Businesses On The Brink: Change Or Fail?

By Mark Riddix | April 02, 2010 AAA
Businesses On The Brink: Change Or Fail?

Many major companies like CircuitCity and Linens 'n Things went bankrupt during the economic crisis of 2008-2009. These companies folded under high debt levels and a decline in sales. Just because some companies were able to survive the economic downturn of the past few years doesn't mean they are out of the woods yet. Companies like Blockbuster (NYSE:BBI) and Borders (NYSE:BGP) are going down with their industries, meaning that making drastic changes is their only option. Here are five major companies that are struggling - it is unlikely that all will survive.

In Pictures: The Biggest Bank Failures

Blockbuster
The former king of video rentals is on life support. Blockbuster's shares are trading under 30 cents per share and the firm is saddled with debt. Blockbuster has over $963 million in debt. The company's biggest problem is that its business model no longer works. Blockbuster rose to prominence by renting videos and DVDs to customers from its traditional brick and mortar stores.

However, Netflix has become the new king of movie rentals with its DVD by mail strategy. To make matters worse, Redbox is quickly gaining market share with its $1 DVD rentals from kiosks set up at grocers, fast food chains and convenience stores. Blockbuster is trying to change its business by adopting a DVD rental kiosk model and offering mobile movies via smartphone. But unless Blockbuster can rid itself of its onerous debt burden, these changes may be too little, too late.

Rite Aid
Things haven't been right at Rite Aid (NYSE:RAD)in quite a long time. Rite Aid's biggest problem is that the drug store giant just doesn't make money. Rite Aid has been losing money and is expected to have negative earnings for the foreseeable future. Add in that Rite Aid has only $150 million in cash and more than $6 billion dollars in debt and you can see why the outlook isn't so rosy.

The ill-advised Brooks Eckerd acquisition has buried the company under a mountain of debt. Rite Aid has seen its same store sales decline for nine consecutive months. With Walgreens, CVS and Wal-mart all competing for pharmaceutical sales, it doesn't appear that there is any viable plan that can save Rite Aid. (For related reading, see Analyzing Retail Stocks.)

Borders Group
The printed book market just doesn't seem large enough for Borders anymore. Borders is the second-largest bookstore chain in the U.S. behind Barnes & Noble. Unfortunately for these companies, bookstore chains are going the way of the dinosaur with Amazon digitizing books and becoming the largest online seller of books in the United States. Borders is developing a Kobo e-reader to try and compete, but with e-book readers from Amazon, Apple and Barnes & Noble, Borders may be living on borrowed time.

How troubled is Borders? The company's stock currently sells for under $2 dollars a share. Borders has to repay a $42.5 million dollar loan due on April 1. If Borders can raise this money, the bookstore chain still faces a $360 million dollar note payment due July 2011.

Perhaps the most damning sign was that the company's CEO left to take a job at a supermarket chain. The company's short-term hopes lie in getting creditors to refinance debts. The best hope for long-term survival is an acquisition by a larger bookstore chain like Barnes & Noble.

Palm
Palm (Nasdaq:PALM) was counting on the Pre and Pixi Plus to lead its resurgence back to the top of the smartphone market. Unfortunately for Palm, these two smartphones have failed to deliver. Although the initial response was good, Palm has been unable to sustain its momentum. Palm reported a non-GAAP net loss of $102 million last quarter. (Find out what these numbers really mean in How To Evaluate The Quality Of EPS.)

Palm has found it increasingly difficult to compete in the crowded smartphone market with Apple, Research in Motion and Google. Shares have been slaughtered, dropping 77% over the past six months to $3.75 – and this valuation may be overly generous. Some Wall Street analysts have valued the smartphone marker's shares as worthless and are speculating on a Palm bankruptcy.

So, what can Palm do to survive? Palm's best chances at a turnaround may be for a larger industry player like Nokia or Motorola to buy Palm out. Palm is burning through cash at an alarming rate and would need a technology company with deep pockets to keep them afloat.

YRC Worldwide
YRC Worldwide (Nasdaq:YRCW) is a Fortune 500 Company with a whole lot of problems. YRC Worldwide competes in the trucking industry - an industry in which carriers have very little pricing power and intense competition. The trucking company was on the verge of bankruptcy last December before doing a $470 million dollar debt for equity swap. Existing shareholders were diluted and shares now trade below 50 cents.

The equity swap may have only saved the firm over the short term. YRC Worldwide is still awash in red ink due to massive losses and mounting pension obligations. The trucking firm has tried everything to lower costs including employee layoffs, property sales and plant closures. Despite all of these actions, YRC Worldwide has not posted a profit since 2006. All of these moves may just be delaying the inevitable.

The Bottom Line
Saving these companies may be an impossible task. Unless these companies undergo a major restructuring or are acquired by a competitor, they may collapse before the calendar year is over. (Even in bankruptcy, some companies can be a good investment. Find out more in Taking Advantage Of Corporate Decline.)

Still feeling uninformed? Check out last week's business news highlights in Water Cooler Finance: Zombies File Taxes, Dead Bills Rise Again.

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