(July 13, 2015) — Small businesses rise and fall on a weekly basis. Most of us have witnessed the decline of a corner bookstore, the demise of a family-owned video shop, or the disappearance of local ice cream parlor.
In many of these cases, there’s often a larger, national chain just waiting to take their place. But those big brands can fail too, and often in spectacular fashion. Think Borders or Blockbuster—big, national brands that go bankrupt after over a decade of dominance.
With this in mind, FindTheCompany set out to identify which American brands would be most likely to disappear by the end of 2016. Researchers based their analysis on the Altman Z-Score, a four-part formula developed by NYU Professor Edward Altman in the 1960s. Specifically, the Altman Z-Score is designed to predict a company’s likelihood of bankruptcy, and incorporates four factors, all of which can be found in a company’s financial reports:
Z-Score bankruptcy model: Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4
- T1 = Working Capital / Total Assets: companies with a low or negative score here will struggle to pay bills on time
- T2 = Retained Earnings / Total Assets: companies that rely on large amounts of debt and borrowing receive a low or negative score here
- T3 = Earnings Before Interest & Taxes (EBIT) / Total Assets: companies that bring in a small amount of revenue relative to their size receive low or negative scores
- T4 = Book Value of Equity / Total Liabilities: a low or negative ratio here indicates that the company may be using debt to finance growth, which can often lead to bankruptcy
Companies with an Altman Z-Score over 2.6 are considered “safe,” companies with a score between 1.1 and 2.6 are in a “grey” zone, and companies with a score under 1.1 are placed in a “distress” zone.
Below, FindTheCompany selected 10 widely recognized American brands that all fall within the “distress zone.” In each case, they provided each brand’s Altman Z-Score and individual scores on each of the four metrics. We’ll start with moderately distressed companies and end with the most precarious of all.
Editor’s note: See several caveats for the Altman Z-Score at the end of this article.
Founded in 1902, the mid-range department store had a strong run throughout the 20th century, growing to over 1,000 stores in 49 states. The last five years have been bumpier. First, there was the 2011 “spamdexing” scandal, wherein J.C. Penney was penalized for trying to manipulate their placement in Google results. Over the next several years, the company has closed dozens of stores and laid off thousands of employees, a series of moves that have prevented outright bankruptcy, but has failed to fully right the ship. The future remains murky.
9. Sprint Nextel
While the financials for Verizon and AT&T are no picnic, the two giant wireless carriers are forcing the rest of the market out, including Sprint. Only upstart T-Mobile has been able to gain traction against the twin titans.
8. Groupon Inc.
Still the fastest startup to reach a billion-dollar valuation (less than 1.5 years after its launch), Groupon has ridden a long and bumpy road down since 2010. Today, with the group deal business stagnant, the company could soon make history again: as one of the shortest-lived billion-dollar runs in business history.
7. Quiksilver Inc.
Founded in 1969, the surfwear and boardsport clothing brand slowly rose to prominence throughout the ’70s and ’80s, before ultimately going public in 1986. Unfortunately, the last decade hasn’t been kind to the brand, which saw consistently declining sales after the golden years of the ’90s. What’s more, according to data compiled by Bloomberg, “the company’s $1.99 billion of total debt is about 11.1 times its earnings” (before interest, taxes, depreciation and other adjustments).
6. Sears Holdings Corporation
The classic American department store may be living in its twilight, perhaps the best example of a giant brand soon to be killed by the Internet. If you’d rather not blame online shopping itself, look to Amazon and Wal-Mart, companies that have largely made Sears redundant.
5. Aérospostale Inc.
Another likely victim of the Internet, the casual apparel retailer’s financials have looked worrisome across the board, particularly given how low its profits are compared to its size.
4. Rosetta Stone Inc.
Founded in the early ’90s, Rosetta Stone quickly became the CD-ROM standard for learning a new language on your personal computer. Since then, however, language-learning opportunities have increased significantly, while Rosetta’s financials have declined.
3. American Apparel Inc.
Known for its lightweight, comfortable closing and controversial advertising campaigns, American Apparel has been on bankruptcy watch for a half decade. The numbers say that the year 2016 might be their last, but who knows if the clothing retailer will defy the balance sheet yet again.
2. Angie’s List Inc.
The business review site has offered local, consumer-curated reviews since 1995, but the two-decade run appears close to bankruptcy. Squeezed out by the likes of Yelp, Google and Amazon local, most Internet users can now find comparable reviews on other sites, without having to pay an Angie’s membership fee.
1. Jamba Juice
Jamba Juice might be the largest standalone smoothie chain in America, but two factors have contributed to its decline: seasonality and growing competition from even bigger food industry brands. As a purveyor of blended fruit drinks, summer remains the most reliable season for Jamba, but maintaining healthy sales through fall and winter has only gotten more difficult. What’s more, companies like Starbucks and McDonald’s have expanded their smoothie offerings over the last decade, reducing the novelty of Jamba’s offerings.
Notes and Caveats
While FindTheCompany used the latest iteration of the model for this piece, there are a few important caveats. First, the Altman Z-Score doesn’t do a good job accounting for deferred revenue. Certain companies, like Salesforce, can thus receive low scores despite having reasonably bright futures.
Second, the formula relies on data directly reported by each company. Some companies might misrepresent their financials in order to sugarcoat a bad situation—here, the Altman Z-Score is only as good as the data that goes in.
Finally, companies will sometimes record a one-time write-off during a single quarter, often as part of a failed acquisition. These situations will often complicate the Altman Z-Score calculation, resulting in a less accurate picture of the company’s future.
See a breakdown of each company’s individual category scores below