“If gasoline tops $4.00 per gallon in the coming weeks, consumers may be forced to make significant changes to their spending habits. At this stage of the recovery, that could be an extremely damaging setback,” Challenger, Gray & Christmas.

The media has said a great deal about what high gas prices will do to people’s driving habits, but it has had little to say about the impact it will have on corporate profits. Gasoline prices rose by nearly 30% in the last year and the national average price for a gallon of regular costs more than $3.50. The political upheaval in the Middle East does not appear near an end. Libya, which is in the midst of a rebellion against dictator Muammar Gaddafi, has the 10th largest oil reserves in the world. There is some concern political instability could even reach Saudi Arabia, the world’s largest oil producer.

24/7 Wall St. looked at the large American companies which will be hurt the most by high gas prices.  If history is any guide, many will begin layoffs soon. Companies went through “downsizing” when gas rose above $4 in July 2008. At the time, BusinessWeek suggested that companies could go to four-day work weeks to save costs. Most firms with profit margins threatened by rising fuel prices will not bother with cutting workers’ hours. Layoffs are more cost-effective.

Most of the companies on this list face many problems due to rising gas prices such as higher costs of their goods sold. That is lumber in the case of Home Depot and coffee, sugar and meat at McDonald’s. Toyota will face profit pressure because of the cost to transport parts to its plants and cars to their dealers. The lower traffic to its dealers will magnify the vulnerability of any industry heavily dependent on goods which are subject to fluctuations in commodities costs.

The economic effects of fuel are particularly cruel because they sap the buying power of consumers and erode the profit margins at many corporations. Companies cut people to save money. Those people have a higher cost of living when they can least afford it.

1. Borders
> Number of Employees: 17,500
> 52-Week Range: Bankrupt
> Current Stock Price: Bankrupt

It is well-known that Borders is facing major financial challenges. Recently, it filed for Chapter 11 bankruptcy.  The company has announced that it will close 200 of its bookstores, about one-third of its stores.  These closings are expected result in about 6,000 job cuts. High gasoline prices will present greater challenges to the book retailer to get customers to its stores. Worst still, there is always Amazon.com which doesn’t require the customer to drive at all.

2. American Airlines
>Number of Employees: 78,250
> 52-Week Range: $5.86 – $10.50
> Current Stock Price: $6.21

AMR Corp., the parent of American Airlines, is facing major challenges because of the rising price of fuel.  The company also experienced a reduction of about $50 million in revenue due to bad weather in January and February.  Although higher fares are being put in place now, consumers and business travelers may reject them. American’s stock price has been battered. The International Air Transport Association recently downgraded the industry’s 2011 outlook to $8.6 billion in profits.  This is a 46% fall in net profits compared to the $16 billion earned by the industry in 2010.

3. USPS
> Number of Employees: 596,000
> 52-Week Range: N/A
> Current Stock Price: N/A

The US Postal Service has continued its streak of huge losses.  Earlier this year, the service cut 5,600 jobs. Gas prices will exacerbate its financial woes.  The Postal Service recently reported a first-quarter net loss of $329 million, compared with a loss of $297 million a year earlier.  Since the end of 2007, the company has laid off about 103,000 people, and plans another $2 billion in cost reductions for fiscal 2011. Those cost reductions won’t be enough to offset the difference between $2.50 gas and $4.00 gas.

4. Home Depot

> Number of Employees:
> 52-Week Range: $26.62 – $39.38
> Current Stock Price: $36.87

To help stores operate during the spring, Home Depot’s busiest season, the company plans to hire 60,000 new workers.  Of course, the majority of them will only hold temporary positions and will be laid off as soon as business slows.  Job cuts at comparable companies, such as the recent 1,700 person reduction at Lowe’s, reinforce this idea that few of the 60,000 will be kept on. A sharp rise in lumber prices will make many of the products at Home Depot more expensive, and the transportation of these products to the stores will cost more.  A combination of high product prices and gasoline prices for customers will be crippling for the retailer.

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5. Best Buy
> Number of Employees: 180,000
> 52-Week Range: $30.90 – $48.83
> Current Stock Price: $31.81

Best Buy is planning on making major restructuring charges during fiscal 2011 and 2012 with a price tag of $225 million to $245 million.  In order to pay for this, the consumer electronics company announced in late February that it would close stores in China and Turkey.  This move is expected to generate savings of up to $70 million by fiscal 2013. The Wall Street Journal recently reported that one of Best Buy’s biggest problems is that its customers are moving online, and not in most cases to BestBuy.com. The increasing cost of driving to the stores can be added to the company’s growing list of problems.

6. McDonald’s
> Number of Employees: 400,000
> 52-Week Range: $63.25 – $80.94
> Current Stock Price: $76.29

McDonald’s is another company which is being hit on two sides by sharp rises in commodities prices. It must pay more for meat, coffee and wheat. These increases make it hard for the world’s largest fast food chain to keep its prices low. The company must also deal with the price of gas which sharply increases costs to ship food to each McDonald’s restaurant.  It similarly costs people more to drive to McDonald’s. This is an especially important consideration, given that most of the company’s customers are not wealthy.

7. Amazon.com
> Number of Employees: 33,700
> 52-Week Range: $105.80 – $191.60
> Current Stock Price: $169.08

Ironically, Amazon is both the beneficiary and the victim of high gas prices bricks and mortar customers are less likely to drive to stores as gas prices increase. Many of them will turn online. But, Amazon.com offers free shipping for orders over $25, and increased gas prices will push their price to offer that service higher. Amazon’s cost to stock its 52 distribution centers will skyrocket. Wall Street hammered Amazon last quarter for overspending on its cost of goods and services. Short-term, gas prices will only make this worse.

8. Toyota
> Number of Employees: 317,734
> 52-Week Range: $67.56 – $93.90
> Current Stock Price: $89.02

The car industry is supposed to be in the midst of a recovery. That could be cut off suddenly by a sharp increase in high gas prices. Plants have to pay more for their parts as transportation costs rise. The expense to get vehicles to dealerships also will rise. Toyota’s sales in the US rely heavily on light trucks that guzzle gas. Toyota sold 141,000 vehicles in the US during February. More than 61,000 of those were light trucks. Toyota Executive Vice President Takeshi Uchiyamada recently commented that “Customers in the U.S. are the most sensitive to oil prices.” S&P said, in reference to Toyota, that “the company’s profitability is still weak, its pace of recovery is slower than those of Japanese peers, and its profitability might remain under pressure from higher raw material prices and gasoline prices…”

9. GameStop
> Number of Employees: 17,000
> 52-Week Range: $17.70 – $25.75
> Current Stock Price: $19.71

The leading game retailer has 6,100 stores. The company operates in a new environment where gamers purchase and download more of their favorite products from the Internet. Xbox Live allows consumers to download games directly. Many games also only work on portable devices and smartphones. NPD figures show that video game sales have eroded over the past two years . Only 60% of game purchasing is done in stores now. The cost to drive to GameStop is going up. The cost to get games over the Internet is not.

10. Blockbuster
> Number of Employees: 25,000
> 52-Week Range: Bankrupt
> Current Stock Price: Bankrupt

Already in Chapter 11 and perhaps nearing liquidation, Blockbuster’s only hope is to eliminate its thousands of unprofitable stores and to increase revenue from online video sales and its DVD via mail business. Blockbuster now faces the trouble that stores which might have been marginally profitable when gas was at $2.75 are less likely to be so at $3.50 as video rental customers become users of streaming video services including Netflix. Blockbuster could, in theory, keep several thousand of its stores profitable, but that number shrinks by the day as gas prices tick toward $4.

Douglas McIntyre, Charles Stockdale

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