When times are tough, a little schadenfreude goes a long way. I mean, if your investment portfolio looks like it's been hit by a Mack truck, then I'm sure you'd take some solace in knowing that your neighbor's portfolio has sunk like the Titanic. That's why looking at companies that are potentially going broke is so much fun (especially if you're not invested in them).
When we've looked at "broke" companies in the past, we've considered folks like Eddie Bauer (which actually did file for bankruptcy protection in June). This time, we're going to take a look at two highly-leveraged companies living in the real world of retail and restaurants.
Dude, am I still cool?
Teen retail, once the bastion of high-fashion (and high-priced) duds, is being taken over by value-focused clothing options. Not good news for trendy clothing companies like Quiksilver
Two years ago, back when the economy was relatively decent, Quiksilver's stock price lingered around $14. When you're selling $88 women's tank tops, you really need money flowing freely throughout the economy, so any bump in consumers' personal situations causes serious problems. Not surprisingly, the stock is down more than 83% from its high point in 2005, and it even hit the dollar menu early this year.
In its last quarterly earnings release, Quiksilver's revenue dropped by 17% and gross profit was down by 22%. With debt exceeding $1 billion, Quiksilver has tried a get-out-of-debt-quick plan in which it borrowed $150 million from the private equity firm Rhone at 15% interest and gave up seats on its board. At last report, the company had more than $307 million in inventory (huge!) and only $74 million in cash, putting it perilously close to being broke. Quiksilver reports earnings again this week, so we'll soon see if the company has made any substantive improvement in its operations.
Of course, Quiksilver isn't a lone ranger in fighting the value tide in retail. Once-uncool but cheaper Aeropostale
It might not be alone there, but Quiksilver's debt situation and declining sales are just two of the reasons that it belongs at the value investor's reject table.
These pancakes aren't so palatable
Eighty million dollars in non-restricted cash on hand isn't chump change, but when you owe more than $2.2 billion in long-term debt and leasing obligations like DineEquity
OK, so consumer confidence numbers are improving, and competitor Darden Restaurants
Over the long haul, DineEquity has certainly outpaced rivals like Denny's
In its most recent earnings statement, DineEquity expresses its strategy of promoting value for its customers while aggressively paying down debt, which is pretty much a no-brainer considering the company's current situation. And while DineEquity touted its success in retiring debt in its last quarterly earnings report, actual long-term debt decreased by only 2.5%.
DineEquity's stock price is up more than 300% since its low of $5.24 earlier this year, so investors somewhere must see a glimmer of hope in the company's profit picture. I'm not one of them, though, and any company with that much debt and so little cash in this fickle economy would actually make me turn down a plate of pancakes for once.
Folks are always going to eat and drink, so it's not like selling retail products is a recipe for failure, even in this struggling consumer-based economy. However, as Eddie Bauer and Circuit City can attest to, high levels of long-term debt can take a company from survival to failure in a heartbeat, making Quiksilver and DineEquity among those to watch in the coming months.
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Fool contributor Colleen Paulson does not hold positions in any of the stocks mentioned in this article and is all about chocolate-chip pancakes. The Fool's disclosure policy always sets the latest trends.