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Protecting a Sharper Image

After staging a comeback, the retailer's founder takes aggressive steps to sustain momentum

September 28, 2003|James F. Peltz | Times Staff Writer

SAN FRANCISCO — Matthew Kelley is a subscriber and fan of Consumer Reports magazine. But he also loves his Ionic Breeze room air cleaner from Sharper Image Corp.

So when Consumer Reports' October issue termed the Ionic Breeze "ineffective" in cleaning the air, the Georgetown, Colo., accountant was torn. In the end, he sided with Sharper Image. In a letter to the magazine, he called the $300 product "a terrific purchase."

"I rarely respond to things like this" in writing, Kelley, 33, said later. "But it's made a difference in our home."

Kelley's loyalty is welcome news for Richard Thalheimer, Sharper Image's founder, chairman and chief executive. But Thalheimer is still livid over Consumer Reports' assessment and has taken matters into his own hands. The retailer sued the magazine this month on grounds that its findings were false, misleading and harmful to the air cleaner's sales and reputation.

"They pretend they've addressed our concerns, but they really haven't, and we're ticked," Thalheimer said.

Consumer Reports said it stood by its story as "truthful, fair and accurate."

Companies seldom sue Consumer Reports, but Thalheimer took the aggressive step to help protect the brisk sales momentum enjoyed not only by the Ionic Breeze air cleaners but by Sharper Image overall.

Once a peddler of expensive and largely unnecessary gadgets to upper-income men, Sharper Image now sells a broader, more useful product line to men and women -- and the company is on a roll. Sales and earnings are up smartly, and the company's stronger stock price and debt-free balance sheet are enabling Sharper Image to step up its store expansion.

Rising sales from the company's catalog and Internet operations, which together account for about 40% of Sharper Image's business, also are fueling growth. It's all backed by nearly $100 million in annual advertising that includes lots of TV infomercials.

"This is not the boy-toy company of 20 years ago," said Thalheimer (pronounced TALL-heimer). "Today our bestsellers are an air filter, an eyeglass cleaner and a nose-hair trimmer."

The company's sales per square foot are running above $625 annually, "at the high end" of specialty retailers in general, said Kristine Koerber, an analyst with WR Hambrecht & Co., which has had an investment banking relationship with Sharper Image.

Through the first seven months of this year, the chain's same-store sales -- those of stores open at least 12 months, a key measure of retail success -- jumped a stout 15% from a year earlier. Sharper Image expects its total sales to grow 20% this year, to about $635 million, and it's gunning to reach $1 billion by 2006. Earnings also are forecast to rise about 20% to roughly $22 million, according to analysts surveyed by Thomson First Call.

The retailer, which once operated only in the toniest shopping malls, also has expanded into the heartland with stores in Fresno; Omaha; Peoria, Ill.; and Little Rock, Ark. And more are coming. Sharper Image, now with 130 stores -- including 32 in California -- plans to open 25 additional stores this year and 25 to 30 next year.

Even the weak economy and sagging consumer confidence aren't impeding the company's momentum. Credit not only the chain's broader appeal and wider range of prices but also its shift toward selling unique products under its own brand, analysts said.

For Sharper Image, it's a strategy that Thalheimer, 55, began developing several years ago, after he had to pull Sharper Image from the brink of disaster.

A Background in Retail

The son of Little Rock department store owners, Thalheimer graduated from Yale University, moved to San Francisco in the early 1970s and began selling copier and typewriter supplies to offices. That's when he coined the name "The Sharper Image."

Then an avid runner, he discovered a multifunctional watch he was sure runners would want, but the item had narrow distribution. After striking a deal with the watch's producer, he ran a full-page ad in a running magazine, and the orders poured in.

He made a small fortune, which gave him the springboard to start selling other goods by 1977.

"I took all the money and put it into a color catalog, a computer and an office," he recalled.

For its first 10 years, Sharper Image became synonymous with the trendy, often frivolous consumption of the 1980s. It sold mainly high-end consumer electronics made by Sony, Panasonic and other companies, and expensive toys such as suits of armor and crossbows. Its target shoppers were men earning six figures or more.

Thalheimer took the company public in 1987 at $10 a share and then began to leave the daily operations to others. His timing was awful. The go-go economy of the 1980s was ending, and a deep recession was around the corner. In addition, many Sharper Image products -- stereos, TVs and telephones -- were becoming available at electronics chains and mass merchandisers, whose price-cutting eroded Sharper Image's popularity.

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