In late July, Conn’s (OTCMKTS:CONNQ) announced that it filed for Chapter 11 and would close at least 70 locations across 13 states. It quickly was added to a list of retail stocks to sell. Its shares now trade over the counter, down nearly 99% year-to-date.
Fast forward to August. It is now closing all 174 of its stores across 15 states. With the store closures from its December 2023 acquisition of Badcock & More, it will close more than 500 stores.
“Conn’s and Badcock have served as a go-to destination for its loyal customers’ home goods necessities for more than a century,” said Tim Shilling, president of B. Riley Retail Solutions, which is hosting the liquidation.
How does a retailer acquire in December and then go bankrupt in July? Unfortunately, it’s all too common in retail.
Who else could go bankrupt in 2024? Here are three retailers at the top of my list of retail stocks to sell for this very reason.
The RealReal (REAL)
The RealReal (NASDAQ:REAL) is the smallest of the three retail stocks to sell, with a market capitalization of $262 million.
The San Francisco-based online marketplace for buyers and sellers of resale luxury goods had a Q2 2024 GMV (gross merchandise value) increase of 4% year-over-year, leading to net revenue of $145 million, 11% higher than in 2023, with an adjusted EBITDA loss of $1.8 million, down from a $22.3 million loss in Q2 2023.
There is no question that its business will be stronger in 2024.
However, according to GuruFocus.com, its Altman Z-Score is -3.06. The Altman Z-Score predicts the likelihood of bankruptcy proceedings within the next 24 months. Generally, you want this figure to be 1.81 or higher, out of the distress zone.
As of Q2 2024, its net debt was $402.3 million or 154% of its market cap.
That’s based on total debt of $553.2 million [operating lease liabilities: current $22.1 million and long-term $97.0 million plus non-convertible notes $131.3 million, convertible senior notes of $276.2 million, and current portion convertible senior notes $26.6 million] less cash and cash equivalents of $150.7 million.
Given that its annualized interest expense in 2024 should be approximately $23 million—Q2 2024 interest expense of $5.8 million times four quarters—it can ill afford to lose momentum on its turnaround.
Petco Health & Wellness (WOOF)
Petco Health & Wellness (NASDAQ:WOOF) stock rallied 27% in late May after delivering a Q1 2024 loss of four cents, two cents better than the analyst estimate. On the top line, its sales were down 2% to $1.53 billion, but $16 million higher than the Wall Street estimate.
Like RealReal, it’s in the middle of transforming the business for sustained and profitable growth. Despite the better news, Petco is expected to lose four cents a share in 2024 and turn profitable in 2025.
The problem is that Petco’s Altman Z-Score is 0.18, well below 1.81, the level at which a company moves from the distressed zone. It could still go bankrupt in the next 24 months.
Its biggest issue is debt. As of May 4, it had $2.98 billion in total debt at the end of Q1 2025 and less than $90 million in cash. Its net debt of $2.89 billion is 3.6x its current market cap.
Its hiring of Joel Anderson as CEO in mid-July—Anderson ran Five Below (NASDAQ:FIVE) for nearly a decade—might be too late to save Petco.
Nordstrom (JWN)
Nordstrom (NYSE:JWN) is the largest of the three retail stocks with a market cap of $3.55 billion. Its stock is up more than 18% in 2024 but down 26% over the past five years.
Nordstrom’s Altman Z-Score is right on the fence at 1.82, just outside the distressed zone. I’ve included the department store chain because of its total debt. As of Q1 2025, it was $4.23 billion, nearly 1.2x its market cap. Excluding cash, it has a net debt of $3.81 billion or 45% of its total assets.
Nordstrom’s short interest is currently 14.96 million shares, accounting for 13.72% of its float. By comparison, Walmart’s (NYSE:WMT) short interest rate is 0.85%, considerably less than Nordstrom’s. While it doesn’t make the list of stocks whose floats are most shorted — it starts at 28% — it is something to be aware of.
What investors often forget is that total debt includes not only the loans a retail company has outstanding but also the leases it’s committed to for its store locations. Those are future obligations to meet.
As I said, I don’t believe you’ll see Nordstrom in bankruptcy court anytime soon. However, its adjusted return on invested capital remains low at 8.2%, less than half what it was five years ago.
There are much better retail stocks to own.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.