Yesterday was a sad day for those of us who fondly remember brightly lit stores with video games, computers, and all sorts of other electronic gadgets. RadioShack Corporation (NYSE:RSH) defaulted on its debt for a second time, this time without a financial backer to buy it a little more time. The company’s fate looks to be Chapter 11 bankruptcy protection, an end certainly not fitting to such an iconic part of our most recent electronic revolution.
For Canadian consumers, the consequences are negligible. The company sold its Canadian operations in 2005 to Circuit City, which eventually were rebranded as The Source by Circuit City. BCE acquired the chain when the U.S. parent went bankrupt, and dropped the Circuit City part from the name. Currently, The Source has more than 700 locations across the country, and seems to be doing just fine.
Still, the RadioShack news got me thinking. Which Canadian businesses are at risk of closing over the next few years? By taking the time to identify these now, we can potentially save ourselves some capital in the future.
Oh, Sears Canada Inc. (TSX:SCC). It’s hard to believe the company was once one of Canada’s retail giants.
Lately, the company has been selling everything it can to stay afloat. It has sold some of its real estate, while taking the financial benefit of breaking some of its leases early in other locations. It has outsourced its credit division, which was a major source of profit, back in 2005. Instead of reinvesting the proceeds from these sales back into the business, shareholders have received special dividends instead. Since Sears Holdings was a major owner of its Canadian subsidiary, the special dividends essentially just helped to prop up the parent company.
The problem with Sears Canada now is there isn’t a whole lot left to sell. The company has been losing money for years, taking various steps to help stop the bleeding. Thousands have been laid off, spending on logistics has been scaled back, and yet same-store sales continue to decline.
The company currently has a little over $200 million in cash left. Based on its recent results, that’ll maybe last through 2015. After that, it looks to need more capital to stave off bankruptcy.
There are reasons to be bullish about Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE). The company is trading at a fraction of its book value, insiders have recently been buying shares, and the company did a good job at both cutting costs and reducing debt before this latest storm hit the energy sector. If oil recovers, it could be a big winner.
There’s a pretty big if in that last sentence.
The Penn West story is a pretty simple one. If oil recovers to anywhere above $60 per barrel, Penn West looks to be a huge winner. It can generate enough cash to stay on the good side of its lenders, and even have enough left over to invest in new projects. But if oil remains under $50 throughout 2015, chances are Penn West won’t survive the year without seeking some sort of creditor protection.
I think it survives and oil recovers, but there are a lot of reasons to be careful when looking at this company.
The Bombardier Inc. (TSX:BBD.B) story over the last few years almost reads like a soap opera. To give you the condensed version, delays of the company’s new CSeries line of business jets are killing its cash flow, leading it to borrow more cash to get things finished. If deliveries don’t start to happen in 2015, the company could be staring bankruptcy right in the face.
Although the company is currently sitting on more than $2.5 billion in cash, it’s spending money at a much quicker rate than it’s bringing it in. For the first nine months of 2014, the company lost $238 million from operations, and spent an additional $1.5 billion in capital expenditures. Pro-rate that over a year, and the situation is obvious. Without changes, $2.5 billion likely won’t get Bombardier through 2015.