Among the latest victims of the economic slowdown: high-tech gadget shop Sharper Image and catalog company Lillian Vernon.
Both big-name retailers filed for Chapter 11 bankruptcy protection earlier this year after struggling with anemic sales and a weak holiday shopping season.
These retailers are part of a growing trend in the retail industry: In September, furniture retailer Bombay filed for Chapter 11 bankruptcy protection. Three months later, electronics retailer CompUSA announced it was being acquired by an investment company that would start closing its retail operations and sell some of its assets.
And there's likely more retail bloodletting to come. The International Council of Shopping Centers projects that as many as 5,770 stores could close this year, the most since 2004.
Next on the list may be struggling home-furnishings chain Linens 'n Things, which, burned by the housing slump, is hovering near bankruptcy. (Private-equity company Apollo Management bought out the Clifton, N.J., retailer in 2006.)
For consumers, these closures are a mixed blessing: Though they may lose a favorite shopping destination, they can also stock up on some great deals at the going-out-of-business sale. Being able to finally afford that massaging recliner from Sharper Image is enough to make any bargain hunter salivate. But shoppers need to proceed with caution when dealing with stores in their death throes.
"'Going out of business' is a phrase that really draws people in," says Edgar Dworsky, the founder of ConsumerWorld.org. "You get to use it once in a lifetime of a company, and people may presume savings are better than they really are."
Here's what to watch out for when doing business with a store that's going out of business:
Bogus bargains
With signs claiming, "All items slashed by 50%," how could you resist? Going-out-of-business sales are understandably enticing. But shoppers should be extra-careful when wading through a sea of extreme markdowns, particularly when a liquidator has taken over the store and is trying to sell off the retailer's leftover products. Often, a liquidator brings in outside goods and additional inventory to supplement the retailer's own stock, Dworsky says."Those things never really had a regular price at that store. So to say you're getting 50% off a price they never charged is a deceptive practice," Dworsky says. And it's illegal in some states, but that doesn't stop some companies from doing it.
To make sure the store isn't the one that's really getting the deal, go online and do some comparison pricing before you buy anything in the store. Also, check the price tags of various items in the store and see if the color, typeface and format are similar. If there's a lack of uniformity on the tags, you're probably dealing with some extra inventory brought in by the liquidator, Dworsky says.
Points of no returns (or repairs)
In most cases, all sales are final. If you buy something that turns out to be defective or damaged, you're going to have a tough time getting a bankrupt store to repair the product or give you a refund (that is, unless you live in a state that legally requires the seller to do so).To protect yourself, make sure the item you purchase comes with a manufacturer's warranty, Dworsky says, and pay with a credit card. As long as your product is still covered by the manufacturer's warranty, you can probably get it replaced or repaired. If you'd prefer to get your money back, and the store refuses a refund, you can try to charge back the purchase with your credit card company.
In this case, a consumer writes the card issuer, indicating how the product is defective and requesting that the item be taken off his or her bill. The card company then contacts the merchant to get the other side of the story, Dworsky says. If the card issuer agrees with the consumer, the charge is removed from the bill.
If you spent $170 to get a one-year extended warranty on that Sony laptop computer from CompUSA, you aren't entirely out of luck. CompUSA arranged with a third party to take over its service agreements. But that may not always be the case.
And it should go without saying that you shouldn't buy any extended warranties or service agreements from retailers that are in the process of going out of business. California's Department of Consumer Affairs advises consumers to look for a warranty on the product independent of the retail store.
Gift-card holders are out of luck . . .
When a company files for bankruptcy, all of the parties it owes money to -- lenders, vendors, former employees -- stand in line hoping to get at least some of their money back. In this queue, gift-card holders and those who have store credit bring up the rear and rarely get anything."In bankruptcy, there will be a pot of money that has to be distributed to those who are owed money, but it will not generally be enough to give everyone 100% of their losses," Dworsky says. "How much each person gets and in what order is what the bankruptcy court determines."
According to California's consumer-affairs agency, if there are no assets in the bankruptcy estate for unsecured creditors, such as gift-card holders, they receive nothing.
One glimmer of hope for these consumers is if the company intends to reorganize after it declares bankruptcy, says John Rao, a staff attorney at the National Consumer Law Center in Boston. As long as the company stays in Chapter 11 bankruptcy, which means it intends to reorganize, emerge from bankruptcy and continue doing business, there's a chance consumers can redeem their cards.
Keep in mind, though, that most Chapter 11 bankruptcies eventually end up in Chapter 7, which means the company plans on ceasing business operations for good.
. . . especially if they don't act fast
Gift-card holders do have recourse, Rao says. Because gift cards are bought as a deposit for goods to be picked up in the future, Rao believes cardholders should have priority over other unsecured creditors. To make sure cardholders get what is due them, he suggests they fill out a proof of claim form with the bankruptcy court. But consumers have to act fast. The window to file these claims is typically within 90 days of the company's bankruptcy filing.Forms can be found on the U.S. Bankruptcy Court's Web site, the company's site or that of a third-party firm handling the restructuring. According to Sharper Image's gift-card policy on the company's Web site, customers who want to redeem their cards must purchase merchandise equal to twice the value of the card. So if you have a $25 gift card, you'll need to buy something worth at least $50 in order to use it. Customers who don't want to redeem their gift cards can file claims, but there's no guarantee of payment.
Shop defensively
Unfortunately, there's no way to know if a company is going to go out of business until it's announced."When it's two weeks before Christmas, you're at the mall and the music is playing and the stores full, no one would think a month and half later they would go out of business," says Melissa Horne, an attorney at Providence, R.I., law firm Winograd, Shine and Zacks. As retailers continue to grapple with declining sales, it pays to think about where and how you shop.
Consumers shopping for big-ticket items or gift cards can check with the consumer-protection division of their state's attorney general's office for news or notifications about a particular retailer that may indicate whether they're struggling.
And if you have a gift card or store credit, it's probably best to spend it as soon as possible. "Don't throw the gift card away into an envelope," Dworsky says. "Use it as soon as you can because, whether it's a restaurant or retailer, so many companies go out of business."
This article was reported and written by Lisa Scherzer for SmartMoney.
Published May 9, 2008