Dueling Fools
Fruit of the Doomed
Bear Argument
By
Fruit of the Loom's stock was trading just shy of $45 in 1997, and a current look at the stock's quote shows just what a train wreck Fruit of the Loom has been. I think the problems that have plagued Fruit of the Loom will not cure themselves anytime soon. The company is headed toward a serious liquidity crisis that looks to bring bankruptcy into the realm of possibilities, if not probabilities.
First, let's look at the financial statements. There's no top-line growth, and the company's sales have even been contracting -- check it out. Additionally, the company, to put it kindly, has had some profitability issues of late. It's no secret that Fruit has had more than its fair share of operational snafus and customer service difficulties that have sapped earnings. I don't foresee these issues getting resolved anytime soon.
Operational and profitability problems can happen from time to time with just about any company. But with Fruit of the Loom, these problems are especially serious. You see, the company is carrying roughly $1.5 billion in long-term debt and has nearly $2 billion in total liabilities. The financial leverage that has been employed greatly reduces the margin of error for both the company and investors.
In fact, it looks like Fruit's copious use of debt is coming back to haunt the company. Fruit of the Loom recently disclosed that it had some fairly serious liquidity problems, and both Moody's and S&P recently downgraded the company's debt ratings. Allow me to quote from Fruit's most recent quarterly report filed with the Securities and Exchange Commission (SEC):
"It is probable the Company will not be in compliance with certain financial covenants in its Credit Agreement at the end of the third quarter. If the Company fails to comply with certain of the financial covenants in its Credit Agreement, a default will occur which will cross default to the Company's other existing debt agreements."
This isn't just the type of standard, boilerplate warning that is commonly found in company filings. Rather, this is a serious intimation that indicates just how frail a financial position Fruit of the Loom is in. Violating the debt covenants would mean that Fruit would have to make amends with its lenders, and there's no guarantee an agreement could be made, which could easily lead to bankruptcy.
Like a person swamped with credit card debt rejoicing because they can make their minimum payments, Fruit of the Loom recently gathered analysts together to say that the company could meet its financial obligations through the end of the year. That should be comforting! Bankruptcy isn't an option in the company's playbook for the next three months.
Of course, one has to wonder what will happen in 2000 and beyond. The company said that it will sell some of its non-core assets in order to raise some cash. For Fruit of the Loom, that's the corporate equivalent of hitting the pawn shop. If Fruit's situation doesn't improve dramatically in the near future, it looks like bankruptcy is not just a possibility but a probability.
With the recent problems at Fruit it should be of little surprise that there has been a great deal of turmoil in the executive suites. The company's longtime CEO, President, and COO recently left. Like I said in a recent Daily Trouble about Fruit, the company has filled the positions temporarily, but rarely do interim executives have the power to make radical changes, however necessary. It also looks like these positions will be filled later rather than sooner, since the departure appeared to be fairly sudden.
Moreover, just last week it was announced that Standard and Poor's was tossing Fruit from the S&P 500 index. This ain't a good sign, Fools. Not only will numerous huge index funds be dropping the company like a hot potato, but it is also an indication of just how serious the underlying fundamental problems at the company are.
Do you really want to invest in a company that has no growth, questionable profitability, a ton of debt, and is flirting with bankruptcy? Don't eat that fruit, for it is rotten to the core.
Next: The Bull Responds