3 retail stocks you should sell before they go bankrupt

End of July Conns (OTCQB:CONNQ) announced it had filed for Chapter 11 bankruptcy and would close at least 70 stores in 13 states. It was quickly added to a list of retail stocks for sale. Its shares now trade over-the-counter and have lost nearly 99% since the beginning of the year.

Fast forward to August. The company is now closing all 174 stores in 15 states. With the store closures from the Badcock & More acquisition in December 2023, more than 500 stores will be closed.

“Conn’s and Badcock have been the go-to place for their loyal customers for home goods for more than a century,” said Tim Shilling, president of B. Riley Retail Solutions, which is conducting the liquidation.

How can a retailer acquire a new business in December and go bankrupt in July? Unfortunately, this happens all too often in retail.

Who else could go bust in 2024? Here are three retailers that top my list of retail stocks to sell for exactly that reason.

The RealReal (REAL)

The RealReal (NASDAQ:REAL) is the smallest of the three retail stocks for sale, with a market capitalization of $262 million.

The San Francisco-based online marketplace for buyers and sellers of luxury goods reported a 4% year-over-year increase in GMV (gross merchandise value) in the second quarter of 2024, resulting in net revenue of $145 million, up 11% from 2023, with an adjusted EBITDA loss of $1.8 million, compared to a loss of $22.3 million in the second quarter of 2023.

There is no doubt that the company’s business will be stronger in 2024.

But according to GuruFocus.com, his Altman Z-Score is -3.06. The Altman Z-Score predicts the probability of bankruptcy within the next 24 months. In general, this value should be 1.81 or higher, i.e. outside the distress zone.

In the second quarter of 2024, net debt was $402.3 million, or 154% of market capitalization.

This is 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 of convertible senior notes $26.6 million) less cash and cash equivalents of $150.7 million.

Given that annual interest expense is expected to be approximately $23 million in 2024—that is, $5.8 million in interest expense in the second quarter of 2024 times four quarters—the company cannot afford to lose momentum in its turnaround.

Petco Health & Wellness (WOOF)

Petco Health & Wellness (NASDAQ:SHOT) shares rose 27% in late May after reporting a four-cent loss for the first quarter of 2024, two cents better than analysts’ estimates. On the bottom line, revenue fell 2% to $1.53 billion, but was $16 million above Wall Street’s estimate.

Like RealReal, Petco is in the process of transforming its business to achieve sustainable and profitable growth. Despite the better news, Petco is expected to lose four cents per share in 2024 and become profitable in 2025.

The problem is that Petco’s Altman Z-score is 0.18, well below 1.81, the score at which a company is out of trouble. It could still go bankrupt in the next 24 months.

The biggest problem is debt. As of May 4, the company had $2.98 billion in debt and less than $90 million in cash at the end of the first quarter of 2025. Its net debt of $2.89 billion is 3.6 times its current market capitalization.

The hiring of Joel Anderson as CEO in mid-July – Anderson led Five among us (NASDAQ:FIVE) for nearly a decade – may 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. The stock is expected to rise more than 18% in 2024, but is down 26% over the past five years.

Nordstrom’s Altman Z-Score is right on the edge at 1.82, just outside the distress zone. I included the department store chain because of its total debt. It was $4.23 billion in the first quarter of 2025, nearly 1.2 times its market cap. Excluding cash, it has net debt of $3.81 billion, or 45% of its total assets.

Nordstrom’s short interest currently stands at 14.96 million shares, which is 13.72% of its float. For comparison: Walmart (NYSE:WMT), the short interest rate is 0.85%, significantly less than Nordstrom. While the stock is not on the list of stocks whose shares are most shorted—it starts at 28%—it’s something to keep an eye on.

What investors often forget is that total debt includes not only the loans a retail company still has outstanding, but also the leases it has signed for its stores. These are future obligations that must be met.

As I said, I don’t think Nordstrom will be in bankruptcy court anytime soon. However, adjusted return on equity remains low at 8.2%, less than half of what it was five years ago.

There are much better retail stocks to own.

At the time of publication, Will Ashworth had no position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publishing guidelines.

At the time of publication, the editor in charge did not hold any positions (either directly or indirectly) in the securities mentioned in this article.