The Sharper Image Cleans House

The retailer, in a prolonged sales slump, has ousted its founder as CEO. It'll also restate earnings due to improper stock-options accounting

The Sharper Image casts its gadgets as new and cool—food containers aimed at making food stay fresh longer, a robot that can hold your drink—but consumers have yawned in recent quarters.

That problem is just the most visible one at Sharper Image (SHRP). The 190-store chain, which also sells through a catalog and Web site, has been battling a years-long decline in sales, profit, and share price. And last week, the San Francisco-based retailer said it will restate results for the past three years after finding that it improperly accounted for stock-options grants.

So, with sales slumping and its product mix growing stagnant, Sharper Image shook things up, ousting founder Richard Thalheimer as chairman and CEO. The Sept. 26 decision capped a fight with a dissident shareholder group. Investors cheered the announcement of new leadership, sending shares up more than 10%, to $10.33. But Sharper's stock is down 18% over the past year and 52% from two years prior, reflecting a prolonged period of weak financial results.

Director Jerry Levin, who joined Sharper's board in July, was named interim chairman and chief executive. Levin is formerly chief executive of both Revlon (REV) and American Household, formerly Sunbeam. He was part of a shareholder revolt in the spring led by Knightspoint Partners that led to a board shuffle and the addition of three Knightspoint members. Thalheimer, the company's largest individual shareholder with a 22% stake, will remain on the board. A company spokesman said neither Thalheimer nor Levin were available for interviews. Knightspoint did not return a call for comment.


  Still, the company and Levin are struggling with the core problem: Despite some recent additions, the overall merchandise mix is tired. "It's been introducing new products, but we still see minimal impact on sales," says Joan Storms, analyst at Wedbush Morgan Securities. For the six months ended July 31, Sharper's revenues decreased 24%, to $214 million. Excluding any noncash compensation charge resulting from the review of stock option practices, Sharper expects to report a pretax loss of $42.3 million, far wider than the $18.9 million it lost in the same quarter last year. Same-store sales decreased 28% for the six-month period, and catalog sales fell 19% to $54.5 million.

Those kinds of results are a shock for a company that once churned out hits, including the Ionic Breeze line of air purifiers in 2002, the Razor Scooter in the late 1990s, and, earlier, the fogless shower mirror and laser-tag sets. "Originally, Sharper Image was extraordinarily successful because it offered products that consumers couldn't get elsewhere," says Robert Straus, an analyst at Merriman Curhan Ford & Co. "Today, that's gone away with the onslaught of competition, especially in the consumer-electronics space."

Many of Sharper's past popular products were designed by the in-house design staff and promoted as such on packaging and in marketing with the tagline "Sharper Image Design." But the company in recent years has shifted its merchandise mix to emphasize products from third-party suppliers that are widely available. "Now it's selling products from the As Seen On TV line, which is sad," says a former manager who left the company in the late 1990s.


  Analysts also attribute Sharper Image's financial woes to an overdependence on its Ionic Breeze line of air purifiers. At their peak around 2003, the Ionic Breeze products were accounting for as much as 35% to 40% of sales and even more of profits, analysts estimate. But sales of the line have steadily slowed, especially as other retailers ranging from Radio Shack (RSH) to The Home Depot (HD) have begun promoting their own air purifiers. Moreover, Ionic Breeze sales were hurt even further after Consumer Reports magazine rated the product as ineffective. Sharper Image sued the magazine in U.S. District Court in 2003. The lawsuit was dismissed the following year.

To try to compensate for the slowdown in Ionic Breeze sales, the company this year has vastly accelerated the pace of product introductions. Its recently introduced products include the $250 "LoveHandler," an exercise machine designed "to sculpt your abs, trim your waist, and lose your love handles," according to the company catalog. Another recent addition: the line of FresherLonger food-storage containers, which are supposed to delay spoilage of perishables. In all, Sharper has been planning to introduce about 200 new products this year, far more than in past years.

Yet analysts say the company may need to think even more broadly, perhaps expanding into entirely new product categories and bulking up its internal design staff, to get sales back on a growth track. Until then, Sharper's results look to be anything but.

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