Blames loss leaders:

The company said increasing competition from discount retailers, the rising popularity of CD burning and illegal downloading of music contributed to sagging sales at its 370 stores.

The company, which emerged from bankruptcy in 1998, said Tuesday that the move was necessary to streamline its operations, including the closing of 120 stores within the next few months.

Wherehouse, based in Torrance, Calif., recently closed 30 unprofitable stores. The filing was in Delaware, where the company is incorporated.

The company said its remaining stores will continue to operate and has asked the court for permission to honor outstanding gift cards.

The company hired a new chief executive and chief financial officer in June. They reviewed the company's finances and opted for bankruptcy to strengthen the balance sheet, Wherehouse said.

Wherehouse said it plans to remodel many of its remaining 250 stores to provide a more interactive environment, including listening stations and interactive kiosks. [AP]

They should be able to use their used goods as a wedge against the discounters loss leaders, but the price is going to have to be low enough to attract the bargain hunters who would rather buy new, but who can't pass up a good enough deal. Provide an appealing interactive environment for this to take place in, and maybe they can give it a go. Used is key because, unlike news product, they can determine their own margin.