Thalheimer out as Sharper Image CEO - Multichannel Merchant

For Sharper Image shareholders, enough was finally enough. On Sept. 25, following 18 months of shrinking sales and profits, Sharper Image Corp. founder Richard Thalheimer, the merchandising visionary who made high-end gadgetry accessible to the masses, was replaced as chairman/CEO. He retains a seat on the board of directors, however.

Turnaround specialist Jerry W. Levin was tapped as chairman and interim CEO. He joined the board of the San Francisco-based cataloger/retailer in July, part of a compromise by Thalheimer in an effort to stave off a coup by disgruntled shareholder group Knightspoint Group, which owns 12.8% of Sharper Image. Although the statement announcing the changes said only that Thalheimer was “leaving” the company, Knightspoint had wanted to replace him and the rest of his board of directors back in March. Rather than face a proxy fight for control of the company, Sharper Image in May agreed to place three Knightspoint members, including Levin, on the board.

Levin is perhaps best known for replacing “Chainsaw Al” Dunlop at Sunbeam (now American Household) in 1998. His firm, JW Levin Partners, has been signed by Sharper Image for a one-year period “to help address [its] operating issues,” according to the statement. Neither Levin nor Thalheimer could be reached for comment at press time, but Sharper Image spokesperson Michael Gross says that Levin will be charged with “putting Sharper Image on a track to profitable growth and restoring shareholder value.”

In its statement Sharper Image Corp. said it “will begin immediately an executive search to find a CEO with strong leadership skills, merchandising experience, and a history of business success.”

Lack of winners

Knightspoint’s desire for major changes at the top was spurred by Sharper Image’s sinking fortunes. Revenue fell 12% last year, to $668.9 million for the year ended Jan. 31 from $760.0 million in 2004. Direct-to-consumer sales tumbled 21%, to $194.7 million. And the company posted a net loss of $15.2 million, compared with net income of $14.7 million the previous year.

Knightspoint was pushing to cut and redirect marketing spending, defer store expansion, eliminate significant quantities of slow-moving and obsolete inventory, and overhaul the product development process, among other changes. Earlier this year Sharper Image had cut its corporate staff 20% and its retail work force 12% through a combination of layoffs, retirements, and positions left unfilled. It also slashed its advertising budget and its catalog circulation 30% this year, as well as chopped its circulation of solo mailers 40% and its spending on infomercials 25%.

In announcing these cuts in March, Thalheimer had said in a statement, “We are maintaining intense efforts on good merchandising, marketing, and the gauging of customers’ tastes and demands. We are focused on introducing many new products that we believe will be attractive to our customers.”

In fact, the lack of exciting new products appears to be at the root of Sharper Image’s troubles. Stuart Rose, managing director of Wellesley, MA-based investment bank Tully & Holland, refers to Sharper Image as a “fashion house,” in that it needs to continually churn out new hit products on a seasonal basis.

“But [Sharper Image] relied too much on one product — the Ionic Breeze air purifier,” Rose says. “This is what happens when fashion companies rely too much on one product and can’t follow up with new hits and smooth out the curve. You see it all the time in apparel stores, like the Gap.”

Yet for a long time Thalheimer, who founded the company in 1977, was able to follow up one hit with another, and another. Roy Schwedelson, CEO of Boca Raton, FL-based list services firm Worldata, says Thalheimer had a knack for sensing trends before anyone else. When messaging tools were just starting to catch on, “he had them in the catalog before they were in the stores. His catalogs were exciting. You didn’t need to buy any of the stuff, but you wanted to.”

Schwedelson refers to Sharper Image’s original product line of executive toys and electronic gadgets as “me buys.” When the company shifted to “them buys” — products one would buy as gifts for others or as gear for the household — it lost its way, Schwedelson says.

Geoff Batrouney, executive vice president for Estee Marketing, a New Rochelle, NY-based list services firm, says that Thalheimer was ahead of the curve not just in merchandising but in marketing products as well. Take the product placement in the 1985 film A View to a Kill: James Bond uses a Sharper Image credit card to rescue the damsel in distress.

“Nobody was doing that at the time,” Batrouney says, recalling the way the credit card glittered on the big screen. “All successful marketers today should tip their hat to Mr. Thalheimer because he led the way. He understood the value of the hero shot, making the merchandise the star.”

Can this company be rehoned?

In light of the company’s response to ongoing sales declines, Rose says he wouldn’t be surprised if Sharper Image closes “money-losing stores and is sold in the next year. The ups and downs of a fashion company might fit better in a private context. Some private equity group might bring it private and then restructure it away from the prying eyes of the public market.”

But Craig Battle, managing director of Princeton, NJ-based investment bank Tucker Alexander, doesn’t think Sharper Image will be sold just yet. “It’s more likely that [Levin] will stabilize things and hand it off to the new guy. Even if they did decide to sell it, they wouldn’t do it right away.”

Much, though, depends on what Levin and his team uncover going forward. “If the interim guy identifies fairly traditional issues that can be handled with skillful leadership, that would dictate one kind of hire. If there are systemic, complex issues, that would dictate another kind of hire. And if it’s a mess,” Battle concludes, “they’d sell it.”

Is Sharper Image’s creative slipping?

Recent catalogs from The Sharper Image are a far cry from the marketer’s once upscale, cutting-edge image. Multichannel Merchant asked Mike Wychocki, executive vice president, and Mark Swedlund, senior executive vice president, of Mill Valley, CA-based catalog agency Haggin Marketing to critique the current Sharper Image catalog (above). Here are their comments:

One can almost sense the financial pressures on the organization from flipping through the November 2006 catalog. We went back into our files to contrast it to a September 2002 catalog, and here are a few things we observed.

Though both catalogs have the same number of pages (52), the paper weight in the latest catalog has been cut, and we would guess the paper itself was less expensive. This was not a marginal cut in weight: The 2006 catalog is about 20% lighter than the 2002 edition.
It looks like Sharper Image has also cut back on its photography budget. The 2006 catalog seems to have a lot more product silhouettes and fewer environmental shots. This small savings in photography may have hit the soul of the brand even harder than the decline in paper quality, as the imagery was for many years the cornerstone of the catalog’s appeal.
The copy continues to be the strong point of the book. Sharper Image is one of the few companies that is able to write copy well enough to grab the reader’s interest in nonessential items, like its famous nose-hair trimmer.

It’s safe to say that today not as many people say “wow” when they receive the catalog. The Sharper Image was built on offering exciting product and presenting it in an over-the-top way. Every gadget-craving male in America looked forward to pulling the new edition of the Sharper Image catalog out of the mailbox. With the expansion of the store chain, the branding support the catalog provides is even more important. Understandably, the company needed to bring costs in line with revenue. But because its brand image was linked to quality, decreasing the quality of the book may be accelerating the company’s slide.

The Sharper Image is fighting many external factors right now that go far beyond the catalog presentation itself — brand fatigue, a world-class visionary founder who may have overstayed his leadership role, and most important, the rapid change in what “cool gadgetry” means in the marketplace today. Sharper Image was cutting edge for a long time, but that was before laptop computers, cell phones, HDTVs, digital cameras, GPS devices, and iPods.

In comparison, the new products that Sharper Image brings to market seem tame and almost trite. Yes, it sells some of the above mentioned products in those categories, but being an “item” business is only good when these products are new to market — when gadgets become mainstream and these product categories mature, you need to have a “line” selection to have any leadership credibility. Selling just one LCD TV and one digital camera is not going to make you a cutting-edge retailer.

Following 18 months of shrinking sales and profits, Sharper Image Corp. founder Richard Thalheimer, the merchandising visionary who made high-end gadgetry accessible to the masses, was replaced as chairman/CEO on Sept. 25. He retains a seat on the board of directors, however.

Turnaround specialist Jerry W. Levin, who has been on the board of the San Francisco-based cataloger/retailer since July, was tapped as chairman and interim CEO. In a release, the company said it “will begin immediately an executive search to find a CEO with strong leadership skills, merchandising experience, and a history of business success.” Levin is perhaps best known for replacing “Chainsaw Al” Dunlop at Sunbeam (now American Household) in 1998. His company, JW Levin Partners, has been signed by Sharper Image for a one-year period “to help address [its] operating issues,” according to the statement.

Although the statement said only that Thalheimer “is leaving,” Knightspoint Group, a shareholder group that owns 12.8% of the company, wanted to replace Thalheimer and the rest of the board of directors back in March. (See “Dull Performance Shakes Up Sharper Image.”) Rather than face a proxy fight for control of the company, Sharper Image in May agreed to place three Knightspoint members, including Levin, on the board.

Sharper Image’s sales fell 12% last year, to $668.9 million from $760.0 million in fiscal 2004. Direct-to-consumer sales tumbled 21%, to $194.7 million. And the company posted a net loss of $15.2 million for the year, compared with net income of $14.7 million the previous year.

Knightspoint wants to cut and redirect marketing spending, defer store expansion, eliminate significant quantities of slow-moving and obsolete inventory, adjust executive compensation, and overhaul the product development process. Levin could not be reached for comment at press time, but Sharper Image spokesperson Michael Gross says that Levin will be charged with “putting Sharper Image on a track to profitable growth and restoring shareholder value.”

Sharper Image’s troubles “are a result of not being able to replace the sales of a huge hit,” says Stuart Rose, managing director at Wellesley, MA-based investment bank Tully & Holland, “The Sharper Image is a ‘fashion company,’” Rose says, in that it needs to continually churn out new hit products on a seasonal basis. “But it relied too much on one product — the Ionic Breeze air purifier. This is what happens when fashion companies rely too much on one product and can’t follow up with new hits and smooth out the curve. You see it all the time in apparel stores, like the Gap.”

In light of the company’s response to ongoing sales declines, Rose says he wouldn’t be surprised if the company closes “money-losing stores and is sold in the next year. The ups and downs of a fashion company might fit better in a private context. Some private equity group might bring it private and then restructure it away from the prying eyes of the public market.”

Craig Battle, managing director of Princeton, NJ-based investment bank Tucker Alexander, says he can imagine several scenarios: “First, you can have someone come in, right the ship, and tell us what’s wrong and what the prospects are for moving forward. If he says you have systemic problems that require a major overhaul, they may decide to market the company. But it’s more likely that this guy will stabilize things and hand it off to the new guy. Even if they did decide to sell it, they wouldn’t do it right away. It’s more than likely that they will ultimately hire a guy with operating and turnaround experience who can build a business. If the interim guy identifies fairly traditional issues that can be handled with skillful leadership, that would dictate one kind of hire. If there are systemic, complex issues, that would dictate another kind of hire. And if it’s a mess, they’d sell it.”