The company warned us, and sure enough, Sharper Image's (NASDAQ:SHRP) third-quarter results are disappointing. How bad is it? Well, it's not even as if Sharper Image is in a roller-coaster market segment -- this is retail, the backbone of the American economy. Sharper Image must certainly have a backache.

Revenue declined 20% from the comparable quarter last year. The net loss of $10.5 million was 2.8 times that of last year's third quarter. Sales were dismal in every segment. Retail revenue decreased 11%, despite the addition of 16 new stores (a 9.2% increase) since the beginning of the year. Internet sales fared worse, falling 17%, and catalog sales were down a frightening 35%.

When I looked at this company's prospects last year, the stock was trading for $19.56 a share. Back then, I questioned the company's falling earnings, negative same-store retail sales, and reliance on a new version of its iconic Ionic Breeze air cleaners. Earnings guidance for the full year focused on $1.31 at the time, and actual earnings of $0.90 were a significant letdown. Also disappointing was the forecast that 2005 would be a "transition year" and that earnings would fall between breakeven and $0.30 a share.

Fast-forward a year, and analysts now expect fiscal 2005 to produce a loss of $0.74 a share. Talk about a lack of focus and execution. I'm honestly a bit surprised the stock is still trading for $10 and change.

In fiscal 2003, same-store sales increased 15%, only to fall to a negative 1% last year. So far this year, same-store sales are down 15%. If ever there was a sign of failing fortune, I'd say this is most certainly high among them.

For the upcoming holiday season, the company is excited about its proprietary ZipConnect sound systems for Apple (NASDAQ:AAPL) iPods (it works with other MP3 players, too), as well as its interactive robots, its advanced electronics, and its Ionic Breeze. This is the time of year when Sharper Image typically earns all of its net profits. And it shouldn't be a total loss: Analysts expect the company to pocket $0.72 in the third quarter, down from the $1.01 last year.

Sharper Image also has considerable strength in having a debt-free balance sheet. Although the company had $17.5 million outstanding on its line of credit at the end of this quarter, it should be able to return to being debt-free at the end of the holiday season.

But then we look toward next fiscal year, when analysts expect the company to lose $0.04 next fiscal year. In fairness, you have to wonder why they are so optimistic when this company's results are currently in freefall. For this observer, there is no reason to believe that Sharper Image is regaining its marketing edge or its profit focus, no matter how well it might fare over the Christmas season.

Investors looking for retail assets at value prices should pass Sharper Image by and instead consider any of these Motley Fool Inside Value recommendations: Rent-A-Center (NASDAQ:RCII), Dollar Tree (NASDAQ:DLTR), Home Depot (NYSE:HD), and AutoZone (NYSE:AZO).

Are you looking for stocks selling for less than intrinsic value? If so, start up a free trial subscription to The Motley Fool's Inside Value newsletter.

Fool contributor W.D. Crotty owns shares of Home Depot. Click here to see The Motley Fool's disclosure policy.