Bankruptcy Scores: 20 Risky Retailers

(Bankruptcy scores updated with American Apparel cash infusion.)

NEW YORK ( TheStreet) -- Bankruptcies in the retail sector are still a very disconcerting prospect.

In less than a year, we have witnessed the fall of two behemoths: Blockbuster ( BLOAQ.PK) and Borders, an indication that there is always some weeding out to be done in the sector.

While consumer spending has returned substantially since the depths of the recession, those retailers that struggled prior to the downturn are finding it hard to continue to tread water.

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Given this, TheStreet is taking a look at some of the riskiest retailers in the sector based upon 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 gray area.

>Bankruptcy Scores: 18 Riskiest Retail Stocks of Summer 2010

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.

TheStreet previously conducted a mid-year analysis of the Altman Z-Score within the sector in July 2010, and found 18 retailers falling under the safety score of 3. Of those 18, three had a Z-Score under 1.8, including both Blockbuster and Borders.

In light of this, TheStreet is taking another look at retail's riskiest companies. The list looks at those companies with a Z-Score below 3 for the full fiscal year, as compiled by I-Metrix, and is presented from the least risky to most risky.

20. Cost Plus

Altman Z-Score 2010: 2.94

Altman Z-Score 2009: 1.76

Cost Plus ( CPWM) is the least risky retailer, with a Z-Score teetering just under the safety zone. This is a marked improvement from 2009, when its score indicated it was in danger of bankruptcy.

The specialty retailer, which sells casual home furnishings and entertaining products, spent much of 2010 trying to turn around its business -- efforts that appear to have started to pay off.

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In its fourth quarter, Cost Plus earned $28.5 million, or $1.23 per share, compared with $21.1 million, or 95 cents per share, in the same quarter a year earlier. Sales grew 7% to $341.6 million, while gross margin also expanded.

But its 2011 outlook disappointed Wall Street. Cost Plus foresees earnings in the range of 45 cents to 55 cents a share on revenue of $946 to $956 million. Analysts were calling for a higher profit of 79 cents on revenue of $956 million.

19. Build-A-Bear Workshop

Altman Z-Score 2010: 2.82

Altman Z-Score 2009: 2.24

Build-A-Bear Workshop ( BBW) has had the stuffing beaten out of it.

In its fourth quarter, the company, which lets customers make their own bears, earned $8.3 million, or 44 cents per share, compared with a loss of $916,000, or 5 cents per share, in the same period last year. But same-store sales fell 3.7%, with North American sales down 2.9% and Europe off 7%.

Build-A-Bear hired an outside consulting firm to analyze its supply chain, logistics and other expenses, which it believes will result in some savings in the second half of the year.

The company has also been the target of takeover chatter. Analysts have speculated that the retailer could command a healthy premium from private-equity firms due to its high cash flow and low debt load.

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Over the past several years Build-A-Bear, which started in 1997 as a mall-based chain, has expanded into selling books at Borders and stuffed animal kits at Michaels Stores.

18. Charming Shoppes

Altman Z-Score 2010: 2.81

Altman Z-Score 2009: 2.79

Plus-size women's apparel retailer, Charming Shoppes ( CHRS), has made some marked progress since July, making some major changes in the last several months in particular.

The parent company of Lane Bryant and Catherine's, said it plans to shutter more than 10% of its stores this year. That would amount to about 240 underperforming locations. About half of those expected to close are under the Fashion Bug nameplate.

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Charming Shoppes also named interim CEO Anthony Romano to a permanent role as president, CEO and board member. He replaces James Fogarty, who resigned in October.

In 2010, the women's apparel retailer narrowed its loss to $54 million, or 47 cents a share, compared with a loss of $78 million, or 67 cents, in the year prior. Revenue remained relatively flat at $2.07 billion.

17. Supervalu

Altman Z-Score 2010: 2.75

Altman Z-Score 2009: 2.13

The debate is out as to whether or not SuperValu ( SVU) is on the cusp of a turnaround.

While the grocer reported better-than-expected fourth-quarter earnings, it isn't out of the woods yet, as both sales and profits continue to fall. During the quarter, Supervalu earned $95 million, or 44 cents a share, compared with $97 million, or 46 cents, in the year prior. Revenue dropped 5% to $8.7 billion from $9.2 billion last year.

Looking ahead, Supervalu expects full-year earnings in the range of $1.20 to $1.40 a share and same-store sales to decline between 1.5% and 2%.

Supervalu has been struggling to turn around its same-store sales, which have dropped in the past 12 consecutive quarters.

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Overall, grocers have been working to remain relevant against big-box discounters like Wal-Mart ( WMT) and Target ( TGT), which have been aggressively ramping up their fresh and packaged food offerings.

Supervalu, in particular, has also been hurt by debt incurred from the purchase of Albertsons in 2006 for $7 billion.

Still, some analysts believe the grocer could be on the cusp of a turnaround. Supervalu is generating positive cash flow and management has sold off some assets and cut costs.

Takeover chatter circled Supervalu earlier in the year, following BJ's Wholesale's ( BJ) announcement that it is up for sale.

16. J.C. Penney

Altman Z-Score 2010: 2.68

Altman Z-Score 2009: 2.48

J.C. Penney ( JCP) continues to grapple with a Z-Score under the safety mark, but as TheStreet noted in July, there is no indication that the department store is on the road to bankruptcy.

In fact, since then, J.C. Penney has made significant strides from this summer.

In its fourth quarter, J.C. Penney earned $1.09 a share from 84 cents in the year prior, while revenue grew 35.5% to $271 million from $200 million. Same-store sales grew 4.5% from the fourth quarter in 2009.

Looking ahead, management foresees 2011 earnings in the range of $2 to $2.10 a share and low-single digit increase in revenue.

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J.C. Penney has benefited from its exclusive partnership with Liz Claiborne, as well as deals with Sephora, MNG by Mango and Call It Spring from Aldo.

The company has cut costs and embarked on a share repurchase plan.

Of course, investors worry rising sourcing costs will weigh on J.C. Penney, and higher prices at the gas pump will deter the company's middle class shoppers.

15. 1-800-Flowers

Altman Z-Score 2010: 2.67

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.

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But 1-800-Flowers has sprouted some leaves since July. In its most recent quarter, the company reported earnings that easily topped expectations, as it moderated promotions.

The company has figured out new ways to reach customers, mainly through social networks like Facebook, as well as a mobile application.

But its 1-800-Flowers' variety of niche businesses that really gives it an edge, especially higher-margin brands like Fannie May Confections and Cheryl's Cookies.

14. Saks

Altman Z-Score 2010: 2.65

Altman Z-Score 2009: 1.78

Saks ( SKS) was one of the most noteworthy turnaround stories in the retail sector in 2010.

The luxury retailer was among one of the most depressed amid the recession, as it resorted to drastic markdowns to sell merchandise.

In its fourth quarter, Saks swung to a profit, which is attributed to more full-price selling and fewer discounts. The company earned $25 million, or 14 cents a share, compared with a loss of $4.6 million, or 3 cents, in the year-ago period. On an adjusted basis, the company actually earned 13 cents a share, ahead of analysts' estimates of 6 cents.

Revenue grew 7% to $866.3 million, beating Wall Street's forecast of $854.4 million, while same-store sales climbed 8.4%. Gross margin improved to 37.8% from 36.5%.

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Saks has said it now sees an opportunity to open more of its upscale department stores as its core demographic opens its wallets and also noted that it will strategically shutter underperforming locations.

The company did indicate on a conference call with analysts that it expects some prices to rise in the fall due to inflation, but it will be a result of higher-end fabrics and furs in the stores. "The fashion will in itself dictate higher prices for the fall season," President and Chief Marketing Officer, Ronald Frasch said.

Looking ahead, Saks anticipates same-store sales will rise in the mid-single digits in 2011.

13. Office Depot

Altman Z-Score 2010: 2.60

Altman Z-Score 2009: 2.56

Office Depot ( ODP) raised a red flag earlier in the month when it said it will restate its finances for 2010.

The office supply retailer said it will restate finances for the second and third quarters, as well as the full fiscal year, after the IRS denied its claim for an $80 million benefit related to taxes.

As a result, Office Depot will now report a loss of $46 million, or 30 cents a share, for 2010. The company previously reported a profit of $33 million.

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Office Depot previously restated finances in 2007 due to the improper recording of funds from vendors.

Wall Street also got the jitters when the company said its first-quarter sales fell about 3%. It also predicts a 50% drop in EBIT.

Office Depot's revenue has been sluggish since the recession, down 4% last year to $11.6 billion, and significantly lower than its peak of $15.5 billion in 2007.

The company shuttered 21 stores in North American in 2010, on top of 121 locations the year prior.

But Office Depot's balance sheet isn't totally dire. The company ended the year with $628 million in cash, with just $732 million in debt and capital leases. Its biggest chunk of debt, $400 million in senior notes, doesn't come due until 2013.

12. Sears

Altman Z-Score 2010: 2.55

Altman Z-Score 2009: 2.64

Sears' ( SHLD) declining Z-Score shouldn't come as much of a surprise.

The department store, controlled by billionaire investor Edward Lampert, has struggled for more than a decade with declining sales and customer loyalty. Sears is in desperate need to revamp its stores and merchandise in order to woo back shoppers.

Sears' strengths have always been in big-ticket appliances, but home improvement chains like Home Depot ( HD) and Lowe's ( LOW) have been stealing market share in this category.

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Kmart is the strongest slice of the business, but even this division can't compete with discount giants like Target ( TGT) and Wal-Mart ( WMT).

In 2010, Sears posted a 43% plunge in profit, earning $133 million, or $1.19 a share. Revenue declined 2% to $43.33 billion, while same-store sales slipped 1.6%.

Lampert has spent the last several years cutting costs, tightening inventory and operating under a managerial merry-go-round.

Of course, Sears had been without a permanent leader since 2008. The expectation has been that once Sears found the right person for the job, the department store would be able to climb out of the deep hole it dug.

But those hopes were somewhat thwarted in February, when the board named Lou D'Ambrosio as the new chief executive. D'Ambrosio's resume is impressive, having headed Avaya, a telecommunications company, and spent 16 years at IBM. But D'Ambrosio is missing one critical element: he has no former retail experience.

It's clear D'Ambrosio has a big task at hand, as Sears has not reported a profit since its first quarter in 2010. And since Lampert combined Sears and Kmart back in 2005, the merged company has reported declining revenues every year.

11. Coldwater Creek

Altman Z-Score 2010: 2.52

Altman Z-Score 2009: 2.68

Coldwater Creek ( CWTR) continued to operate in the red in 2010.

The women's clothing retailer reported a loss of $44.1 million, or 48 cents a share, compared with a loss of $56.1 million, or 61 cents, in 2009. Revenue declined to $981.1 million from $1.04 billion.

"As anticipated, our business remained challenging during the fourth quarter driven by an unfavorable response to our holiday assortments," said Chairman and CEO Dennis Pence, in a statement. Pence said 2011 is a "transitional" year for the company and Coldwater is taking steps to enhance sales.

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Coldwater Creek does not expect sales trends to improve in the near-term, with management saying it foresees the first steps of improvement to come as our summer product begins to arrive in our stores."

The company declined to provide 2011 outlook, citing reduced visibility regarding the turnaround of its business.

Coldwater Creek has also found it difficult to get its trends right. It attempted to get back on track last year by naming a new chief merchandising officer and chief creative officer, but so far their efforts have gone relatively unnoticed.

But Coldwater Creek does have a healthy balance sheet, with more than $50 million in cash and no bank debt.

10. Talbots

Altman Z-Score 2010: 2.44

Altman Z-Score 2009: 1.23

Talbots' ( TLB) recovery story remains questionable, even as its Z-Score has moved out of the danger zone.

While the women's apparel retailer beat low-balled, fourth-quarter estimates, it widened its loss from last year. During the quarter it lost $2.8 million, or 4 cents a share, compared with a loss of $1.5 million, or 3 cents, in the year-ago period.

Talbots' sales also declined 7.4% to $292.6 million, while comparable sales dropped 4% year-over-year, despite a higher level of markdowns.

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The company said it plans to revamp some stores, shutter between 90 and 100 locations and consolidate or downsize another 15 to 20, in the next two years.

Talbots has struggled to fix merchandise misses and hasn't seen an annual increase in sales since January 2006.

9. Bon-Ton Stores

Altman Z-Score 2010: 2.27

Altman Z-Score 2009: 2.07

Bon-Ton ( BONT) returned to a profit in 2010 and its Z-Score is on an upward trajectory.

For the year, the department store earned $21.5 million, or $1.12 a share, compared with a loss of $4.1 million, or 24 cents in 2009. Sales grew to $2.98 billion, while same-store sales inched up 0.9%.

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Looking ahead, Bon-Ton said it expects 2011 earnings in the range of $1 to $1.50 a share, which assumes same-store sales will increase between 1.5% and 3.5%.

Bon-Ton operates 275 department stores and 11 furniture galleries in 23 states.

8. OfficeMax

Altman Z-Score 2010: 2.20

Altman Z-Score 2009: 1.85

OfficeMax ( OMX) saw both fourth quarter and 2010 revenue decline and warned of tepid sales in 2011.

The office supply retailer cautioned that increased promotions and challenging macro conditions may continue to pressure results, and predicted revenue will be flat to slightly higher in 2011 and lower in the first quarter than a year ago.

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OfficeMax is generally looked to as a gauge of the health of small businesses.

The company has worked to significantly cut costs by closing underperforming stores. It has also focused its attention on advertising and customer retention.

7. HSN

Altman Z-Score 2010: 2.17

Altman Z-Score 2009: 1.28

HSN ( HSNI) was nearly left for dead in 2008, when its stock was trading under $2. Wall Street was skeptical that the shop-at-home retailer could contend with e-commerce giants like Amazon and eBay ( EBAY).

But HSN has managed to revitalize the brand, creating a more interactive experience for shoppers and integrating online retail with its television model. It is also looking to steal market share from its online rivals by utilizing social media and crowd sourcing.

HSN launched a partnership with Quirky, a social innovation and product development company, in January, that will allow the retailer to poll its viewers to help create products and content. It even allows viewers who are heavily involved in the process to receive a cut of the profits.

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Still, Wall Street is betting that television shopping won't be around forever, and with a Z-Score of 2.17, that sentiment could prove true.

HSN's balance sheet is still in somewhat of a tatter, with about $315 million in debt.

In its fourth quarter, earnings rose to 77 cents a share on an adjusted basis, from 74 cents a share in the year prior. Revenue increased 9% to $915.2 million, ahead of analysts' estimates.

But its gross margin declined to 34.5% from 35.9% during the three-month period.

6. Zale

Altman Z-Score 2010: 2.14

Altman Z-Score 2009: 2.17

Zale ( ZLC) has made some positive strides since July 2010.

In February, the jeweler reported second-quarter sales quadruples, receiving a boost from the all-important holiday season.

During the quarter, Zale earned $27.2 million, or 73 cents a share, compared with $6.7 million, or 21 cents, in the year-ago period. Revenue surged to $626.4 million from $582.3 million, while same-store sales jumped 7.9%.

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Zale grappled with sluggish sales and struggled to make debt payments. It has been forced to close hundreds of stores over the past several years, and has seen a significant shuffle in key management.

The company announced last week that the Securities and Exchange Commission cleared Zale in its investigation.

The SEC began investigating the jeweler in October 2009 after it restated its 2008 and 2009 earnings. The company said at the time that a financial audit had uncovered internal control and accounting issues related to advertising costs, income taxes and internal company payments, among other things.

5. Macy's

Altman Z-Score 2010: 2.11

Altman Z-Score 2009: 1.70

In 2009, Macy's ( M) was one of the riskiest retailers, with Audit Integrity, an independent financial research and risk modeling firm, naming it at the time as one of the 20 publicly traded companies with the highest probability of filing for bankruptcy.

But since then the department store has become a standout in the sector.

In its fourth quarter, profit surged 50% to $667 million, or $1.55 a share, compared with $445 million, or $1.05 a share, in the prior-year period. Excluding a 4 cent charge, the department store actually earned $1.59 a share, ahead of both analysts' and internal forecasts.

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Revenue rose 5% to $8.27 billion, just missing Wall Street's estimates of $8.28 billion. Same-store sales increased 4.3%, receiving a 1.1 percentage point boost from online sales, which soared 29%.

Macy's has placed a greater focus on its private-label merchandise, seeing success from the launch of the Material Girl line during the back-to-school season. Private label, exclusive merchandise and limited distribution brands make up about 43% of business.

Its My Macy's localization effort has also been credited to the company's recovery.

For the full-year, Macy's foresees earnings between $2.25 and $2.30 a share, which assumes a 3% jump in same-store sales. Revenue is expected to grow 3% to $25.8 billion. Analysts expect income of $2.27 a share on revenue of $25.7 billion.

4. Barnes & Noble

Altman Z-Score 2010: 2.11

Altman Z-Score 2009: 2.66

Barnes & Noble ( BKS) put itself up for sale just weeks after TheStreet's first bankruptcy scorecard.

But the struggling book giant, it seems, has still been unable to find a buyer, and according to reports, may take the company off the block.

Barnes & Noble's Z-Score has dropped significantly year-over-year, and its business model has been under close scrutiny since rival Borders filed for bankruptcy in February.

Following Borders' bankruptcy, Barnes & Noble declined to provide guidance for the remainder of the year and suspended its dividend in an effort to preserve liquidity.

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In its third quarter, Barnes & Noble earned $60.6 million, or $1 a share, down 24% from $80.4 million, or $1.38, in the year prior. Revenue rose 7% to $2.33 billion, while same-store sales jumped 7%.

Barnes & Noble is aggressively throwing its efforts behind developing and growing its Nook e-reader. The device has been one of the only hope's left for the company up against Amazon's ( AMZN) Kindle and Apple's ( AAPL)iPad.

3. Rite Aid

Altman Z-Score 2010: 2.06

Altman Z-Score 2009: 2.18

Rite Aid's ( RAD)Z-Score continues to drop, down to 2.06 from 2.18 in July.

While the drugstore reported a smaller loss in 2010 and is seeing its revenue stabilize, it expects to continue to operate in the red in 2011.

In its fourth quarter, Rite Aid posted a loss of $208.1 million, or 24 cents a share, compared with a loss of $210.6 million, also 24 cents a share, in the year-ago period. Revenue remained flat at $6.46 billion after declining for 10 consecutive quarters. Same-store sales also grew 1% for the quarter.

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Underneath this positive report, though, Rite Aid still forecast another loss in 2011, even as it foresees a sales gain. Rite Aid predicts a loss in 2011 of $370 million to $560 million, or 42 cents to 64 cents a share. Analysts are calling for a loss of 52 cents.

2. American Apparel

Altman Z-Score 2010: 0.84

Altman Z-Score 2009: 3.04

It doesn't come as a surprise that American Apparel ( APP) ranks as one of the retailers most at risk of filing for bankruptcy, with a Z-Score of 0.84.

The t-shirt retailer, which is better known for its racy advertising than its product, warned in April that it may have to file for bankruptcy if it is unable to improve its sales or cash position or find other sources of financing to keep it afloat.

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Regardless, it looks like, at least for now, that the company will live to see another day. Great White North, which also bailed out Jamba ( JMBA), agreed to inject about $40 million into the flailing t-shirt retailer, Bloomberg reported. As part of the deal, the investors will immediately give American Apparel $15 million, and during the next six months will retain the right to buy nearly one-third of the company's shares at just 90 cents each. This represents a 27% discount to last week's closing price.

It has also been speculated that the company is considering putting itself up for sale, but management denied these rumors.

American Apparel swung to a loss in 2010 of $86 million from a profit of $1.1 million in the year prior.

"We suffered the after-effects of a major labor disruption resulting from an immigration intervention in 2009. The disruption of our 2010 production schedule resulted in significantly higher production costs per unit and late deliveries of products to our stores and to our wholesale clients," said acting president Tom Casey. "In addition, we encountered extraordinarily challenging world-wide economic conditions. We also experienced higher yarn and fabric costs in the second half of 2010."

The company said it expects to report a loss from operations and generate negative cash flows in 2011, leaving it with "substantial doubt that the company will be able to continue as a going concern."

"In addition, the company could be prevented from borrowing under its revolving credit agreements and this could have an immediate and significant impact on its liquidity," American Apparel said in its statement.

American Apparel has been grappling with severe operating issues. Under the scrutinizing eye of Wall Street, the company hired a new chief financial officer in February in the face of a prolonged sales decline. The company's problems have ranged from a possible covenant breach to immigration probes and charges from its accountant that it withheld vital information.

In October 2010, American Apparel amended a loan agreement with Lion Capital to give the company more flexibility to meet its debts. It ended the year with $213.2 million in current liabilities.

The company closed eight stores in 2010, leaving it with about 273 locations.

American Apparel's eccentric CEO has also been in the spotlight in recent months after being accused in two back-to-back sexual assaults.

1. Drugstore.com

Altman Z-Score 2010: -1.35

Altman Z-Score 2009: -1.30

Drugstore.com ( DSCM) is pegged as the retailer most likely to file for bankruptcy over the next two years, according to the Altman Z-Score. But its recent buyout from Walgreen ( WAG) will most likely save it from this potential fate.

Walgreen agreed to acquire the online retailer for $429 million in March, with plans to utilize the site to expand its online presence.

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Drugstore.com posted sales of $456 million in 2010, making it the eight largest e-retailer, according to Internet Retailer Magazine.

In 2010, Drugstore.com reported a loss of $3.6 million, or 3 cents a share on sales of $456.5 million.

Given all of this, which retailer do you think will file for bankruptcy next? Take our poll below and see what TheStreet readers think....

Which retailer do you think will file for bankruptcy next?

Rite Aid
American Apparel
Barnes & Noble
Zale
Supervalu

-- Reported by Jeanine Poggi in New York.

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