To keep growing, Sharper Image prunes

Sharper Image Corp. has had a great run: For nine of the 10 past years, the San Francisco-based manufacturer/marketer of high-tech gifts enjoyed sales growth and solid profitability. But last year, though both revenue and income continued to grow, the company’s performance fell short of expectations. To come to terms with a cooling off of its business after years of red-hot growth, Sharper Image started 2005 with layoffs, advertising cutbacks, and reduced catalog page counts.

The cost-saving measures, announced Feb. 10, included a 10% reduction of staff at its headquarters, in which 25-30 of nearly 300 employees — both executives and nonsalaried workers — were laid off, says director of investor relations Tersh Barber.

The company is also scaling back on advertising, which includes catalogs and infomercials. Total catalog circulation increased in the fiscal first quarter of 2005 by a percentage in the “very low teens,” Barber says, and for the year will increase by the mid-single digits — more modest than the company’s usual year-over-year circ increases of up to 10%. Total page count for fiscal 2005 will be down by a percentage in the mid-teens.

“This headwind in our business, if you want to call it that, is allowing us to focus on some expense control and really re-right-size our business,” says Barber.

One area in which Sharper Image doesn’t plan to cut back is retail growth. It will open approximately 26 new retail locations this year, which Barber says is in line with past years’ retail expansion. “We typically guide to 15%-20% unit growth for new stores,” he adds, “and 2005 targets of 15%-18% are within that range.”

Record — but disappointing — sales

Although last year’s sales did not meet company expectations, “fiscal ’04 was still a year of record revenues for us,” Barber says. The company’s total sales for last year increased roughly 17%, from $646.9 million in 2003 to an estimated $755.1 million. (As of mid-March the company had not yet released final 2004 results.) Direct sales (including wholesale) climbed 35%, from $223.8 million in 2003 to about $302.8 million.

But whereas comparable store sales — a key metric when gauging a brand’s health — had grown 15% in 2003, last year they fell 1%. And total year-over-year sales for February, the first month in Sharper Image’s fiscal calendar, decreased 13% this year, to $45.4 million from the previous February’s $51.9 million.

Sharper Image has already warned that sales for 2005 will be lower than last year’s. But it still expects revenue to exceed that of 2003.

On the other side of the ledger, Sharper Image expects its costs related to compliance with the Sarbanes-Oxley Act of 2002 to be lower than last year’s. The legislation, designed to protect investors and the public from fraudulent accounting activities by public corporations, required the applicable companies to spend substantial sums on legal and consulting fees associated with setting up systems to verify internal accounting practices. Now that the systems have been set up, the expenses should be reduced.

In the meantime, Sharper Image is gearing up for a stock buy-back plan. The board of directors has authorized the company to purchase up to 1 million shares of its common stock this year. Barber says this action can be interpreted partly as an effort to show the small investor that the company has faith in itself.

Seeking this year’s scooter

Realizing that cost-cutting alone will not rev up the company’s growth, Sharper Image is also concentrating on product development. Merchandising has long been the marketer’s strong suit: Its runaway success with the motorized Razor Scooter in 2000 prompted a slew of knockoffs. Sharper Image plans to introduce products to complement MP3 music systems such as the Apple iPod — a brand that some say gave Sharper Image fierce competition during last year’s holiday season.

More than a streamlining of its internal and marketing costs, the company’s long-term success hinges on the development of new product, says Coy Clement, president of East Greenwich, RI-based consultancy ClementDirect: “It is hard to maintain steady sales growth when one or two ‘home run’ products represent a high percentage of sales.”

Sharper Image could use a hit in the entertainment electronics department, says Ozarslan Tangun, director of research at Dallas-based investment management/brokerage firm Southwest Securities. The marketer’s offerings in the stereo category were disappointing in the fourth quarter of 2004, he feels. But merchandise akin to the iM3 inMotion for iPod and iPod Mini, a portable stereo with a built-in port for the iPod, could be winners for the company.

Sharper Image also has high hopes for an item featured on its March catalog cover: the $169.95 Treat & Train, a remote-controlled system that automatically rewards food treats to dogs for good behavior. Rather than waiting for the fall/ holiday season, the company pushed to get the product in all its channels in time for the Father’s Day selling period, a strong holiday for the company.

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