The Sharper Image Corporation Business Information, Profile, and History

Company Perspectives:

I started this business in 1977 for one big reason--to have fun! Our company's mission is to share this enthusiasm--to share the fun of discovering all kinds of exciting, well-designed, and technologically advanced products. As The Sharper Image has grown, my passion for new products has grown, too, and today we are an international icon innovation--a unique kind of specialty retailer that represents the highest standards of customer service.

History of The Sharper Image Corporation

The Sharper Image Corporation is a specialty retailer that sells apparel and gift items through catalogs, retail stores, and a Web site. Various editions of the catalogs are mailed to 16 million customers; these account for 25 percent of sales. Offering electronic and other unique and sometimes pricey products, the company grew rapidly in the 1980s, bolstered by a yuppie-driven demand for luxury goods. By 1990, however, the company's popularity and profitability dropped dramatically, prompting The Sharper Image to widen the scope of its retail operations to include less expensive merchandise that would appeal to a new, broader customer base.

Focusing on a more mainstream market paid off in 2000, when the company rode the Razor scooter craze to an outstanding year. Still, as founder and CEO Richard Thalheimer said in Newsday, "This is not the boy-toy company of 20 years ago. Today our best sellers are an air filter, an eyeglass cleaner and a nose-hair trimmer." Thalheimer remains the company's largest shareholder.

Founded in 1977

The Sharper Image was founded in 1977 by Richard Thalheimer. Thalheimer put himself through law school in San Francisco by selling office supplies, and three years after his graduation he hit upon a potentially profitable marketing idea that led to a full-time career in retailing. An avid runner, Thalheimer speculated that high-tech stopwatches might prove popular among others who enjoyed the sport. After lining up a supplier, he invested $1,000 in a magazine ad offering digital wristwatches with a stopwatch mechanism for sale by mail. Thalheimer's venture coincided with the onset of a national jogging craze; he was able to sell out his entire stock of watches.

Realizing that a large American market existed for high-priced gadgetry, primarily among the country's growing yuppie community, of which he was a member, Thalheimer used his profits from the watch venture to run similar ads for telephones, miniature calculators, and other devices. In 1978, he incorporated his mail order business, calling it The Sharper Image, and the following year, he displayed his product line in a lavish, glossy mail order catalog.

Profits from The Sharper Image's mail order operations rose steadily throughout the early 1980s. Eschewing market research, Thalheimer based his product line on his own instincts about what people like himself might buy, and the company's catalogs featured pictures of Thalheimer using the items offered for sale. Product lines were expanded to include a wide variety of unique, often peculiar, items, including a $250 imitation Uzi submachine gun.

As a mail order operation, The Sharper Image was able to keep its overhead low. By purchasing its inventory on delayed credit and paying suppliers after collecting from customers, the company could maintain limited inventory and operate with relatively little ready cash. In 1981, the company reported revenues of $28 million and profits of $1.4 million. In 1982, revenues reached the $51 million mark, and three years later, The Sharper Image was issuing 42 million catalogs annually and reporting sales of $69 million. Quoted in a 1986 article in Forbes on the increasingly whimsical and non-utilitarian merchandise offered in the company's catalogs, Thalheimer remarked: "I think I got a little fixated on toys."

Mid-1980s Decline

In the mid-1980s, orders from The Sharper Image catalogs began to decline slightly, and the company explored new marketing techniques. When The Sharper Image advertisements on cable television proved unsuccessful, the company focused on appealing to customers who preferred not to purchase items through mail order, opening The Sharper Image retail stores around the country. In 1985, 12 stores were introduced in such urban centers as New York, St. Louis, and Honolulu. Twenty more stores were opened the following year, primarily in affluent areas, including Beverly Hills and Stamford, Connecticut. The addition of in-store retailing involved a significant transformation of the company's business practices as well as increased costs for maintaining inventory and leasing store space. Nevertheless, the new Sharper Image stores contributed strong sales to the company's overall performance, and by the end of 1985 revenues from all operations had risen to $87 million.

Going Public in 1987

However, financial growth over the next two years stagnated. As new The Sharper Image retail outlets emerged, the costs they incurred, as well as markedly slower sales, contributed to a first quarter loss of $72,000 in 1987. To offset its lackluster performance, the company went public in April 1987, selling shares over the counter on the New York Stock Exchange. The Sharper Image raised $12 million by selling 1.4 million shares of stock. Thalheimer retained a 72 percent interest in the company, which immediately became worth millions. During this time, Thalheimer reduced his involvement in the company, gradually allowing management to oversee daily operations and make merchandising decisions.

With its infusion of capital, The Sharper Image forged ahead with plans for rapid expansion. The number of retail outlets was increased to 42 in 1987, and the company reported gains in the second and third quarters of the year. Moreover, after an extremely successful holiday season, the company finished 1987 with profits of $5.6 million on overall revenues of $161 million. Despite this strong finish to the year, The Sharper Image experienced losses again in 1988. While first quarter losses totaled $1.2 million, and were expected to continue for the next three months, the company continued its rapid expansion into conventional retailing, opening several more stores that year.

Increased competition from department and electronics stores, as well as an unfavorable currency exchange rate, which led to low profit margins on goods manufactured in Asia, contributed to the company's mounting losses, which were reported at $2 million in September 1988. Some analysts pointed out that any growth reported on the part of The Sharper Image merely reflected the company's aggressive expansion policy and not higher sales at existing outlets. Sales at previously opened stores, in fact, dropped 7 percent between 1986 and 1987.

As a result, The Sharper Image set out to modify its product offerings. During this time, the company was known for its pricey gimmicks and gadgets, including a suit of armor that sold for $3,800, a collector's sport cars selling for $80,000, a $7,700 old-fashioned Coca-Cola vending machine, and a $649 toy model of a Ferrari. While such novelties drew people into The Sharper Image stores, the company began to rely on more practical, moderately priced products, such as briefcases and cordless telephones, for the bulk of its sales. Among its more popular items, for example, was a non-fogging shaving mirror for use in the shower, which retailed for $39; the company sold more than 70,000 of these mirrors.

In addition, the company focused on controlling costs and improving management relations, which reportedly suffered due to that fact many employees and executives found Thalheimer a difficult and demanding boss. In fact, The Sharper Image experienced a high degree of employee turnover and had gone nine months in 1988 without a chief financial officer due to disputes within the company. By providing a more cohesive managerial team, the company hoped to better control the costs incurred by its previously "loose" organization.

By the end of 1989, the company's earnings had fallen to $4.7 million, despite sales of $209 million that represented a 10 percent increase over the previous year. Having become closely associated with the yuppie generation, the company saw its profits decline as the yuppie ethic of consumerism declined. In an effort to bring new customers into its stores, The Sharper Image increased its catalog mailings to 39 million in 1989, incurring a cost of $25 million, or $6 million more than it had spent on promotional mailings the year before. With fewer people in the market for luxury gadgets, however, even this big push failed to significantly increase the company's sales, 80 percent of which now took place in retail stores.

New Markets in the 1990s

The Sharper Image introduced catalogs aimed at several new types of customers in 1990. Sharper Image Kids featured video games and other toys for children. Catalogs designed specifically for customers over the age of 50 were introduced, as were home furnishings catalogs, prompted by a perceived trend among Americans to spend more time at home. In a joint promotional venture, The Sharper Image began to feature celebrities on the cover of its catalogs in exchange for advertising tied in with movie ads. The company also planned to market more functional products, such as devices for measuring cholesterol levels in food. "We want to move away from the disposable glitz of the 80s," Thalheimer told Business Week in 1990.

During this time, the company sought to cut its spending on catalog operations, reducing its yearly mailings to 32 million and trimming its mailing list by dropping customers who had not recently made purchases. Cheaper catalogs, with fewer pages, were produced, and a practice of distributing a condensed version of the catalog through Sunday newspapers was established. Other cutbacks at The Sharper Image included a two-year freeze on salary increases, initiated in May 1990, and a lay off of 110 employees in September of that year.

Like most retailers, The Sharper Image suffered a heavy blow at the end of 1990, when holiday sales declined precipitously. The Sharper Image reported losses of $3.6 million, as sales dropped 13 percent to $181 million. In the spring of 1991, the company's merchandise buyer was let go, and Thalheimer returned to a more active role in the business. To cut costs, Thalheimer directed the renegotiation of some store leases during a time in which the real estate market was depressed. He also renewed the company's commitment to providing less expensive products, particularly those that could be sold for less than $50. Cutting down on the number of low-margin electronic products offered, he began exploring a new area of high margin goods: men's clothing. Since surveys indicated that 65 percent of the company's customers were men, and Thalheimer believed that most men preferred not to shop in department stores, The Sharper Image began to offer designer ties, silk shirts, leather jackets, and comfortable walking shoes for men. This simple selection of stylish goods soon accounted for more than 10 percent of Sharper Image sales. By the end of 1991, The Sharper Image was still struggling. Several banks refused to increase the company's credit lines, as sales fell to $142 million and losses reached $5.2 million during its second year of poor performance.

After this low point, the fortunes of The Sharper Image began to rebound slowly in 1992. The company began to run full-page promotional ads in local newspapers, and ads in two test cities--Kansas City, Missouri, and Buffalo, New York--prompted an 80 percent increase in foot traffic in The Sharper Image stores in one week. The company hoped that the ads, which were relatively inexpensive to run in major metropolitan areas, would familiarize more customers with its stores' new low-priced product offerings.

In April 1992, The Sharper Image began to market its products through mall carts--inexpensive, freestanding units that required only one employee. Offering a small selection of reasonably priced items, these were installed in 17 locations. "It's an easy way to expand the business without opening new stores," Thalheimer noted later that year in Forbes. Moreover, in August 1993, the company announced that it had finalized marketing deals with several department stores, including, most notably, Bloomingdale's, to sell its products at boutiques in their stores.

Later that year, The Sharper Image saw its stock price surge when it announced that it would market its wares through a cable television home shopping channel. During two hour-long promotions on the QVC network, the company sold as much merchandise as a small Sharper Image store typically sold in six months. Earnings from this endeavor were particularly high since most of the products marketed were manufactured by The Sharper Image, and those goods carried a 75 percent profit margin. In December 1993, The Sharper Image announced a second major department store deal, as it sealed an agreement with Dillard's, a department store chain with 200 outlets in the Midwest and Southwest, to sell The Sharper Image merchandise.

As a result of such innovative marketing strategies, The Sharper Image reported profits during 1992 and 1993. In January 1994, the company joined with five other retailers and media giant Time Warner Inc. to launch a new 24-hour cable shopping channel. With more functional and affordable merchandise, The Sharper Image had made strong strides in its effort to refashion itself for the 1990s. Future success would depend on its ability to adapt to changes in the marketplace through creative and aggressive marketing.

Refocusing in the Mid- and Late 1990s

This refashioning continued in 1995, when the company began targeting women through its Sharper Image SPA catalog and four SPA Collection stores. Men had accounted for an estimated 70 percent of sales. SPA products, including a face massager and calorie calculator, brought in about $10 million in their first year. However, the SPA Collection division was axed in 1997 after two years of increasing losses.

Sales were $188.5 million in 1995, producing a profit of $3.7 million. Sales increased to $204.2 million in 1996, while profits, hammered by rising paper costs, fell 88 percent to $444,000. The company was also marketing a line of furniture produced by Lexington Furniture. The Home Collection was pulling in $10 million a year by 1998.

Product selection attempted to track the interests of aging male baby boomers. At the same time, a $2 million print ad campaign took aim at the under-40 crowd. The company brought out more less-expensive, ostensibly useful items (like the electric nose hair trimmer) in order to widen its customer base. Designers also tried tweaking the interior design of the stores, replacing 1980s gray with beige, but this did not produce much measurable improvement.

There was also the old problem of inventory shortages for its unique items, which one executive blamed for stagnant same-store sales. Revenues in 1997 were $210 million, little changed from eight years earlier. To appease grumbling stockholders (though he was the largest), Thalheimer sold the company's corporate jet but continued to pilot a private plane for business travel.

At the same time, the company was developing an online version of its main catalog, which then had a circulation of 30 million. By 1998, online revenues were $5 million; significantly, most of these customers were new to the company. The Web site was revamped in 1999 to bring it more in line with the company's high tech image. It now included more futuristic photos of the merchandise, a 3-D section, and an auction feature for clearance items. Online sales reached $60 million in 2000. The Web business was expanded in 2002 with the addition of sites in Asia and Europe.

Beyond 2000

The Sharper Image rode the Razor scooter craze to one of the best years in its history in 2000. The scooter phenomenon helped the stores connect with mainstream shoppers. The company ended the year with 100 brick-and-mortar stores. An October 2002 tie-in placed 20 items from The Sharper Image's proprietary line of products in Circuit City's 600-plus U.S. stores.

Sales rose 32 percent to $523.3 million in 2002, producing a net profit of $15.9 million. The Sharper Image, once an icon of the 1980s, was finding its focus in the new century. Catalogs accounted for 25 percent of sales in 2002, when 78 million were mailed out to 16 million customers. There were 130 stores, and the company was experimenting with infomercials for its successful Ionic Breeze line of air purifiers.

The company's customers were tending to be younger and not quite as affluent as in the late 1990s. The latter attribute allowed The Sharper Image to open more stores in less upscale areas, such as malls in Milwaukee and Omaha that were far removed from the enterprise's home market in downtown San Francisco. The Sharper Image had more than 140 stores in 2003 and was opening two dozen stores a year. The company believed there was room for another 150 more in the United States.

Most products sold by The Sharper Image were from its more lucrative private label collection, which was by then accounting for three-quarters of sales. These were designed at a facility in Novato, California. New products in 2003 included an ionizing "Feel-Good Fan," a $700 massage chair, and a portable Personal Entertainment Center incorporating a DVD player, TV, and radio. Ionic Breeze air purifiers, which sold for $200 to $500, continued to be best sellers.

Principal Operating Units: The Sharper Image Stores; The Sharper Image Catalog & Direct Marketing; Internet Operations; Other Operations.

Principal Competitors: Brookstone, Inc.; Hammacher Schlemmer & Co., Inc.; Radio Shack Corporation; Relax the Back Corporation.

Chronology

• Key Dates:
• 1977: Richard Thalheimer peddles his first mail order product, a digital watch for runners.
• 1978: The Sharper Image is incorporated.
• 1982: Revenues exceed $50 million.
• 1985: The company's first 12 retail stores open.
• 1987: The company goes public on the New York Stock Exchange.
• 1990: Products for children and home living are featured.
• 2002: Circuit City begins stocking Sharper Image Design products.