Sharper Image…Maybe Time To Close The Stores (SHRP)

October 11, 2007 by Douglas A. McIntyre

If you follow retail stocks, it is no secret that Sharper Image (NASDAQ:SHRP) has not done that well.  In fact, this is becoming a case study on disaster management.  The company reported same-store-sales of -21%, and September’s total revenues fell to $19.6 million from $31.9 million in September 2006. 

Air purification sales were only 13% of sales this last month, versus 30% in September 2006.  There were also $3.5 million in infomercial sales counted in the September 2006 numbers (discontinued this in OCT 2006).  Without prior year infomercial sales, the total Company sales decrease in September was 31 percent. Total store sales were down 22% to $13.6 million compared to $17.5 million in the prior September.

For the eight months ended September 30, 2007, total sales were $184.9million compared to $273.4 million in the previous year, a massive dropof 32%. Air purification sales accounted for approximately 13% of salesyear-to-date 2007 versus approximately 33% of sales year-to-date 2006.The main reason for the huge drop is because the public thinks thesedon’t work.  If the company wants to dispute it they can, but theybetter look at their underwhelming success before pointing to thecontrary.  In fact, you might even argue that air purification systemsmight be the single largest contributor to the failure of the store.

SharperImage used to be cool.  Brookstone used to be way behind them, but thenthings started changing and Brookstone got acquired by OSIMInternational in Singapore in a deal valued in the $400 million rangein October 2005.  Sharper Image’s market cap is down to $51.8 millionwith the stock at $3.42.  In early 2004 this was a $30+ stock. 

Today’spress release contains no quotes.  How would you like to have to makequotes on this?  The company still describes itself as a leader: TheSharper Image is a specialty retailer that is nationally andinternationally renowned as a leading source of new, innovative,high-quality products that make life better and more enjoyable. TheCompany’s principal selling channels include 186 Sharper Imagespecialty stores throughout the United States; the award-winningSharper Image monthly catalog; and its primary Web site,www.sharperimage.com. The Company also has business-to-business salesteams for marketing its exclusive and proprietary products forcorporate incentive and reward programs and wholesale to selected U.S.and international retailers.

If you trust the balance sheet it trades at a discount to bookvalue.  That is because it is losing money now and the outlook neverseems to look up.  There is no way to calculate what the disgruntledshareholders will get out of it in class action suits, if anything.  Sofar the new CEO and CFO aren’t making a difference, and it’s no wonderthat shares hit a new 52-week low (in fact, it’s a low back to 1998).At this point, you have to wonder what the company could do to reallyturn itself around.  The net loss last quarter was some $20.6 million.

It has already announced plans to close one of its threedistribution centers.  Maybe it needs to review all of its stores moreclosely as well.  Frankly, this turnaround is looking elusive.According to Alexa the daily reach (traffic) for 2007 is showing that2007 is a low.  This implies that its online visits are dropping alongwith store sales.  That makes the argument that it might be verydifficult to change to an online only or more online-focused model.Something has to happen here and it really needs to happen fast.Otherwise even closing the stores will be too little too late.  It needs more exclusive products that are in demand that can only be purchased there, but it’s hard to imagine them getting too many eager suppliers to use Sharper Image for an exclusive platform. 

Acall into the company’s VP of Finance has not yet been returned.Frankly, it’s really hard to blame him if you think about being inthose shoes.

Jon C. Ogg
October 11, 2007