Two major sellers of gifts, gadgets, and assorted tchotchkes have filed for bankruptcy.

The Sharper Image filed for Chapter 11 bankruptcy protection late Tuesday, and Lillian Vernon followed suit this morning.

It's probably not surprising that given the rise of Amazon.com and online commerce that a catalogue retailer like Lillian Vernon had trouble. A pullback in consumer spending appears to have been the last straw. The retailer said lower than expected sales, increased costs, and lack of funding had caused it to seek bankruptcy protection.

Last week, Lillian Vernon laid off half its workforce and is weighing whether a sale or a liquidation is in the best interests of stakeholders.

Sharper Image has also been on a slow and steady decline as consumers lose their appetite for discretionary sending -- it turns out that nobody actually NEEDS a stretching robotic massage recliner, especially when a real belt tightening takes effect.

Innovations in consumer electronics by the likes of Apple and Microsoft have been dazzlingly rapid of late, adding another strike against the retailer; Sharper Image's gadgety offerings, along the lines digital photo frames and business card scanners, can't help but seem outmoded and dull next to the iPhone.

Sharper Image has seen its sales decline steadily since 2004, and has posted net losses every year since. Same store sales have decreased by the double-digits in that time period, and January 2008 produced an 11 percent decrease in same store sales and a 23 percent decrease in sales overall. And investors have noticed the problems -- since mid-2004 the company's shares have slipped from just under $40 to $1.44, before plummeting to 38 cents on the bankruptcy news this morning.

The company's bankruptcy filings point to an unlikely culprit: air purifiers, a high-margin category that were once a cornerstone of the retailer's revenue. Class action suits filed in multiple districts against Sharper Image's Ionic Breeze purifiers have greatly depressed sales of the products (from 27.7 percent of Sharper Image's total revenue in 2005 to 9.4 percent of revenue in 2007), not to mention acting as a source of negative publicity for the company as a whole.

When a settlement offer was rejected by Florida District Court last October, things really started to fall apart. Its share price dropped 18 percent and Sharper Image's 650 suppliers and vendors began requesting cash on delivery.

Other reasons cited by the company for being in need of a bailout include increased competition, deteriorating gross margins, and maintenance and increases in the number of noncontributing stores.

Add in the general turmoil in the credit markets, and the Sharper Image has found itself in a severe liquidity crisis.

But unlike Lillian Vernon, Sharper Image is committed to getting out of bankruptcy as an independent retailer. Shaper Image plans to close its 90 worst performing stores, and is seeking a $60 million loan arranged by Wells Fargo to keep operating.
That loan is sorely needed. Sharper Image said it had $251.5 million in assets and $199 million in debt as of January 31, according to bankruptcy filings.

Cash on hand totaled just $700,000 -- enough to buy about 145 Human Touch Massage Chairs.

Liz Gunnison