Rumors about retailers can be very bad news for their health

Word started trickling out in October, warning that gift cards could be worthless if stores were to go bankrupt. Within a month, an ominous Internet claim said chains including Ann Taylor and Zales would close by year's end. By January, news reports and TV segments were practically declaring retailers dead, often touting lists of the 10 or 15 recognizable names most likely to disappear in 2009.

Pretty rough stuff considering cost-conscious consumers had already cut back on spending.

So can bad buzz run a store out of business — or at least push it into bankruptcy court?

Retail industry officials say alarmist media reports screaming about which stores are likely to close, among other claims, are tainting perceptions with consumers, investors, creditors and suppliers.

Retail implosion forecasts typically come from the same handful of retail consulting gadflies — at least one of whom says he makes money when retailers' stock prices fall — and the forecasts are often based on subjective criteria that do not jibe with widely accepted methods of assessing corporate health.

"People are really paying attention to these articles, and the effects are extremely damaging," says Tracy Mullin, CEO of the National Retail Federation, which represents most major retailers.

To be sure, the retail industry is in dire straits. Even retailers agree this year will see more store closures, and that more Chapter 11 bankruptcy filings and liquidations are likely. An estimated 150,000 stores closed last year, while only about 110,000 opened. The same is expected this year, leading to a net loss of 40,000 retail locations each year, according to the International Council of Shopping Centers. Some big-name retailers, such as Gottschalks and Circuit City, are simply liquidating.

But accurately declaring whether an individual company is in trouble isn't something that can be done flippantly. Credit-rating agencies — Standard & Poor's, Moody's and Fitch Ratings — are generally considered the official purveyors of data on the health or plight of public companies. These agencies rank retailers based on the size of their debt loads, business stability and outlook, and ability to keep up with interest payments.

A USA TODAY analysis of Altman's Z-score data from S&P's Capital IQ shows that just one of 12 major retailers that have shown up on retail death lists — Eddie Bauer EBHI— is under a potentially dangerous level of financial duress. The Z-score is a mathematical way to measure how much financial stress companies are under and is one predictor used by financial analysts and in business books and databases.

Stores take it on the chin

The 2008 holiday season aptly illustrated the bad-publicity effect. Charming Shoppes CHRS, which owns Lane Bryant, Fashion Bug and Catherines, says it was experiencing double-digit growth in gift-card sales for several years before a few iterations of an Internet hoax hit.

"The decrease in our gift-card sales exceeded the decrease in sales that we attribute to a difficult economy," says Gayle Coolick, Charming's director of investor relations.

Soon after the false e-mails, articles on Forbes.com and elsewhere suggested that store closings by a few of the same purportedly troubled retailers, including PacSun and Zales ZLC, could presage the end of some well-known chains.

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