Sharper Image Dims

http://www.businessweek.com/investor/content/feb2008/pi20080220_224253.htm

Stocks in the News
February 21, 2008
Sharper Image Dims
The beleaguered retailer has filed for bankruptcy court protection and will close nearly half its stores nationwide
by Eva Woo

More than three years of losses finally caught up to Sharper Image (SHRP), the gadgets retailer that saw its fortunes dip after a disastrous legal battle involving the effectiveness of its signature air purifier.

As recently as last fall, Sharper Image dismissed notions that it was headed for bankruptcy, despite the rejection of a settlement in a consumers' suit over the air purifier and a steep slide in its share price. "The only way we would go bankrupt is if we run out of money (BusinessWeek.com, 10/19/07)," Chairman Jerry Levin told BusinessWeek in October. That's apparently what happened.

Too many eggs in one basket

In its Chapter 11 filing, the San Francisco-based retailer said it faced a "liquidity crisis" and that its situation had been complicated by "the ever-tightening and volatile credit financing markets." The comments from CFO Rebecca Roedell were filed with its petition late Feb. 19 in U.S. Bankruptcy Court in Wilmington, Del. The company plans to close 90 of its 184 stores nationwide.

While the U.S.'s cloudy economic outlook has played a role in weak sales for numerous retailers, some analysts believe Sharper Image had unique troubles that contributed to its bankruptcy: deep reliance on a single product for most of its history and high costs due to expensive retail locations and catalog printing. "It's very much a Sharper Image issue," says Scott Tilghman, a specialty retailer analyst at New York-based Hudson Square Research. "I think it's your very small retailers that have either some debt on the balance sheet or not enough cash to fund operations (that) are really going to be put at risk."

Adds Jack Plunkett, CEO of a Houston-based market-research firm, Plunkett Research: "Sharper Image is absolutely a discretionary store, the kind of store that will find the cutback early in an economic situation like this."

The company failed to transition to a set of alternative products, as the one-time flagship product sales fell, said Joan Storm, retail analyst at Wedbush Morgan Securities. The troubled product, the "Ionic Breeze Quadra air cleaner," had seen negative reviews claiming the product was "ineffective" by Consumer Reports in 2002 and 2003. Since then the company lost its lawsuit against Consumer Union, which endorsed the reports, and a class action filed by consumer groups. Sales of the air purifier tumbled. "Sharper Image has been relying too much on a single product—an air purifying product that used to count for 35% of sales," Storm says.

Retail weakness

In October, a federal judge rejected a settlement that would have given consumers $19 coupons to use at Sharper Image stores, calling the deal inadequate.

Last week the company replaced CEO Steven A. Lightman with Robert Conway, head of a crisis and turnaround advice firm. Sharper Image has seen declining sales since 2004, and it recorded net losses in fiscal 2005 to 2007, continuing into 2008. Its shares fell 71%, to finish at 41¢ on Feb. 20 on Nasdaq, hitting an all-time low of 29¢ in intra-day trading.

Another retailer, privately held Lillian Vernon, which sells low-cost gifts and gadgets online and via catalog, also filed for bankruptcy court protection this week in Delaware.

In 2007, 75 retail chains announced a total of 4,603 store closings, down 3% from the previous year. Home furnishing and home entertainment stores accounted for almost half of the 2007 closures, according to a recent research report from International Council of Shopping Centers, a trade organization.

Eva Woo is a reporter for BusinessWeek.com