It is now no secret that we are in a very weak economic environment and if it is not an official recession it is for about 80% of the country.  We've already seen some retailers collapse entirely or at least fall into the restructuring chapters that protect the company from liquidation.  Among these are Sharper Image, Lillian Vernon, Mervyn's, Ames, Harvey Electronics, Good Guys, Levitz, Bombay, Movie Gallery, Tweeter, and other former modest-sized retailers which have filed to shield themselves from creditors.

There are several larger retailers that are in real trouble. Some are at risk for bankruptcy and each of them could have to cut operations so much that their revenue would be a fraction of what it is now.

24/7 Wall St. has reviewed the stocks of a number of retailers that are still operating independently. If  consumer buying power gets worse it could lead to an ugly outcome for retailers that don't have strong balance sheets and at least modest same-store sales.  Bankruptcy is not at all a pre-determined fate and these retailers may have modest prospects if they can get their houses in order.  But significant risks loom for their shareholders, especially if the economy takes several quarters to recover.

Sears (SHLD) is the most likely candidate for mass store closings. It has the balance sheet to weather a tough period, but not at its current size. Between the Sears and K-Mart brands, SHLD operates in 3,800 locations. The company is losing money and its cash balance fell sharply in the last quarter. In its comments about financial results, Sears said it did not expect that the troubles with a slow economy or rising commodities prices would get better this year. Comparable store sales for the Sears brand dropped almost 10%. The only way to improve that if the current retail recession continues is to close 10% of the company's outlet, about 350 locations.

Circuit City (CC) has to top the list of retailers that are not likely to make it out of a severe recession.The company's share price is $2, down from over $25 less than two years ago. Its market cap is only $350 million even though annual revenue runs about $12 billion. The competition in consumer electronics is killing CC margins.The company has almost 700 stores. If a downturn lasts well into next year, CC will have to cut scores of locations or seek court protection for its assets

The cool importers..... You can argue that Pier 1 Imports Inc. (PIR) and Cost Plus Inc. (CPWM) are being thought of as one because the plan by Pier 1 to acquire its smaller troubled competitor.

Pier 1 is expected to lose money for fiscal Feb-2009 and has posted losses over the last three years.  The good news is that appears to have liquidity enough to get through the storm as long as it can move back to annual profitability in fiscal 2010 as analysts expect.  As of March 1, 2008 it had 1,117 stores and it has already closed some locations and many expect more.  If consumer buying power get worse, at a minimum you could anticipate fewer Pier 1 stores as it reviews its geographic position. If the retail recession lasts into next year, Pier 1's future starts to get dicey.

Cost Plus is thought of by many as "The Other Pier 1" and it can't be any secret that its restructuring and turnaround have failed to generate anything of benefit. Its market cap is only $50 million against annual sales of $1 billion  It has just shy of 300 locations and Cost Plus is faced with the prospects of closing more stores or paring down the size of some of the stores on its current leases whether their landlords want that or not.  As it fights a buyout by Pier 1, Cost Plus is faced with management and legal distractions not unlike those which Yahoo! has been up against.  Analysts expect losses for the next two years and loyal customers are likely wondering how long the financial performance can be tolerated. The current market value of the company is astonishing close to nothing

Re-Sellers:

Tuesday Morning Corp. (TUES) is another at-risk liquidation retailer that sells many in-home items that overlap products sold at larger retailers.  In fact, it is not infrequent at all that the items on their shelves still have the original large store's price and retail tag on them with the lower-priced Tuesday Morning tag over the original price.  The company is expected to be profitable by analysts but it doesn't take a genius to realize that the company has had enough earnings warnings to bring the stock down from $30 in 2005 down to $4 today.  Bankruptcy isn't an immediate possibility, but it would be easy to imagine that with 800+ locations the company may start lopping off some under-performing units.

Gap Inc. (GPS) is such a damaged brand that you have to be amazed that it has remained profitable during a period of declining sales.  The "dead money stock" classification for investors has been in effect for almost this entire decade.  It shuttered its Forth & Towne brand and has been restructuring under new management.  It has announced that it is closing many locations of the Gap, Banana Republic, and Old Navy brand stores, and it is really consolidating the Gap locations of Baby, Kids, and "Us."  The problem is that GPS has to fight so much brand damage that even in the current economy the restructuring could go on for years.  Added economic pressure will drive more store closures.  The good news here is that this could always be a break-up stock or a a perpetual "re-org" for investors.  Analysts are still expecting profits for the coming years, so don't lose too much sleep about whether or not the company will be there.  How many locations of each store brand is another question entirely. With same-store sales at Old Navy in particularly bad shape, the entire division may be closed. The Gap will make it, but its weakest brand will not

Blockbuster Inc. (BBI) has been a perpetual saga which many would have call a race to Zero. Netflix is only one of its problems, but it is amazing that Blockbuster has managed to do well as it has.  Many market pundits believe it is only WHEN rather than IF it disappears.  But there is hope and amazingly enough it is expected that the company will be profitable for each of the next two years and it is even expected to grow earnings.  Whether or not this happens depends on both the economy and the rate at which consumer move to digital downloads.  The company has sliced store counts already but it still has 7,800 locations when combining the U.S. overseas.  Competition and a changing consumer are elements BBI has had to adapt to and Wall Street would seemingly not be in a position to blame management if they decided to close more stores. While consumers may still rent DVD's, the risk that internet delivery of content will grows as a formidable alternative every day puts an endpoint on physical stores are a primary delivery system. At some point Blockbuster cannot support its own infrastructure.

Rite Aid Corp. (NYSE: RAD) has been another turnaround stock that just never turned around.  The company was a huge growth engine for investors for much of the 1990's, but it has been under $10 this whole decade and sits close to a $1 now.  It has lost money in the last two years and Wall Street expects losses to continue for the next two years. It has over 5,000 stores and yet it doesn't cover the entire U.S.  When a company keep losing money, has sporadic to negative sales growth, and faces much more dominant competition, the market begins to wonder if or when the day will come when it disappears.  A turnaround is always possible and it has many investors holding out for that day.  But competing against Walgreen's, CVS, Wal-Mart, and Target is a tough space to be in.  If the trends of the last decade continue and if you include an economy where stronger companies can undercut Rite-Aid day in and day out, then store traffic is likely to fall very sharply.  Management's purchase of shares recently can't change the economy.

Some of these companies will not make it, at least not without a Chapter 11 filing. Others may survive, but in terms or size and store count, they will likely look nothing like they do now.

Jon C. Ogg and Douglas A. McIntyre

Fannie, Freddie stay in free fall on bailout talk

August 21, 2008

Fannie Mae chief executive officer Daniel Mudd, speaking on National Public Radio, reiterated that the company has more capital than it has ever had and that it has not asked for nor been offered help from the Treasury Department.

The fate of the two lenders, which together own or guarantee nearly half of all U.S. mortgages, has cast a pall over Wall Street and exacerbated a year-long credit crunch.

U.S. President George W. Bush signed an emergency law in late July that granted the Treasury Department the power to extend unlimited credit to the two companies if needed.

But unexpectedly steep second-quarter losses and reports that foreign investors may be dumping Freddie Mac and Fannie Mae bonds renewed selling pressure.

Freddie Mac and Fannie Mae were forced to pay their highest-ever risk premiums over Treasury bonds in recent debt offerings - a sign of growing nervousness about the companies' financial health. On Tuesday, Freddie Mac issued $3-billion (U.S.) of five-year notes, yielding 4.172 per cent, or more than a full percentage point greater than comparable Treasury bills.

Foreign investors, including many central banks, hold more than half of the two companies' combined $3.5-trillion worth of debt.

Analysts said investors appear to want Washington to put capital directly into the companies, rather than just provide an implicit guarantee. That would clarify the sometimes murky status of the companies, which were created by the government, but later privatized.

The ability of Fannie Mae and Freddie Mac to serve "two masters" - the U.S. government and private shareholders - has become untenable, argued Bose George, an analyst at Keefe, Bruyette & Woods Inc. He said the interest rate spread will remain wide as long as the government remains on the sidelines.

Critics, however, argue that a bailout would unfairly reward the companies' management, shareholders and debt holders at taxpayer expense.

"The Treasury bailout plan is socialism for the rich, the well connected and Wall Street," said Nouriel Roubini, an economist at New York University.

Mr. Roubini said the government should instead wipe out shareholders and force bondholders to take "a haircut."

U.S. officials are reportedly weighing this moral hazard against the knowledge that the two companies underpin an already shaky mortgage market. If Fannie Mae and Freddie Mac collapse, the mortgage bond and insurance market would freeze up, making it tough for banks to extend credit to homeowners.

The Federal National Mortgage Association, nicknamed Fannie Mae, was created during the Depression to encourage banks to extend credit to homeowners. It was privatized in 1968. The Federal Home Mortgage Corporation, or Freddie Mac, was created in 1970 to prevent further monopolization in the secondary mortgage market.

Fannie Mae and Freddie Mac grew rapidly and took on far greater risk, particularly during the post-1980s housing boom.

Combined, the two companies' now boast assets nearly 50 per cent greater than the largest private U.S. bank - Bank of America.

Both companies were involved in accounting scandals in 2003 and 2004, prompting allegations of mismanagement.