Retail Bankruptcies On The Rise

A weak holiday season and a struggling economy led retailers Sharper Image Corp. and Lillian Vernon Corp. to file for bankruptcy this week, and analysts predict others could soon follow them as consumer spending worsens.

"You'll see a record number of bankruptcies over the next 50, 100, and 1,000 days," said Burt P. Flickinger III, managing director of the New York-based retail consulting firm Strategic Resource Group. "Consumers are cash- and credit-constrained. They're out of purchasing power."

Both Sharper Image, known for its high-tech novelty gadgets, and Lillian Vernon, which sells low-cost gifts and gadgets through its catalog and Web site, have long been plagued with falling sales.

But retailers across the sector have been laying off staff and closing stores as consumers cut back on discretionary spending, faced with weak credit and housing markets and high food and gas prices.

The International Council of Shopping Centers projects 2008 store closings could reach 5,770 stores in the U.S. in 2008, the largest number of closings since 2004.

Even Wal-Mart Stores Inc., the world's largest retailer, reported sales in stores open at least one year rose just 0.5 percent in January, missing analyst expectations. Retailers as a whole reported their worst January same-store sales in almost four decades.

Flickinger said the problem is partly food and fuel inflation. While consumers used to pay 10 cents of every dollar for food and fuel, they now pay up to 20 cents per dollar.

"Companies are contracting and collapsing," he said. "You'll see it in food and drug, discount and department stores, as well as specialty stores and dollar stores. Every major form of retailing."

In an affidavit filed with the U.S. Bankruptcy Court for the District of Delaware on Tuesday, Sharper Image Chief Financial Officer Rebecca L. Roedell said the company has experienced declining sales since 2004 and recorded net losses in fiscal 2005 to 2007, continuing into 2008.

She said the company is in a "severe liquidity crisis," hurt by tougher competition, deteriorating gross margins, pending litigation and the volatile credit and financing markets, among other factors.

San Francisco-based Sharper Image plans to close 90 of its 184 stores as soon as possible after it sells their inventories. It plans to continue to conduct business as usual while it develops a reorganization plan.

Meanwhile, Lillian Vernon Chief Financial Officer Robert J. Eveleigh said in an affidavit Wednesday that the company, which has a highly cyclical business that peaks during the Christmas holidays, has experienced declining sales and rising costs over the past decade.

"During the past holiday season expected sales growth did not occur, which resulted in lower profitability and significant unsold inventory," Eveleigh wrote. "These factors combined to significantly impair (Lillian Vernon's) ability to find additional financing."

The company is evaluating whether it is in the best interest of its shareholders to sell itself or liquidate.

Both companies had recently attempted management changes and other moves to try and help results. Last week, Sharper Image named a crisis-management expert as its new chief executive, while Lillian Vernon laid off half its year-round work force.

Soleil Securities Group Inc. analyst Scott Tilghman said in a note to investors on Wednesday that Sharper Image's filing was not a surprise, and he discontinued coverage. "We find no reason for investors to be involved with Sharper Image in the near term," he wrote.

Sharper Image shares lost $1.05, or 72.9 percent, to 39 cents, and hit an all-time low of 29 cents at one point during the day.

• Canton, Massachusetts-based electronics retailer Tweeter Home Entertainment Group filed bankruptcy last June. It was acquired by Schultze Asset Management LLC, which continues to operate the company.
• Fort Worth, Texas-based home furnishings retailer The Bombay Co. declared bankruptcy in September, and shuttered the last of its stores in January.
• New York-based Levitz Furniture filed for bankruptcy in November. The company has since been liquidating its inventory.
• Lyndhurst, New Jersey-based Harvey Electronics Inc., a high-end audio-video retailer, filed for bankruptcy protection in December.
• Wickes Furniture Co., a Wheeling, Illinois-based company owned by private investment firm Sun Capital Partners Inc., filed for bankruptcy earlier this month.
• Jewelry and home furnishings retailer Fortunoff, based in Uniondale, New York, agreed this month to sell its business to NRDC Equity Partners LLC, which owns the Lord & Taylor department store chain, through a bankruptcy process.