Chapter 11 for Sharper Image and Lillian Vernon

Two struggling catalogers have taken a turn for the worse. Sharper Image Corp. and Lillian Vernon Corp. both filed for Chapter 11 bankruptcy protection in the past two days. Both companies cited poor holiday season results and a weak economy as the key reasons for the filings.

Sharper Image filed for Chapter 11 on Tuesday. In an affidavit filed in the U.S. Bankruptcy Court for the District of Delaware, the San Francisco-based high-tech gadgets and gifts merchant’s chief financial officer Rebecca L. Roedell said the company incurred declining sales since 2004 and net losses in each of the past three fiscal years. The bankruptcy petition lists total assets of $251.5 million and total debts of $199 million, as of Jan. 31.

Those creditors include United Parcel Service, which is owed more than $6,654,431; Quebecor World (USA) Inc. ($3,636,484); Tom Tom Inc. ($2,075,439); Garmin Internstional Inc. ($2,070,133); New ($1,669,471); Interactive Health ($954,950); Philips Consumer Electronics ( $913,399); SkyMall Inc. ($840,000); Thelen Reid Brown Raysman ($734,276), according to the filing.

Also named were list companies Paradysz Matera ($473,431) and InfoUSA ($94,452), and several manufacturers.

A Chapter 11 filing allows a company to stay in business while a bankruptcy court supervises the reorganization of the company’s debt obligations. Sharper Image officials said in a statement they would continue to conduct business during a reorganization period. In a separate filing, Roedell said the 31-year-old company plans to close 90 of its 184 stores after it sells their inventories.

Since January 2005, Sharper Image’s annual sales have slipped more than 50%, from $776 million to less than $400 million. For the fiscal year ended Jan. 31, 2008, total company sales fell 26%, to $374.9 million, compared to $506.7 million a year ago.

“Chapter 11 will enhance Sharper Image’s ability to effectively deal with the nonproductive stores, reject lease obligations that are not in the best interests of Sharper Image, and apply the provisions of Chapter 11 to maximize the value of its estate,” Roedell said in court papers.

She added that the company is in a “severe liquidity crisis,” caused by tougher competition, deteriorating gross margins, pending litigation, and the volatile credit and financing markets.

For certain, “Sharper Image has dealt with liquidity issues recently, and things came to a head,” says Lee Helman, managing director of New York-based investment firm Financo. “I am not surprised by their filing since their performance has been below par.”

Stuart Rose, managing director with Wellesley, MA-based investment firm Tully & Holland, is surprised that Sharper Image didn’t file Chapter 11 a long time ago. But he believes that current board chairman Jerry Levin “may have seen some sort of light at the end of the tunnel, despite collapsing sales over the past two fiscal years.”

On Valentine’s Day, Sharper Image announced it had replaced Steven Lightman as CEO. The company brought in turnaround specialist Robert Conway to replace Lightman, who had been on the job just 10 months.

Conway is a principal and founder at New York-based Conway, Del Genio, Gries, & Co., a financial advisory firm providing restructuring, crisis, and turnaround management, and merger and acquisition services.

Meanwhile, Lillian Vernon’s Chapter 11 filing comes just five days after the gifts and housewares cataloger laid off about half its remaining staff. At the time, CEO Michael D. Muoio told MULTICHANNEL MERCHANT that the company is for sale, and that it had hired an investment to explore strategic alternatives.

Robert J. Eveleigh, Lillian Vernon’s chief financial officer, said in court papers that the company has “determined that a sale or orderly wind down of the debtors’ business is in the best interest of all stakeholders. During the past holiday season expected sales growth did not occur, which resulted in lower profitability and significant unsold inventory. These factors combined to significantly impair (Lillian Vernon’s) ability to find additional financing.”

The cataloger’s creditors include SmartPost, which is owed $2,181,042.81; Direct Holdings Worldwide LLC ($1,368,630); Gift (VA) LLC ($1.047,360); Federal Express Corp. ($990,359.98); Graphic Communication (901,101.47) and Quad Graphics ($830,684.99), according to court documents.

Lillian Vernon is a victim of bad timing, Financo’s Helman says, because the cataloger reduced prices in the same year it was hit by postal and paper increases. “For the work that Mike and his team had done out of the gates, 2007 was a real setback for them,” Helman says. “That said, there is relevance to their brand.”

But the lease the company signed for its Virginia Beach, VA, operation is too much of a burden, he notes, and Sun Capital Partners, which bought Lillian Vernon in 2006, isn’t going to wait for things to get back on track. “They are prepared to move on,” Helman says.

On the other hand, Tully & Holland Rose believes that “Chapter 11 will give Lillian Vernon some breathing room. Sun Capital often buys distressed properties and turns them around. This one seems to have gotten away from them – for now.”

He thinks Lillian Vernon can mount a comeback after it winds up Chapter 11 proceedings. “The sector is not a growth sector, it’s older customers, gadgets, and useful items,” Rose says. “The question is, can they attract boomers as they age and transition, or will their customer base disappear as the older customers trail off?–Additional reporting by Larry Riggs

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