Some gift horses you should look in the mouth.
The growing number of retailers filing for bankruptcy as the U.S. economy teeters on the brink of a recession means consumers can’t redeem gift cards as easily as they once could.
Sharper Image Corp., the bankrupt seller of $300 electric shavers and $2,000 massage chairs, wants customers to spend twice the value of their gift cards before they can redeem them.
Levitz Furniture Inc. is telling holders who want to use the cards to file a claim with the bankruptcy court overseeing its liquidation. Linens ‘n Things Inc., a bankrupt U.S. housewares retailer, is honoring the credit card-size plastic cards with court approval.
“Pity the poor young bride who chooses gift cards as wedding gifts and then gets stuck,” Brian Riley, a senior research analyst with the Needham, Mass.-based Tower Group research firm, said in a telephone interview. “It does shake confidence in the concept of gift cards.”
The first wave of retail bankruptcies since the use of gift cards became widespread in the U.S. in the past seven years exposes the potential risk for holders. The average card has $120 worth of store credit, and often there’s no time limit on when it must be used.
“This is the first test of gift cards we have seen so far,” Riley said. “The current economy is causing this facet of stress to come out.”
Shoppers have trimmed spending because record food and fuel prices left them with fewer dollars for less-essential items. Home-furnishing chains were particularly hurt, reeling from the worst U.S. housing slump in a quarter century. Levitz, a 76-store furniture retailer, is in bankruptcy court for the third time.
Sharper Image, which filed for protection under Chapter 11 of the bankruptcy code Feb. 20, and Linens ‘n Things had a total of more than $100 million in unredeemed gift cards and certificates and other amounts due to customers, according to company filings.
Holders of gift cards at bankrupt retailers may end up empty-handed, said John Suckow, a managing director at Alvarez & Marsal in New York who advises companies on restructuring.
After a company files for bankruptcy protection, it must pay administrative costs relating to its reorganization, settle tax claims and reimburse creditors who have collateral.
Gift-card recipients are lower on the repayment totem pole, Suckow said.
“That’s if there is money left,” he said. “They may get nothing.”
Linens ‘n Things, the Clifton, N.J.-based retailer owned by Apollo Management LP, still sells cards valued at as much as $200 each, and its gift-card Web page doesn’t mention the bankruptcy.
“There’s no reason to,” said Susan Kenney, an outside spokeswoman for the company. “There is no change to the gift- card program.”
Sharper Image “is working diligently” to be able to honor cards and certificates without condition in the future, according to the San Francisco-based company’s website.
The restrictions imposed were a compromise arrived at in bankruptcy court, Robert Conway, the founder of Conway Del Genio Gries & Co., which was hired to help sell Sharper Image, said in a May 9 interview.
A retailer that plans to continue operating after reorganization is more likely to honor gift cards than one that’s in liquidation, Suckow said in a May 8 interview.
