Which Other Retailers are Headed for Bankruptcy?

Following up on Harry Dent's "Shakeout Victims" who will go bankrupt this year

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OK, OK — we’ve had a few folks who seem to have noticed that I promised to follow up on my original Harry Dent piece, and then didn’t follow through.

That first piece came out last week, when I revealed the stock that Dent was claiming will go bankrupt as soon as August 1, when their next debt payment comes due and it’s revealed that they’re standing there naked behind the racks of cell phones, remote-control helicopters and obscure batteries. That was RadioShack (RSH), as you may well remember, and we had a good long chat about it (and some reminiscing from the hobbyists and closet electrical engineers out there).

But while that was the headliner, Dent also said that he thought there were two other stocks that were destined for the trash heap of history — and sooner rather than later, with bankruptcy announcements expected (by him, at least) sometime this year. So let’s ID those for you, shall we?

The basic idea, if you don’t feel like going back to read our original article, is that the big demographic wave (baby boomers retiring) is, along with other forces, pushing a “great shakeout” in the economy that will crush businesses and clear the way for the world’s next great innovations. That’s nothing new, of course, that’s one consequence of the march of capitalism and free markets and the “creative destruction” that feeds so many economic cycles, at least on the micro scale.

Here’s how Dent puts it in the teaser ad:

“The first announcement that I see coming will take place on Thursday, August 1. [that’s the RadioShack one]

“And this will be just the beginning of a wave of corporate failures that will send the economy into a tailspin and the Dow plunging.

“Why am I so certain?

“Because the one thing – that’s about to devastate these companies – is the most powerful and destructive economic force known to man.

“It’s the same force that likely caused these well-known American companies to fall by the wayside:

  • Borders Books
  • Blockbuster Video
  • Ritz Camera
  • Linens ‘n Things
  • KB Toys
  • Circuit City
  • Bear Stearns
  • Lehman Brothers
  • General Motors
  • Hollywood Video

“I call it The Great Shakeout.

“It’s a survival-of-the-fittest crisis period.

“Its whole function is to:

“WAKE UP Society…

“WAKE UP Companies…

“And WAKE UP Governments…

“During a Shakeout, it’s not enough anymore for companies just to come up with a revolutionary new technology or product.

“They’ll have to know how to market and distribute it.

“They’ll have to know how to connect and collaborate with customers and partners.

“They’ll have to be quick to take advantage of disruptive new technologies, radical new business models, economical new supply chains, just-in-time fulfillment processes, and new leaner manufacturing methods.”

There’s certainly some logical sense to it, and we know that companies rise and fall with changing trends and demographics all the time — though it’s rarely so specifically predictable that you’d want to say “these three companies will go bankrupt this year” … unless, of course, you’re trying to get attention and sign up new subscribers for your newsletter.

So we’ve already established that RadioShack (RSH) is his “number 1,” what are the other two companies he thinks are going bankrupt?

“Bankruptcy #2: A Minnesota firm in the same industry with over 160,000 employees is also buried in debt. This company has over $1.7 billion in debt and no way to pay it back.

“Bankruptcy #3: A company in a similar business with over 15,000 employees and 500 million outstanding shares will crash and burn when its main product soon becomes obsolete.

“In a nutshell, I believe these three companies will announce they’re bankrupt in 2013.”

“Bankruptcy #2,” sez the Thinkolator, is almost certainly Best Buy (BBY), the “big box” electronics retailer whose sales have been swooning in recent years as the great switchover to flat screen HD televisions ran its course and digital media crushed their sales of DVDs and CDs and, particularly with the many years since the last gaming console advances, video games … and the stores have now effectively been turned into showrooms for Amazon.com. Which makes management angry.

Like RadioShack, they’ve also focused heavily on mobile — selling phones and gadgets and service plans for the major telecoms.

They’ve also branched out somewhat to try to increase cachet, including adding little junior “Apple stores” to some of their shops, and they also have exposure to home appliances, which you’d think would be a growth factor with housing recovering somewhat. But really, all I ever see in my rare trips to a Best Buy are bare-looking shelves and bored teenagers playing video games.

The stock has obviously been a wounded duck, particularly after substantial losses last year meant they booked their first unprofitable year in a decade, though analysts are clinging to some optimism and projecting a profit this year and a growing profit next year — including one (deluded, I’d say) analyst forecasting what would be an all-time best profit per share from BBY of $3.84 in 2014 if they’re right. The average analyst is expecting $2.17 in earnings per share this year and $2.35 next year, which means BBY is still trading at more than 10X next year’s earnings and about 15X their average earnings per share over the last decade — which is fine for a growing company, but really expensive for a company that is stagnating or shrinking, as I expect could easily be the case for BBY (revenue grew at better than 10% a year for many years, but that appears to have come to a grinding halt in 2010-2011, with no real sign of revenue growth in my view).

Still, what Best Buy looks like to me is a “too expensive” company, not a company that’s on the verge of bankruptcy just yet. It’s possible, I suppose, but it’s more likely to me that the stock would fall enough that it gets taken private (the founders have tried to take it private before, which may be why it’s as expensive as it is now). They don’t have all that much debt, and they have some cash on the books and have continued paying (and increasing) their dividend, so I think it’s a company with serious operational challenges and I think the investors driving up the price of BBY shares over the last six months are probably too optimistic, but they seem to be stabilizing the business somewhat despite likely falling revenues so my guess is that the most likely outcome is a very long, very slow demise for BBY as a public company — and they’re not that huge (market cap less than $10 billion), so the possibility remains that they could change and improve results fairly quickly if they come up with some kind of operational turnaround that will help the business grow again … or if the economy continues to perk up, some private equity company will want to take them private, load ’em up with debt, and do something dramatic to turn things around.

And number two? Well, 15,000 employees and 500 million shares and a main product that will soon become obsolete doesn’t necessarily specifically narrow it down to one exact match, even for the Mighty, Mighty Thinkolator … but I’d say the best match for “Bankruptcy #3” is the punching-bag-of-the-decade Blackberry (BBRY), formerly known as Research in Motion.

Blackberry did have 15,000 employees a year or so ago, though that number has shrunk considerably now — down to fewer than 13,000. And it was closer to 20,000 back in 2010, so the precipitous drop of “mind share” and market share for the formerly ubiquitous Blackberry smartphone over the past several years has been reflected, to some degree, in the size of the company that makes it.

And they do have roughly 500 million shares outstanding and a product that is, while new models are technologically now back to being probably close to on par with the market-dominating Apple and Android phones, or better if you want to argue the point, practically obsolete because they have almost no chance of taking back a substantial portion of the enterprise market after frittering away their near-monopoly position with stagnation and missteps in the late 2000s. At least, that’s what I think.

Does that mean they’re on the road to bankruptcy? Well, that seems unlikely.

They don’t have any debt — which means, to me, that they’re not going bankrupt anytime soon. The stock could certainly crater (it traded down to close to the value of their cash on the books last Fall), and it may be that their obligations (pensions, etc.) are greater than shows up on a quick scan of the balance sheet … but companies who have sizable cash positions ($5 a share for BBRY in cash) and no debt or troubling debt payments upcoming don’t go bankrupt — they don’t have any creditors that they need to get relief from so they can repair the business, which is the point of most bankruptcies.

Like Best Buy, Blackberry posted its first loss in a decade or more last year. Unlike Best Buy, which is seeing falling revenue after a couple years of stagnation, Blackberry’s revenue has already fallen off a cliff, dropping from almost $20 billion in 2011 to $11 billion in 2013. Most analysts already rate it a “hold” or a “sell”, so though there isn’t a massive short position in Blackberry (at least, not in the US shares), there is certainly a shortage of optimism about their prospects. Still, the analysts do see a profit for this year, with a forward PE estimate of about 20.

Blackberry’s hopes are riding on their new operating system and the new devices that run it, the Z10 touchscreen phone that they introduced earlier this year, and now the Q10 phone with the familiar full Qwerty keyboard that they’re hoping will be their entree back into the enterprise market. A lot of the chatter now about their prospects revolves around whether the closed, supposedly more secure Blackberry network might have more value in an era of mobile security fears, and whether there is still enough of an underlying demand for physical keyboard buttons to drive sales and enterprise adoption of the Q10 now that everyone’s had a couple years to get used to touch screens.

So, I dunno — like Best Buy, it’s really hard to picture Blackberry going bankrupt immediately — their balance sheet is very strong, and unless the sales collapse dramatically further this year and the Q10 shows absolutely no sales traction they should have lowered costs enough that they could fund their operating expenses with their cash for at least the rest of the year. I wouldn’t buy BBRY at this price, since you’re effectively betting on a new product in an extraordinarily competitive marketplace, but if the sales stabilize or only decline gradually they could certainly keep going for several years at this rate — and if the product turns out to be a big hit and generates surprisingly good sales, perhaps the $13 share price it trades at now would be justified.

So that’s my take — Dent’s demographic forecasting is telling us that spending will fall dramatically as the Baby Boomers have left their consuming years and my generation, Gen X, is the smallest generation and can’t take up the slack … and partly because of those shifting trends in spending, he’s apparently predicting imminent bankruptcy for Blackberry and Best Buy … I personally would predict slower demise, and neither is without hope or under creditor pressure as far as I can tell.

And of course, you’ll find plenty of material if you want to debate Dent’s big picture prognostications — he made a couple crash predictions of the last two years that haven’t gone too well (yet, at least), but he’s also been eating out for years on some big-picture calls that he got right in the 1990s and early 2000s … if you publish a book of forecasts every couple years and have strong opinions that do have a logical backing, well, you’ll probably hit some of those forecasts right. Think he’s better than most, or worse? Or think Blackberry or Best Buy is circling the drain at a predictable rate? Let us know with a comment below.

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23 Comments on "Which Other Retailers are Headed for Bankruptcy?"

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Peter
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Peter
June 5, 2013 4:13 pm

I would have voted for J C Penney and Sears as #2 and #3 in fact I’m going to buy put spreads on RSH, JCP, SHLD Let’s see how I do !

Roger Bond
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0
June 5, 2013 4:14 pm

I’m with you, there’s a big difference between:
1) No growth, trouble brewing
2) Bankruptcy
Interested in seeing what everyone thinks.

Roger
InvestLetters.com

Peter
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0
Peter
June 5, 2013 5:11 pm

“if not for the aggressive turnaround plan that cut revenues by 40% instead of the usual 5% a year.” Travis .. do I read that right?

Shawn OHalloran
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0
Shawn OHalloran
June 5, 2013 6:16 pm

Re Best Buy, aren’t they doing a deal with Samsung to establish boutique Samsung mini-stores within the Best Buy’s, to be staffed by Samsung employees? This sounds promising for increasing appliances traffic as well as for the plethora of Samsung electronics.

Buddy
Guest
0
June 5, 2013 6:41 pm

Obviously I don’t know because I can’t spend the needed time to delve into all details. However, there is little question but that the central bankers of the world will be sucked into a currency printing war by Japan. Thus, look for cheapening of currency throughout the “developed” world. That can escalate a lot of prices including those of equities. Such may be a fraudulent solution to some of these bankruptcies, so don’t count on following markets like was possible only a few decades ago.

archives2001
Irregular
29
archives2001
June 5, 2013 7:34 pm

Don’t leave out China,
They also did the unthinkable in a clandestine way.

anthony barbuto
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anthony barbuto
June 5, 2013 6:44 pm
Radio Shack going BROKE,,,?????…YEAH…could not happen to a more deserving,.. rotten company….I had the misfortune of working for Radio Shack back in the 1990s…I lost my GOOD job in Industrial Sales in Aerospace, after 13 years. I was forced to exist on three JUNK jobs from 1993-1995…one of them was Radio Shack. Why do I hate Radio Shack…..?? *…they paid minimum wage plus a ridiculously low commission. *…the stuff they sold was all made abroad…and this was before the big push to China…I looked in the store one day and did not find ONE THING made in USA…everything was made… Read more »
archives2001
Irregular
29
archives2001
June 5, 2013 7:45 pm

Anthony,
Not that I support all retail but I was once co owner of a very cool old rare and collectible book store next to the U of Wash in Seattle. Cool books and cool people!
We finally met our demise with the Internet.
So if everyone rejects all retail per your suggestion, then our future will dwell in our work
or home cubicles. In our leisure time or on vacation, we’ll have our smart phones to order
food and drinks. No more restaurants, bars, and all our amusements will come via our phone?
A future I wouldn’t want to be part of.

olivan leach
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0
olivan leach
June 6, 2013 12:41 pm
I live in a small town in Texas were walmart is about the only thing we have to shop from. Like most small towns were walmart builds they kill off most retail so they become king of the hill you could say. My 10 year old son wanted a new tv so I go to walmart to buy one and they only have sony brand in that size. I don’t want to pay that high a price so I ask if they will have any other brands soon, no just more sony. So I order my new tv from amazon… Read more »
anthonys_6
Member
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anthonys_6
June 5, 2013 7:56 pm
I agree, Radio Shack does suck! When I bought my GPS, I was told I could get a chip (insert) that would give me traffic info. It was another $50-$80, so I told the salesman that I could not swing it now. Told him I’d be back in another month when I was a bit more flush. I came back a month later, that salesman had quit and then I was informed that my brand of GPS did not come with a traffic upgrade or “chip”! I couldn’t make them take it back, it was worn a bit and now… Read more »
Going loco
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Going loco
June 6, 2013 3:10 am
For the positive slant on Blackberry see Karl Denninger’s recent analysis (http://market-ticker.org/akcs-www?singlepost=3202931 http://market-ticker.org/akcs-www?singlepost=3211938 – search for Blackberry and you’ll see a lot more), and he has been long the stock for a while. In the UK they are struggling to keep up with demand for the Q/Z10s. Incidentally I am working on a plan to junk all my current computer equipment in one or two years’ time. I am going to run my office off one of the next generation smartphones, probably Blackberry. I will have a wireless screen, keyboard, mouse and multifunction printer; data will live on the phone’s… Read more »
alainbm
Member
1
alainbm
June 6, 2013 4:32 pm
Well you hit it on the head with Blackberry which is not going bankrupt anytime soon. A strong cash position of $1.5 billion as of March 1, 2013 and no debt. Even with the precipitous drop in revenue from its 2011 peak BBRY still has managed to generate substantial free cash flow in the year ended March 1, 2013 they generated 1.9 billion. If you look at the major markets where they have launched the Z10 and Q 10 they have been clawing back market share in the smart phone market. Although they hit a huge rough spot BBRY is… Read more »
Joseph E Fasciani
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0
June 9, 2013 10:50 am

Lots of great comments, even a few I’ll take action on, ASAP. It’s VERY refreshing to visit a site where people are civil, have their Spell Checkers working, and discuss relevant ideas and concerns. It shows what a wonderful world the Internet could be!

Myron Martin
Author
197
June 11, 2013 5:31 pm
There is no information that is more valuable than personal “on the job” experience being reported first hand. Never having shopped at a Radio Shack I must admit I found the report by Anthony Barbuto rather brutal and disturbing, but no doubt there are other companies with questionable practices in the retail industry. Harry Dent MAY turn out to be right on this one, in which case properly timed PUT options could be a good play. Anybody if they make enough predictions is bound to get some right if they have done their homework, however in the case of HARRY… Read more »
Alan Harris
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Alan Harris
July 21, 2013 12:19 pm

7/21/13…..BBRY and BBY seem to be doing rather nicely as of this date. Remember, the motto ‘dont try to catch a falling knife’ should not be confused with ‘ a fallen knife (past tense) is often worth picking up’. Trading once the herds’ dust has settled, can be highly profitable.

Myron Martin
Guest
0
July 21, 2013 2:11 pm
Agreed Alan, the tendency of human nature is to “swing to extremes” based on short term news. Being dramatic sells newspapers and/or investing newsletters, the truth or REALITY usually lies somewhere in the middle. The old adage to “buy when there is blood in the streets” or buying when nobody else wants the stock is not easy to do, but is far more profitable than “following the herd” stampedes do not usually end well. I certainly wish I had bought some Blackberry stock near its low point and may still try a “stink bid” to pick some up below market… Read more »
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