With the economy still in a downward spiral, most consumers are cutting back on their spending. That means retailers who were barely surviving before the downturn are now dropping like flies. Bombay, Sharper Image and Linen-n-Things are just a few of the stores that have already closed for good.

But with every closing retailer comes the inevitable “liquidation sale.” And its that liquidation sale where you could walk out with the bargain of the century or looking like a pound-foolish idiot.

(More after the jump)

Let’s take the dying west coast clothing retailer, Mervyn’s, as an example.

I recently strolled into a local Mervyn’s store about a week after the company announced that it would be shutting down. The mid-market clothing retailer plans to close stores after the holiday season and I decided to do some before and after price comparisons between the liquidation prices now and the regular prices before the announcement.

To give you a little background on how a liquidation sale works, typically a liquidation company will purchase a retailers’ entire inventory, ask employees to continue to work through the final weeks of the liquidation and use the retailers’ existing stores to sell that inventory. That way, the transition is seamless for the customer, except that the liquidator will no longer accept gift cards or the retailers’ credit cards. (For more information on what to do if you have a gift card or credit card from a bankrupt retailer, watch for one of our upcoming episodes of 2 Minute Finance that will address that topic).

But one of the pitfalls of the liquidation sale is the fact that discounts are based on prices that were “reset” to manufacturer’s suggested retail price, rather than from the price that the retailer was charging when it went bankrupt. Here’s a case in point:

This Cambridge Classic dress shirt typically sells for $18-$20 at Mervyn’s, depending on the sale and the season.

But Manufacturers’ Suggested Retail Price (MSRP) — the standardized price that manufacturers set — is $30. (Sorry for the blurry price tag photo)

And looking at the discount:

Here’s what the breakdown would look like:

$30 Original Price – 25% off = $22.50

That’s $22.50 now versus $18-$20 prior. Meaning if you bought that dress shirt now versus a month ago when Mervyn’s was still in regular operations, you would be paying $2.50 to $4.50 more. Not really a good deal.

Another example…shoes:

MSRP is $70. This pair of shoes were regular Mervyn’s price at $50-$55. After the discount:

Here’s what the deal looks like. $70 – 25% off = $52.50. Not much of a deal here either. You’re paying exactly what you would have paid prior to liquidation.

Now there are some good deals to be had if you search carefully. On the men’s clearance rack, I found this god-awful polo shirt.

I regret not snapping a photo of the rack sign with the additional percentage off. But it was 50% off. So 50% off of $11.98 is $5.99, making this shirt an incredible deal.

So out of this quick sample of prices, only one out of the three “deals” makes sense. If this doesn’t convince you to stay away from liquidation deals, think about how much more complicated it could be if you were to visit the liquidation sale here:


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