Daily Double
October 14, 1999

Sharper Image

Ticker: (Nasdaq: SHRP)
Phone: 425-653-4600
Website: www.sharperimage.com
Price (10/13/99): $11 5/8

By Rick Aristotle Munarriz (TMF Edible)

How Did it Double?

Q Ball, Q Ball, on the shelf,
Has your maker outdone thyself?

At this point, a shake of Sharper Image's newest techno-novelty would produce a blast of LED light and an audible reply. Maybe it's Austin Powers' "Yeah, baby!" or an "I'm so sure" in Valley Girl speak -- but the random answer would prove correct.

While the contagiously clever Q Ball is just weeks new to the market, it is typical of what has made Sharper Image a winner on Wall Street this year. It's hip. It was created in-house to assure exclusivity along with juicy margins. It sells itself online.

The company's overnight success was almost a dozen years in the making. A year ago the stock was selling for just $2 1/2 a share. The last time the stock had seen double digits was in the summer of 1987. The market crashed a few months later and bounced back -- Sharper Image wasn't so fortunate.

However, thanks to an aggressive Internet strategy and successful retailing trends at the storefront level, the company is humming along like a Lightscape relaxation device on a fresh pair of batteries.

Shake the Q Ball. Rattle the cynics. Roll back into favor. For Sharper Image, which many figured had peaked in the 1980s when heat massage cushions and Eye of the Storm light spheres were all the rave, it is success that is back in vogue.

Business Description

Sharper Image operates 85 retail stores. Beyond the shops, the company mails out monthly catalogs and allows for online shopping at sharperimage.com.

Financial Facts

Income Statement
12-month sales: $252.4 million
12-month income: $6.2 million
12-month EPS: $0.71
Profit Margin: 2.5%
Market Cap: $104.6 million

Balance Sheet
Cash: $25.9 million
Current Assets: $75.7 million
Current Liabilities: $31.8 million
Long-term Debt: $2.4 million

Price-to-earnings: 16.4
Price-to-sales: 0.4

How Could You Have Found This Double?

For a mall merchant stocking cutting-edge gizmos, the Internet was a predictable step in the evolutionary process. Logic would dictate that the typical Sharper Image shopper is either online or a tourist -- or, quite possibly, both.

By already mastering the art of impulse buying at the store level and effectively managing mail-order operations, should it have surprised anyone that Sharper Image would become one of the few to turn e-commerce into a profitable venture?

Then again, Sharper Image has been online since 1995. Despite being in the black and having a dot-com lifestyle, it was still a discarded penny stock a year ago. However, it wasn't until late last year that the company began to market its online personality effectively. By ramping up its exposure, the company has been able to reach new audiences. A whopping 70% of the cybershoppers have never made a purchase from Sharper Image's stores or catalogs. Internet sales are expected to grow from $4.9 million last year to $30 million this year. That represents a little more than 10% of total sales for the company.

One didn't need a Q Ball to figure out how time and eyeballs would make Sharper Image an attractive destination online. Then again, a dozen years of patience is no easy feat.

Where to From Here?

I think I want a Q Ball. By the time you read this, I might already have one -- if only I can decide which of the three available color schemes I prefer. While I live a few miles from a Sharper Image store, you can count on me placing the order online.

Why? I'll tell you -- and this is why Sharper Image earns its moniker. Convenience will always be a selling point for sitting back at home and thumbing through a print catalog or clicking past Web pages. The website is done superbly, as it also provides 3-D animation to see and hear the feature products in action. It's not a perfect substitute for in-store interaction, but it is unique and effective. But the real clincher is that Sharper Image's shipping cost is $2 lower for online orders than those placed by phone or by fax.

Why is this important? Last year the Internet accounted for just 2% of total revenues. This year that figure might run as high as 12% of total sales, if Q Ball wins over holiday e-shoppers. And the stores aren't slouches either. They have actually turned in an electric 9% increase in same-store sales so far this year. With the premium Wall Street has been giving to successful online ventures, it is in Sharper Image's best interest to continue to grow its slice of online pie.

The Internet might also help smooth out some of the company's seasonality. While sales will always cluster around the holidays, the online cost efficiencies seem to be helping the company trim non-fourth-quarter losses. Sharper Image traditionally loses money in its first three fiscal quarters only to make it up and then some with a blowout January quarter.

That is why it's exciting to see a company that earned $0.51 per share last year slated for $0.63 this year, and looking at $0.75 a share next year in the situation it's in today. That is smooth bottom-line growth for a company with a bubbling wired audience. After a July secondary offering helped shore up the balance sheet and discontinuing its home furnishings catalog provided focus, Sharper Image provides an enticing opportunity.

Isn't that right Q Ball?

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