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Tickers in this Article: SHRP, LUX, BKS, SGU, IACI, SBH, CWTR, BAMM, OSTK, REDE
News surfaced on Wednesday that gift retailer Sharper Image (Nasdaq:SHRP) had filed for bankruptcy, blaming the weak holiday season as the main near-term catalyst.

It's just common sense that this type of company is struggling right now. In difficult economic times, when consumers are pinching pennies and gas prices are on the rise, what's the last thing people are going to spend money on? Retail novelty fluff, more commonly called "discretionary spending" in the investment world.

Cut Back the Slack, Jack
In paperwork filed with the U.S. Bankruptcy Court for the District of Delaware on Tuesday, Sharper Image mentioned that it has been in the red since 2005 and now plans to close 90 of its 184 stores. What's more, Sharper Image was hurt by a class action lawsuit over the alleged ineffectiveness of its air purifiers, with the stock commencing a gut-wrenching decline in summer of 2007 as a result. At present, investors are likely wondering if the company has any hope whatsoever. It's hard not to be negative at moments like this, especially because the company has so much going against it. (To learn more, see An Overview Of Corporate Bankruptcy.)

However, it's important to note that last week the company replaced its CEO with someone who specializes in troubled turnarounds, Robert Conway. And it's no wonder that just a few days after Conway has been holding court at Sharper Image, the company files for bankruptcy protection.

Bringing in a outside CEO who specializes in restructuring is the best thing that the company could have done for itself, especially during a time when consumers simply don't need high-priced gadgetry. Most likely, during this time, the new management will likely take a step back and figure out how to bring the company into the demand radar of consumers, or architect a sale of the whole enchilada. Regardless, despite naysayer lashing out at the company in the media, Tuesday's bankruptcy filing was the best course of action for recovery. (For more on turnaround stocks, see Catching Comeback Stocks For Clients.)

Where There's Smoke, There's Fire
I was shocked when I looked into 2008 performance results within the Specialty Retailers sector. What I found was a sea of red, which is proof that consumers are not spending money on fluff this year. There are 10 companies with share performance down more than 15% for 2008, including:

  • Luxottica (NYSE:LUX): -15.24%
  • Barnes & Noble (NYSE:BKS): -15.27%
  • Star Gas Partners (NYSE:SGU): -17.38%
  • IAC/Interactive (Nasdaq:IACI): -19.50%
  • Sally Beauty (Nasdaq:SBH): -19.78%
  • Coldwater Creek (Nasdaq:CWTR): -20.03%
  • Books-a-Million (Nasdaq:BAMM): -24.66%
  • Overstock.com (Nasdaq:OSTK): -27.24%
  • Sharper Image (Nasdaq:SHRP): -48.57%
  • Redenvelope (Nasdaq:REDE): -61.20%

The Bottom Line

I was most surprised to see the booksellers not performing. While I don't think of books as fluff, perhaps many Americans do? At the end of the day, retailers that rely on discretionary spending could be in big trouble until the economy recovers. With its industry in such calamity right now, Sharper Image's decison to seek bankruptcy protection and bring in a turnaround specialist to take the helm may prove to be the best possible move it could have made.

For what to look for in a turnaround candidate, see Finding Profit In Troubled Stocks.

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