Sharper Image's Broader, Richer Focus

No longer content to offer only fun stuff, company founder Richard Thalheimer explains why useful products are paying off

Specialty retailer Sharper Image (SHRP ), which made its name with sleek, big-tickets gadgets, has found it also pays to offer more practical, less-pricey products. "I grew up thinking of us as a shop for executive boys' toys," says Richard Thalheimer, chairman and chief executive, who founded the outfit in 1977. Now, eyeglass cleaners, shower-proof CD players, and an electronic "object locater" -- a $50 gadget that helps keep track of keys, cell phones, and reading glasses -- have their places alongside recliners that give shiatsu massage and the "electric cruiser" -- a battery-powered bike that looks like one from the '50s.

Offering hard-to-find, whiz-bang stuff in all price ranges has been a winning strategy for the San Francisco-based retailer. Christmas sales, which were hit-or-miss among retailers this season, were up significantly for Sharper Image, says Thalheimer. From Dec. 1 to Christmas Eve, the retailer's sales rose an impressive 30% over the same period last year. Same-sales stores were up 21%, and Internet sales climbed by 34% in the same period.

As a result of its strong December performance, Sharper Image raised its fourth-quarter and full-year earnings guidance by a few pennies. It now expects earnings per share of $1.57 to $1.61 for the 2003 fiscal year ending Jan. 31, on about $640 million in sales, up 25% from $523 million in 2002. The stock has gained some 30% in the last 10 weeks, closing at $32.29 on Jan. 5.

Thalheimer spoke with BusinessWeek Online Reporter Amy Tsao on Dec. 31 about his high/low luxury strategy and its prospects for the new year. Edited excerpts of their conversation follow:

Q: Many of your products can't be bought elsewhere. How do you come up with proprietary products?


Eighty percent of our product sales come from items that are exclusive to Sharper Image. We spend about $2 million a year developing our proprietary products. Today, we have 20 full-time product designers, electronics engineers, mechanical engineers, and sourcing specialists, up from just three in 1993.

Half of the proprietary products are ones we invented ourselves and hold the patents on. For example, a very popular product is our automatic eyeglass cleaner. The other half we negotiate for exclusive U.S. rights. These are excellent products that result from people walking in with a patent, we see value in it, and we create a product around it. Ionic Breeze [an air purifier that can sell for as much as $499] was developed that way.

Q: You're selling a range of products at all different prices, and many of them are more practical than the high-end gadgets that dominated the store just a few years ago. Why?


We found that more useful products tended to sell better. It was a real awakening to me that useful products had broader appeal. Now we still have fun stuff and glamorous products, but we also have items you can use every day, like our ultrasonic jewelry cleaner.

Q: You also seem to build product lines around a certain technology. For example, the Ionic Breeze air purifiers start at $39.95 for a desktop model, all the way up to $499 for the top-of-the-line version.


When we get involved with a technology like Ionic Breeze, because we have something unique, we try and leverage that asset into product extensions. It makes a lot of sense to find new ways to use the technology we control.

Q: How has your customer demographic changed?


Our price range is broader than ever, as are our demographics. Now, we can build stores in cities we never could go to before. And our products appeal to women more these days. Maybe 55% of our customers are female, vs. 10 years ago, when it was 35%.

Q: How do you decide which nonproprietary products to sell?


It's hard to find products we want to sell. We want to avoid products that get discounted at Target (TGT ) and Wal-Mart (WMT ). In the 1980s, we carried merchandise other retailers could easily copy. Most of our products now are exclusive to us or can be gotten in only a few other places. Like the Roomba [robot] vacuum cleaner, which is only available at specialty retailers.

Q: How do margins differ between Sharper Image-only products vs. nonproprietary products?


With brand-name products, margins range from 25 to 35 basis points. For a $100 sale, we get $25 to $35 in gross profit. Typically, when we make a product, we get the margin of the manufacturer and the retailer -- about 45 to 60 basis points of margin as manufacturer and retailer. Selling more proprietary products makes us much more profitable than [we were] 10 years ago.

Q: Many retailers had a more difficult time than expected this Christmas. What set Sharper Image apart?


As consumers become more sophisticated, they know better values come after Christmas. We don't markdown much since we don't have much that's seasonal, but [other retailers' discounting] gets a lot of people into the malls. Our products tend to be the same year round.

Q: If this is such a good strategy, why don't more retailers do this?


Because they usually don't know what will sell, so they'll have hits and misses. [For every 30 hits], we have about one miss. [In the 26 years since the company was founded], I've been here the whole time. People in our buying department that buy what we don't invent have been here between and 5 years and 10 years. Our store managers have been with us 15 years to 20 years. They are firm in their opinion of what will or won't succeed.

Also, we're dealing more in products that are less [subject to people being] fickle than something like fashion. Our goods are somewhat insulated from competition. One thing we do is consciously stay out of commodity electronics, where companies like Dell (DELL ) and Best Buy (BBY ) play.

Q: What's a miss that you've had recently?


We had a home robot last year that sold for $700. It didn't do a whole lot -- it greeted guests and could be used as a video camera. It didn't sell as well as we thought it would. We just finished selling it this past Christmas. Basically, it would need higher functionality or lower price, and in the 21 months since we introduced it, we haven't figured out how to do either.

Q: What is your role in developing products?


I am the leader of the group that comes up with the product ideas and eventually creates and finalizes every product. We meet once a week for four hours, and the rest of the design team works the rest of the week to get everything done. [I'm involved] from product idea, to graphic design, to how buttons work, what the features are, down to what the box looks like. I'm very hands-on in product creation.

Q: What were the big sellers this Christmas?


Our Ionic Breeze air purifiers were a huge contributor to holiday sales. Word-of-mouth has been positive. Others make ionic air cleaners that use the same principle, but our [Quadra 4 model] is unique because of the slim, space-saving design, lack of a filter, ease of cleaning it, and lack of noise.

Massage chairs were fantastic. The chairs sell well at all prices. This is the first year we've sold the iJoy massage chair. This chair, at $700, expanded the market to so many people, and it easily doubled our massage-chair business from a year ago. The next item in the massage-chair line is $1,500.

Q: What are your goals for Sharper Image in 2004?


We will continue to add stores in lifestyle centers in midsize cities, in addition to filling in stores in upscale malls. We will continue to build our online business and expand catalog sales. And we will continue to leverage our expense structure as we add another 30 stores on top of the 150 stores [that we had] as of the end of 2003.

All of that should allow us to achieve our goal of at least 20% growth in sales and profits. We will continue to build our proprietary products as a percentage of sales. They are currently about 80% of all dollar revenue, and I think this can continue to grow a few percentage points each year.

Q: How would you characterize the holiday retail season in 2003? And what kind of year will 2004 be for retailers?


This was an excellent holiday and fourth quarter for us. We recently raised guidance for earnings. This will make for a record year for earnings and revenues in our 26th year of business. As for 2004, we are planning for at least 20% growth in revenues and earnings. There is reason to believe, based on what economists are saying, and the fact that Presidential election years tend to be expansive, that the economy will continue to accelerate, and retail sales will benefit. 2004 should be another record year for Sharper Image.

Edited by Patricia O'Connell

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