Get a reality check Alex Smith. We need you to make the tough decisions.

  • Report this Comment On January 16, 2009, at 4:33 PM, Ownit wrote:

    Don't get depressed, look for opportunities,

    Thanks for reading the posts. Any retails you would recommend. There has to be some buys when we hit bottom. Just when that is who knows.

  • Report this Comment On January 16, 2009, at 5:29 PM, Wharton93 wrote:

    This recession will really punish the bricks and mortar the way we all thought the "dot-com" was going to in the late 1990's. It just took the dot-com a decade longer than expected. But, the death of CompUSA, Sharper Image, Circuit City, every other book store, etc., etc---a lot is internet driven. In this economic environment, all but the hyper efficient bricks&mortars are finished.

  • Report this Comment On January 17, 2009, at 3:52 AM, avw123 wrote:

    dmv4ever- Do you happen to be from Fort Worth, Texas?

    I have worked for the company for 11yrs and have seen many products and employees come and go. There are many other retailers that carry similar items, with lower prices. The one thing that sets P1 apart from other retailers is the customer service that is provided by the employees at the store level. We are expected to be friendly, helpful, and sell like we're straight commision. We will happily greet when customers enter the store, help them decorate a room that we've never seen before, and even help carry their purchases out to their car. Most of the other retail stores that I've been in won't even glance in your direction, and if you ask them a question, they are completely bothered. That is why I don't understand why P1 is making such poor decisions regarding their employees. Not only have jobs been cut and benefits eliminated (which although unfortunate, certainly understandable), but employees are expected to work 4hr shifts two or three days a week. That means only getting 8 to 12 hrs, 16 if you are really lucky. We had a visit from our Regional manager and she outlined how many hours each of us will be allowed to work. Our two most valuable employees, who open the most IC's, have the highest sales, and are the most dependable, had their hours cut from between 25-30hrs to 16hrs. Oh, and we need to hire 2 NEW people to work the additional hours. Company wide, from upper management, they want employees to work about 12hrs a week. How helpful and friendly can you be when your hours have been cut from 25-30, to 12? Your worried about not having enough money to even scrape by and where you will be going to apply for a new job. And although there are some exceptions, generally, people who work at a job 12hrs a week don't care much about their job. I think that will ultimately be P1's demise, not having employees around that are able and willing to sell the merchandise needed to become profitable again. Our store was one of a few stores in the company that was profitable last year (almost there this year). My store manager has been very resistant to cutting hours and increased existing employees hours, before hiring seasonal help. He kept the number of staff members in line with the amount of hours that the EMPLOYEE wanted to work. Therefore we have always had very low turnover. It will be interesting to see if our sales reflect our new way of scheduling. Any thoughts?

  • Report this Comment On January 17, 2009, at 5:18 AM, kahunacfa wrote:

    I LOVE to look at and sometimes buy, slowly accumulate out-of-favor unlved low expectation stocks and industry groups. Retail stocks right - well not exactly.

    Retailers need working capital, easy buy-now pay in 30-60-90 days or better yet, pay us when you sell or get paid. In this Greenspan inspired, deregulated financial world it is COD=cash on delivery or pay up first we will ship(PFS) or no merchandise. Hello Circuit City & Read our Chapter 7. - Thanks but no thanks to the group.

    I can wait until next January 2010 to take a look at disappointing Holiday 2009 sales. In January 2010 I can see who is left. Coach(COH), Tiffany(TIF), the best names in the business, WalMart(WMT). When I can buy at 25% of book-value, YES. Half book-value, maybe. Book-value - What is the Investory worth? Arther Anderson you tell me.

    Remember the Alamo and Enron, and 911 ...

    Kahuna, CFA

    <Owns A.T. Cross & Buying Starbucks(SBUX) <$8.

    hanks

  • Report this Comment On January 19, 2009, at 7:52 AM, Nebulan wrote:

    Yes we are taking a beating. I currently work in a Dillard's Store, and I watch the market regularly to see whats in store for its stocks and dept. Department stores have really gotten themselves into a real pickle. As mentioned above in order to do business now we have to cut hours. Drop our prices to uncommon lows and hold unusual sales. The problem with that obviously you can only run a business so long like that to attract people if your already stretching your dollar. Rubber money anyone?

    When you see signs in the stores for the next couple of months that read 50% off or 70% off. Please note that if there are a lot of those signs up that we are slowly bleeding to death financially. Thank you for surfing our isles on a regular basis loyal customer. To bad your to cheap to realize that what you truly represent are a flock of buzzards. Hovering over the store at all times. That's what we see in the stores. Feasting customers who have an endless appetite for low low low down deals. I don't want to be a Walmart. Like Pier 1 I to want to sell something that's actually worth the time selling, and at a reasonable price.

  • Report this Comment On January 19, 2009, at 4:15 PM, conwayguy2001x wrote:

    Interesting Nebulan. So I take it you go out, pay retail prices (WAY OVERFLATED) and don't look for sales or bargains? If all of your products weren't made by China for $1.50, I wouldn't have a problem paying $100.00 for your retail jean prices, but please, Dillard's bites. You don't have anything in Dillards that I can't get from the original maker's website, Macy's, Neimans or anywhere else...plus, 90% of your sales people have their nose so high in the air, if it rains, they are going to drown! Take a look at your own store to see why people don't shop there or only go there for sales. The dollar speaks volumes and I chose to spend it where I feel appreciated, not snubbed. Pier 1 is great at customer service, but enough with the dayum wicker!

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