Bankruptcy Scores: 18 Riskiest Retail Stocks

NEW YORK ( TheStreet) -- Retail risks are still a major concern, as consumer spending remains skittish and the job market continues to worry shoppers.

The economic downturn has, of course, already eliminated several retail powerhouses, including Circuit City and Linens 'N Things. But while the fear of bankruptcy filings has, for the most part, subsided, some companies remain in danger of insolvency. continue to flirt with the danger zone.

One way to test if a company poses any threat of filing for bankruptcy is through the Altman Z-Score, a formula developed by New York University professor Edward Altman in 1968. The Altman Z-Score measures several aspects of a company's financial health to forecast the probability of it going bankrupt within two years. Since its inception, the formula has been 72% accurate in predicting corporate bankruptcies two years prior from the filing.

On a general basis, companies with a Z-Score higher than 3 are considered safe, while those with a score of 1.8 or lower are considered distressed. Anything in between is a grey area.

"I think Altman's Z-Score is a very interesting concept. It drills right into the heart of the company: sales, debt, retained earnings," Wall Street Strategies analyst Brian Sozzi says. "Obviously all of these things are intertwined, but the measure is in depth enough to at least pay attention to it."

While the formula, of course, isn't the only indicator of the financial health -- and is by no means a guaranteed barometer of a company's bankruptcy risk -- it is a metric worth considering for those retailers who fall below the safety zone. Those whose Z-Score is declining year-over-year may also raise a red flag.

Taking this into account, we offer here the retailers with a Z-Score below 3 for the trailing twelve months, as compiled by I-Metrix, from the least risky to the most risky.

Dillard's

Altman Z-Score, Current: 2.95

Altman Z-Score, 2009: 2.76

Dillard's ( TLB) is closest to the safety zone, with a Z-Score of 2.95, but it's easy to see why the department store remains on shaky ground.

The department store sector was among the hardest hit amid the recession, and it has been difficult for these companies to regain their footing as shoppers continue to flock to discounters and online retailers. Dillard's, in particular, has reported annual revenue declines in seven of the last 10 years and has lost money in four of the last nine quarters.

Still, it seems the company is in the midst of a turnaround. Dillard's stock return is among the highest out of its peer group, up 30% to $21.10 for the year-to-date period. In its first quarter, Dillard's saw its profit surge nearly seven-fold to $48.8 million, or 68 cents a share, as gross margins improved by 300 basis points and the company cut costs by $20.7 million. Dillard's has also issued a quarterly dividend of 4 cents a share.

Office Depot

Altman Z-Score, Current: 2.84

Altman Z-Score 2009: 2.56

Office Depot ( ODP) is on a steady climb back to stability, with a Z-Score of 2.84, higher than its 2.56 at the end of 2009.

Last week, the office supply retailer was upgraded by Moody's Investor Services, which cited its strong cash position. "The large cash balance, resulting from reductions in expenses and inventory, as well as the excess proceeds from the 2009 convertible debt offering, provides support," Moody's senior analyst Charlie O'Shea said in a statement.

Still, Moody's said Office Depot faces some challenges, as sales remain sluggish and it faces weak credit metrics. In April, Office Depot reported first-quarter results that missed Wall Street expectations and forecast a loss in the second quarter. But the company does predict growth in international profit in 2010.

Supervalu

Altman Z-Score, Trailing 12 Months: 2.75

Altman Z-Score 2009: 2.75

Like most traditional grocers, Supervalu ( SVU) has been struggling to remain competitive as it faces deflation, and as discounters ramp up their packaged and fresh food offerings. Most recently Wal-Mart ( SVU) extended its price roll backs to its grocery segment.

While Supervalu swung back to a profit in its fourth quarter, it said challenges still lie ahead, issuing weak full-year guidance.

But Wall Street Strategies analyst Brian Sozzi thinks there is no threat of a Supervalu bankruptcy. "I did some work on the company, and I like what they have done to reduce costs," he says. "Management seems very inclined to cut expenses instead of opening new units."

Earlier in the month Supervalu said its will pay an annual dividend of 35 cents a share and a regular quarterly dividend of 8.75 cents; it also plans to buy back up to $70 million shares through June 30, 2011.

Charming Shoppes

Altman Z-Score, Trailing 12 Months: 2.72

Altman Z-Score 2009: 2.78

Charming Shoppes ( CHRS), which owns plus-size apparel stores like Lane Bryant, Catherine's and Fashion Bug, returned to profit in its first quarter.

During the quarter, it earned $3.9 million, or 3 cents a share, compared with a loss of $6.6 million, or 6 cents, in the year-ago period. Sales dropped 6% to $504.8 million, while same-store sales declined 2%, but this was primarily due to the closure of stores.

In an effort to cut costs, Charming Shoppes has shuttered about 150 stores over the past year.

J.C. Penney

Altman Z-Score, Trailing 12 Months: 2.72

Altman Z-Score 2009: 2.48

J.C. Penney ( JCP), of course, has given no indication that it is on the road to a Ch. 11 filing; still, it's worth noting that its Z-Score logs in below the safety zone of a score of 3.

"One never knows," says Sozzi, who calls out the following characteristics that could make J.C. Penney susceptible to bankruptcy: selling mid-priced merchandise that is getting hit by competition from Kohl's ( KSS) and Macy's ( M), and the threat of online retail channels.

"Taking these basic items into account, over time, one has to wonder if the company runs into trouble servicing its debt," he says.

Overall, J.C. Penney has seen improvement in 2010, even though its same-store sales remain sluggish. In the first quarter the department store generated a profit of $60 million, a 140% surge from the year-ago period.

J.C. Penney is unique compared to its peers in that its earnings are negatively impacted by a non-cash pension expense each quarter.

The department store has a strong liquidity position, which prompted Fitch Ratings to rate the retailer as stable. The company also paid down $393 million in debt maturities due in March 2010.

Barnes & Noble

Altman Z-Score, Trailing 12 Months: 2.72

Altman Z-Score 2009: 2.55

Barnes & Noble ( BKS) might be seeing some improvement in its Z-Score, but the book retailer isn't very confident in the near-term.

On Tuesday, Barnes & Noble issued a disappointing full-year forecast, which sent its stock plunging to its lowest level in 18 months. Management predicts earnings to fall between a loss of 10 cents and profit of 30 cents a share.

Barnes & Noble also reported a steep fourth-quarter loss of $32 million, or 58 cents a share, compared with a loss of $2.7 million, or 5 cents, a year earlier.

Barnes & Noble is narrowing its focus to the e-reader market, with plans to control 25% of the market by 2013. Earlier in the month, the company slashed its price on its Nook to $199 from $259, igniting a price war with Amazon ( AMZN). It also plans on increasing its spending to $150 million from $128 million in order to grow the division.

Build-A-Bear Workshop

Altman Z-Score, Trailing 12 Months: 2.71

Altman Z-Score 2009: 2.23

Build-A-Bear Workshop ( BBW) swung back into profit in its first quarter, earning $1.7 million, compared with a loss of $826,000 in the prior year. It also posted a 4% jump in revenue to $101.4 million.

While the company attributed the gains to the later Easter holiday, it is also making headway with some new initiatives. In February, Build-A-Bear signed a licensing agreement with A Squared, to expand its offerings to DVDs, accessories, apparel, books and other branded merchandise. It also began selling the popular Zhu Zhu Pets.

The board also approved an extension of its $50 million share repurchase program through March 2011.

Build-A-Bear ended its first quarter with about 345 stores in North America and Europe.

Talbots

Altman Z-Score, Trailing 12 Months: 2.62

Altman Z-Score 2009: 1.23

Talbots ( TLB) Z-Score has improved considerably over the past year, moving from a 1.23 at the end of 2009 to 2.62 for the trailing twelve months.

This turnaround is primarily due to a deal the women's apparel retailer completed earlier in the year that allowed it to reduce its debt and buy out its largest shareholder, Aeon. As part of this deal, Talbots acquired BPW Acquisitions, a special-purpose acquisition firm, which provided the company with more flexible financing.

In its first quarter, Talbots narrowed its loss to $7.1 million, or 12 cents a share, as same-store sales grew 2.4%. Talbots forecasts full-year sales to grow between 3% and 5% and earnings to come in at break-even to 5 cents a share.

1-800-Flowers

Altman Z-Score, Trailing 12 Months: 2.59

Altman Z-Score 2009: 1.65

1-800-Flowers ( FLWS) is a gift retailer that offers a range of products, including flowers and plants, cookies and other baked goods and wines.

Once thought of as a unique concept, making it easy for consumers to order presents via the Internet, the company has been facing tough competition from emerging online flower retailers and untraditional rivals like Edible Arrangements. As a result, 1-800-Flowers' stock has sunk 25% over the past year.

OfficeMax

Altman Z-Score, Trailing 12 Months: 2.24

Altman Z-Score 2009: 1.85 Office supply retailers were directly impacted by the massive job cuts amid the recession. But as some business start hiring, the sector could see an uptick in orders.

While Staples (SPLS) has been pegged to take the most share of these new orders, smaller rival

OfficeMax
( OMX) may still benefit.

In its first quarter, OfficeMax nearly doubled its profit, earning $24.8 million, or 29 cents a share, significantly beating Wall Street's expectations. The company has been reducing discounts and selling more of its own store brand.

Bon-Ton

Altman Z-Score, Trailing 12 Months: 2.19

Altman Z-Score 2009: 2.07

Bon-Ton's ( BONT)balance sheet is currently in tatters. The department store is swimming in debt and sales have been pressured from competition with rival department stores and online retailers.

Still, Bon-Ton has seen some slight improvements. The company narrowed its loss in its first quarter as sales increased. During the quarter, Bon-Ton lost $23.5 million, or $1.33 per share, while sales grew 2% to $675.2 million.

After it released first-quarter results, management upped its full-year outlook, and now expects a profit between 80 cents to $1.60 a share. It previously forecast earnings in the range of 30 cents to $1.10 a share.

Rite Aid

Altman Z-Score, Trailing 12 Months: 2.18

Altman Z-Score 2009: 2.18

Rite Aid ( RAD) -- a legitimately troubled company -- hasn't been profitable for several years, and last week the drugstore reported yet another loss in its first-quarter of $73.7 million, or 9 cents a share.

Much of Rite Aid's woes come from its acquisition of Brooks/Eckerd back in 2007, which has been a drag on the company.

The drugstore is also being beat out by rivals CVS Caremark ( CVS) and Walgreen ( WAG), which are better capitalized. Discount behemoth Wal-Mart ( WMT) is also poised to take market share, as it looks to grow its pharmacy business.

Chatter surfaced earlier in the year that Rite Aid may be a takeover target for one of these companies.

Cost Plus

Altman Z-Score, Trailing 12 Months: 2.15

Altman Z-Score 2009: 1.76

Cost Plus ( CPWM), a home decorating retailer, significantly narrowed its first-quarter loss, as it cut it expenses and saw a slight uptick in sales.

During the quarter, the company lost $10.3 million, or 47 cents a share, compared with a loss of $41.6 million, or $1.88, in the year-ago period. Revenue edged up 3% to $182.9 million, while same-store sales climbed 5.6%.

Looking ahead, Cost Plus forecasts second-quarter sales between $189 million and $192 million, and same-store sales growth in the range of 5% to 7%.

Zale

Altman Z-Score, Trailing 12 Months: 2.08

Altman Z-Score 2009: 2.11

Zale ( ZLC) is definitely one of the riskier retailers, as it continues to see its Z-Score decline to 2.08 from 2.11 last year.

The jeweler has been seeking financing to repay its debt, and last month closed on a much needed $150 million, five-year loan with Golden Gate Capital. The private-equity firm will receive warrants that, if executed, would give it a 25% stake in Zale.

Zale has also made headlines for its credit-card deal with Citibank. The company finally made a $5.3 million partial payment to the bank after months of deciding whether or not it would repay its more than $1 million fine, which it incurred due to a shortfall in the minimum volume of credit sales.

The company has seen a 13% drop in sales and a loss of $155 million over the past 12 months. As a result, shares of Zale have plunged nearly 40% over the past year, currently trading at $1.63.

Quiksilver

Altman Z-Score, Trailing 12 Months: 1.95

Altman Z-Score 2009: 1.52

Clothing retailer Quiksilver ( ZQK) narrowly clears the bankruptcy-danger zone, with a Z-Score of 1.95.

Earlier in the month, Quiksilver said it reached an agreement with private equity firm Rhone that would allow Quiksilver to swap 16.7 million shares in exchange for $75 million in debt. The stock would be priced at $4.50 per share. The deal also includes an option to require Rhone to swap another $65 million in debt for more stock.

In its second quarter, Quiksilver reported a surge in profit to $9.4 million, or 7 cents a share, from $2.8 million, or 2 cents, in the same period last year. Revenue dropped 5% to $468.3 million.

Quiksilver also lowered its debt by $201 million over the past year, ending the first quarter with $744 million outstanding.

Borders

Altman Z-Score, Trailing 12 Months: 1.67

Altman Z-Score 2009: 1.67

Borders ( BGP) is one of three retailers deemed most likely to file for bankruptcy over the next two years, with a disconcertin Z-Score of 1.67.

Borders has been struggling to remain relevant as the digitalized book market grows, with first-quarter revenue falling 16% to $547.2 million.

Wall Street has worried that Borders was slow to react to the e-reader trend, lagging behind Barnes & Noble and Amazon in launching a device and electronic bookstore. The company said in the beginning of June that it was on track to launch its own e-bookstore by the end of the month, but that plan has yet to bear fruit.

The company's upper management ranks have also been in disarray. Chief Financial Officer Mark Bierley took on the additional role of chief operating officer; Bennett LeBow, chairman and largest shareholder, was named chief executive; and Mike Edwards was appointed CEO of the company.

Bluefly

Altman Z-Score, Trailing 12 Months: .31

Altman Z-Score 2009: -1.64

Bluefly ( BFLY), an online high-end apparel and accessories retailer, has been struggling to achieve profitability since it was founded in 1977, suffering nine consecutively quarterly losses. Since 2007, it has seen its stock fall nearly 40% a year.

Still, the company is at least moving in the right direction, as its Z-Score improved to .31 from a horrific -1.64 in 2009.

Management has been able to repay its debt and currently has $14 million in cash on its balance sheet. In its first quarter, Bluefly narrowed its loss to $1.5 million, or 7 cents a share, from a loss of $3.1 million, or 23 cents, in the year prior. Revenue inched up 1.7% to $20 million.

Blockbuster

Altman Z-Score, Trailing 12 Months: -4.64

Altman Z-Score 2009: -3.6

Unsurprisingly, Blockbuster ( BBI) has the most depressed Z-Score at of all the retailers tracked by TheStreet. The beleaguered movie rental retailer has been struggling for some time, as Coinstar's Redbox and Netflix ( NFLX) continue to steal its market share.

Blockbuster is currently in the process of negotiating with bond holders to restructure its nearly $1 billion in debt. Earlier in the year, CEO James Keyes said that if the company did not shore up enough cash, it might be forced to file for bankruptcy.

Blockbuster's annual meeting last week did little to calm investors' fears. After being delayed for 30 days, Keyes still had nothing knew to report in regards to the future of the company.

While the company was able to regain compliance on the New York Stock Exchange after being warned of a potential delisting, the stock is currently trading at 23.8 cents, well below its 52-week high of $1.56.

-- Reported by Jeanine Poggi in New York.

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