5 Gift Cards to Avoid for Holiday Shopping

Updated 11:02 a.m.NEW YORK ( MainStreet) -- Gift cards are a great holiday present only if the stores issuing them stay solvent long enough for customers to redeem them.

American holiday shoppers increased gift card spending from $139.91 per person in 2009 to $145.61 last year, according to the National Retail Federation. That's still less than the $147.33 spent on gift cards in 2008 and well below the $156.24 spent at gift cards' peak in 2007 -- when they were a nice throw-in with a bottle of wine or a gift basket and not an expendable holiday expenditure -- but at $41.50 a card for roughly 3.5 cards, that's still a nice holiday haul.

This year, the NRF and BIGResearch expect holiday shoppers to spend $155.43 per person on gift cards, or $27.8 billion in total. Not only will more shoppers (80.2%) spring for gift cards than they did in 2010 (77.3%), but the $43.28 they'll spend per card is a nice bump for the average recipient. Of those giving gift cards, 46.4% do so because it put the gift decision squarely in the wallet of the person getting the card.

That's assuming the card doesn't become a really expensive eggnog coaster by the next holiday season. Anyone who found a Borders Books and Music gift card stuffed into his or her stocking last year is out of luck if that card was sitting in a drawer while the company liquidated. Did you get a Blockbuster gift card last year? That's nice, if your local Blockbuster outlet wasn't one of the thousands closed during the company's bankruptcy and subsequent sale to Dish Network ( DISH) this year. At least Circuit City cards were a holiday decor-appropriate red when that retailer went under in 2009.

Despite that retail market misfortune and the fact that those less likely to buy gift cards this year think they seem impersonal (26.1%) or worry about fees or expiration dates ($17.8). holiday shoppers are still confident in their card purchases. Thanks to the CARD Act that went into effect last year, gift cards only became a more precious commodity when their issuers were prevented from charging a fee on those cards for 12 months and allowing cards to expire until at least five years after purchase.

It's part of the reason the percentage of consumers who told the NRF that they want gift cards as a holiday present has risen from 50.2% in 2004 to 57.7% this year. That makes gift cards the most popular option for the fifth consecutive year, ahead of the clothing and accessories sought by 50% of shoppers. They're also proving more resilient than former favorites such as books, CDs, DVDs, videos and video games, which were on the wish lists of a market-leading 55.5% of consumers in 2005 but were what only 44% of consumers were looking for in stockings and under the tree last year.

To protect holiday shoppers' investments and prevent them from giving presents that may amount to nothing next year, we've looked at the financial well-being of gift-card-giving retailers and came up with five cards holiday consumers might want to avoid this season:

American Apparel ( AAP)
This doesn't have anything to do with clothing ads that would make much of State College, Pa., uncomfortable or sexual harassment suits against CEO Dov Charney. American Apparel's monetary weakness is much more worrisome than its moral standing.

The company stretched three stores and $82 million in revenue in 2003 to 260 stores and $545 million in 2008. That performance sagged more quickly than a pair of cheap leggings. Revenue dropped $533 million last year, profit fell by $20 million from 2008 to last year, the company turned $14 million in net income into an $86 million loss during the same period and its stock price cratered from a $15-per-share high in October 2008 to roughly 75 cents today.

It took a $14.2 million cash infusion from a group of investors led by Canadian financier Michael Serruya and Delavaco Capital back in April to stave off bankruptcy and an assist from eBay ( EBAY) in July to bulk up its online sales. Net and same-store sales over the past nine months are up slightly from last year, but the company's still operating at a net loss.

Buying an American Apparel gift card isn't worst decision a consumer could make this holiday season. Considering there are specialty clothing retailers out there with none of American Apparel's financial woes or uncertainty that haven't been scolded by the NYSE's Amex Exchange to bring their board into compliance, there are better ways for shoppers to cover their bases than with this company's thin fabric.

Sears ( SHLD)
A Sears gift card a bad investment? How could an item from the store whose catalog was the discount store for much of rural America and whose houses still dot the landscape be a bad gift?

Because it's not the early 20th century anymore, and Sears hasn't adapted well to that fact. Total revenue for Sears Holdings dropped $113 million in the third quarter compared with the same period last year, while revenue year-to-date has dropped more than $570 million from the first nine months of last year. Its third-quarter net loss of $215 million in 2009 more than doubled to $425 million during the past three months. It's more than tripled year-to-date to $743 million from $232 million.

If Sears' merger with Kmart was supposed to help it compete with Wal-Mart ( WMT), Target ( TGT), Kohl's ( KSS) and the rest of the discount sector, those competitors should fill Sears' mailboxes in Hoffman Estates, Ill., with holiday thank you cards for taking that plan in the exact opposite direction. Sears' share price has plummeted more than 61% during the past five years and sales at Kmart for the first nine months of the year are off $148 from last year, while Sears sales dropped by $391 million during that span.

Sears hasn't exactly helped itself by allowing its cherished Craftsman line of tool products to be sold at Ace Hardware and Costco ( COST) stores or by using its Web site as a sprawling, baffling marketplace that's continually one-upped by Amazon ( AMZN).

If none of that makes a Sears gift card a bad buy this season, the fact that it'll be a de facto Kmart gift card in the near future should. Sears stores' operating losses are six times those of their Kmart cohorts. The company may have three fewer Kmart stores than it did during the first nine months of last year, but it has shed 26 of its full-line Sears stores in the past year in favor of "specialty" Sears Outlet and Hometown stores.

It hasn't stopped the bleeding and only reinforces the fact that Sears as consumers know it is fading away. Unless you're willing to trade Kenmore stoves for Blue Light Specials sometime soon, the Sears gift card should be a last resort.

Zales ( ZLC)
Tiffany and Co. ( TIF) weathered the recession by beefing up its downmarket options and Signet ( SIG) cut margins so "he" could still go to Jared and every kiss could begin with Kay. Zales? Not so much.

Zales sales for fiscal 2011 were up by $125 million over past year, while comparable store sales were up 8.1%, That's a dramatic improvement from last year's 6.6% downtick same-store sales, but not even its Jessica Simpson diamond jewelry line could prevent it from adding nearly $20 million to its net loss during the same period. About the best thing Chief Executive Theo Killion could say about it was "we made substantial progress in the multiyear initiative to return to profitability."

Unfortunately, that progress involved trimming nearly 300 stores from its stable within the last three years Within the past six, its stock price has plunged 88%, from $24 a share to less than $3.50. Meanwhile, upstart online-only competitor Blue Nile ( NILE) has eaten up market share and quadrupled Zales' market cap.

In retail's cluttered jewelry box, Zales has made it increasingly obvious that it's the odd piece. The mall jeweler seems content to sell its wares as if its buyers are still wearing Z. Cavaricci pants and B.U.M. Equipment shirts and has missed out on the success its competing jewelers are experiencing beyond the food court.

If Zales can't turn it around, its holiday gift cards will have about as much value as Chess King and Suncoast Video gift certificates.

Friendly's
Wedging a cheeseburger between two grilled cheese sandwiches to make one 1,500-calorie monster sandwich is a bold move, but not enough to keep your restaurant out of bankruptcy.

Even the Grilled Cheese Burger Melt wasn't enough to help Friendly's hang with casual dining heavyweights such as the Cheesecake Factory ( CAKE), Texas Roadhouse ( TXRH), Red Robin ( RRGB), Olive Garden ( DRI), Ruby Tuesday's ( RT), Chili's ( EAT), P.F. Chang's ( PFCB) and Applebee's ( DINE). The chain filed for bankruptcy in October and closed 63 of its more than 500 stores when $700 million in systemwide sales weren't enough to keep the franchise out of debt.

If this is a bit of a head scratcher for Friendly's faithful who love themselves a Fribble and think the $5 food-and-ice-cream combo deal is the best thing on earth, chances are they haven't been exposed to the onion blossoms, drink concoctions and walls and uniforms full of flair that have dominated the casual dining scene for more than a decade.

The Cheesecake Factory's menu is roughly the size of your car's instruction manual. Red Robin's burgers are the equivalent of small cattle. The Olive Garden's breadsticks? Still bottomless. It's not the size of a Texas Roadhouse steak or the volume of Red Lobster's all-you-can-eat shrimp that are drowning Friendly's -- it's the drink menus.

What Friendly's never banked on when it debuted in 1935 and never caught on to as the decades wore on is that the definition of "family-friendly" dining has expanded to include the occasional Bahama Mama or giant glass of beer. It also requires a few high-definition televisions at the bar for when parents want to see how their fantasy league players are doing.

Friendly's still allows you to remove the divider between your table and the one next to you, but casual dining customers want more features -- including stability.

Radio Shack ( RSH)
Its customers have questions, but the longtime electronics retailer is running out of answers.

Once the go-to spot for splitters, switches, cables, antennas and other components, Radio Shack has become the loathed last option for any of those items thanks to an increased focus on mobile device sales and a commission-hungry workforce bent on annoying revenue clear out the front door. Its storefronts stocked with narrow aisles of electronic minutiae have become afterthoughts to wireless kiosks at Sam's Club that gave way to similar kiosks at Target ( TGT).

As a result, revenue at company-owned stores for the first nine months of the year is down by nearly $130 million. Sales of its signature items such as converter boxes and accessories dropped 6.3% last quarter compared with the same time last year, while sales of camcorders, digital cameras, MP3 players and other consumer electronic devices was off by more than 20%.

We'd love to tell you that all of this is a new development, but Radio Shack has been in steep decline since at least 2006 -- when it closed 500 stores and laid off nearly as many workers at its corporate headquarters. Shareholders were rewarded for that move with a $31 drop in share price since the cuts were made and a 33% drop within the last year alone.

Tech geeks are increasingly getting their hard-to-find components on Amazon and other online sites, mobile devices can be found just about anywhere -- including at Verizon ( VZ), AT&T ( T) and Sprint ( S) stores that cut out the middle man -- and just about every other retailer has received the message that when the customer wants help, he or she will ask for it. RadioShack can swap out its T-Mobile partnership for Verizon if it wants to and put as many kiosks in Target stores as its heart desires. But it shouldn't expect holiday shoppers to pay for gift cards to bricks-and-mortar shops they can't stand and that Radio Shack itself is seemingly abandoning.

People laughed when the company tried to rebrand itself as The Shack a few years ago, but Radio Shack's becoming as irrelevant as radio itself.

-- Written by Jason Notte in Boston.

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Jason Notte is a reporter for TheStreet. His writing has appeared in The New York Times, The Huffington Post, Esquire.com, Time Out New York, the Boston Herald, the Boston Phoenix, the Metro newspaper and the Colorado Springs Independent. He previously served as the political and global affairs editor for Metro U.S., layout editor for Boston Now, assistant news editor for the Herald News of West Paterson, N.J., editor of Go Out! Magazine in Hoboken, N.J., and copy editor and lifestyle editor at the Jersey Journal in Jersey City, N.J.

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