Are These Three Retailers Just Like Greece?

Brian Sozzi of Wall Street Strategies is out with a research note this morning on the potential economic fallout of a Greece default on the U.S. consumer, as well as the parallels of the situation in Greece to a couple of U.S.-based retailers. Sozzi says that enormous amounts of debt are prevalent in the U.S. retail sector, and that default in the sector can potentially occur. On the other hand, a credit default of a U.S.-based retailer would not be nearly as bad o trigger the same type of response as Lehman Brothers did or the potential (inevitable, if you ask some) Greece default. Sozzi looked for a few companies that have similarities to Greece, including "(1) burdensome leverage on the balance sheet; (2) significant net losses in recent years that have drained cash; and (3) poor future operating earnings outlook, making debt service a risky exercise." Sozzi came up with three names: Pacific Sunwear PSUN, Liz Claiborne LIZ, and Rite-Aid RAD. For a variety of reasons, these companies may experience the following problems according to Sozzi: * Inability to access excess availability under credit revolvers. * Penalizing interest rates on new debt issuances. * Dilutive equity investments to raise money to fund operations. * Credit rating cuts by agencies that raise the cost of capital. Sozzi goes on to further discuss the companies separately. He downgraded shares of Pacific Sunwear in December 2010, and shares have fallen 55% since then. He notes that Pacific Sunwear has had no operating profits since 2007, and projects to lose $82.7 million this year, and $49.2 million next year. The company expects further gross margin erosion, as noted in its 10-K. Liz Claiborne has had no operating profits since 2008, had just $22 million in cash to start the year, and has a negative equity. Sozzi believes that J.C. Penney JCP might benefit from Liz Claiborne having funding difficulties as the company could buy the brand early. Private equity could also swoop in here. The last name Sozzi mentions is Rite-Aid, which is saddled with billions in debt, $6.2 billion to be exact. The company has not been profitable since 2006 due to the interest expenses on its debt. If interest rates were to rise significantly, Sozzi says, " Rite-Aid could face liquidity problems that might require a disposal of material assets or operations to meet debt and other obligations. For those thinking Wal-Mart (WMT) will buy Rite-Aid, I say they shouldn't bother to incur $6.2 billion in debt. Rather, they should wait for interest rates to creep higher (and they will) which will likely cause Rite-Aid to sell assets on the cheap. Wal-Mart could then go in there with its Express model (putting longer term survival pressure on Rite-Aid) assuming it desires the Rite-Aid locations."