Dim Prospects for Sharper Image

Despite poor quarterly numbers, the gadget retailer dismisses bankruptcy chatter, but it desperately needs a healthy holiday season

by Pallavi Gogoi

A Sharper Image retail store in the Lenox Square Mall in Atlanta. Erik S. Lesser/Bloomberg News

The outlook for Sharper Image (SHRP) is getting fuzzy.

The high-profile retailer known for cutting-edge gadgets has seen its stock hammered in recent days, dropping more than 50% over five trading days from $3.75 to $1.87 on Oct. 17. Prompting the swoon was the refusal by a federal court judge to approve the proposed settlement in a class action over Sharper Image's air purifiers.

Then on Oct. 18, the stock rebounded to $2.72 after six of the company's executives, including Chief Executive Steven Lightman and Chairman Jerry Levin, bought shares in the company. Investors took the purchases, which totaled more than $400,000, as a vote of confidence in the company's ability to overcome declining sales and ongoing losses.

But Sharper Image's top brass may need more than confidence to ward off a cash crunch. The San Francisco company appears to be precariously short of money. In the most recent quarterly report, filed with the Securities & Exchange Commission, Sharper Image's cash and cash equivalents as of July 31 totaled just $801,000, down from $18 million at the end of the previous quarter. For a company that lost $20.6 million and used $13.7 million in cash to fund operations in the most recent quarter, that could leave Levin and Lightman in a tight spot.

Cash Flow and Bright Prospects

Levin says the company will manage just fine. He points out that Sharper Image received a loan of $20 million from Wells Fargo (WFC), with $10 million of that made available to the company on Aug. 21 and the other $10 million expected by November. Levin says that should be enough cash to get the company through the third quarter and into the fourth quarter, when he vows Sharper Image will once again be cash-flow positive.

He dismisses speculation that the company could file for bankruptcy. He points out that even if the Sharper Image needs more cash, it is backed by deep-pocketed investors. "I can't think of one advantage of filing for bankruptcy," says Levin. "The only way we would go bankrupt is if we run out of money, and we have adequate cushion right now."

Levin says the company's fourth-quarter prospects are bright, given the traditional strength of the holiday period for Sharper Image and a change in strategy designed to improve the product lineup. Historically, Sharper Image has relied on one blockbuster product to drive sales, from Razor scooters in the 1990s to the Ionic Breeze air purifiers earlier this decade. Now, Levin is shifting to a broader product assortment that should deliver strong, steadier sales. Among the new products this year: a phantom chess player, where chess pieces move automatically, for $199.95; digital photo frames, from $49.95 to $299.95; and the ISIS puzzle, a handcrafted metal orb with hieroglyphics that need to be correctly aligned to open the orb, for $199.95.

Levin is also working on agreements with a range of manufacturers to have them make products exclusively for Sharper Image, rather than Sharper Image trying to develop products on its own as it has in the past. After a period of exclusivity, the products will go into wider distribution under the manufacturers' brand name, and Sharper Image will get licensing fees from those sales. None of these products have been announced yet, but Levin says they will include cell phones, memory cards, and portable power packs.

Class-Action Challenges

What has spooked investors recently is not future products, but current challenges. In particular, the class action over the company's Ionic Breeze air purifier now threatens to eat into the company's cash reserves. The tentative deal that had been cut between the company and the plaintiffs' attorneys called for customers to receive coupons worth $19 at Sharper Image, instead of actual cash.

But Cecilia Altonaga, a U.S. district judge in Miami, ruled that the settlement was unfair to consumers. She objected not only to the coupons, but to the prospect that the lawyers on the case, led by Miami attorney Robert Parks, would receive $2 million in fees. Thirty-six state attorneys general had filed briefs objecting to the proposed settlement, a highly unusual move that Altonaga said influenced her decision. "We would have preferred a cash settlement, but we know that the company is not in a position to pay," says Parks.