Two retailers file for bankruptcy

NEW YORK - 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 falls.

"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.

The International Council of Shopping Centers projects 2008 store closings could reach 5,770 stores in 2008, the largest number of closings since 2004. Retailers as a whole reported their worst January same-store sales in almost four decades. Same-store sales, or sales at stores open at least a year, are considered a good gauge of a retailer's health.

Flickinger said the problem was 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."

Retail analyst Patricia Edwards, of San Francisco investment management services firm Wentworth Hauser & Violich Inc., said that while Sharper Image and Lillian Vernon were the "weak links," others were likely to follow as the financial situation worsened - in reality or in perception.

"Even if we never hit a classical recession, the consumer is in a recession," she said. "It may just be a mental recession, but as long as people are feeling fear, they're not going to spend the way they did before."

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 had declining sales since 2004 and recorded net losses in fiscal 2005 to 2007, continuing into 2008.

She said the company was 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 expects 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.

Lillian Vernon chief financial officer Robert J. Eveleigh said in an affidavit yesterday that the company, which has a highly cyclical business that peaks during the Christmas holidays, had declining sales and rising costs over the last decade.

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