Why Sharper Image Will Post Disappointing Q4 Results

The answer to any specialty retail store’s woes is simple: Sell as many hot items as you possibly can.

It might sound like I am over simplifying things. Many will argue that there is much more to business than this. You need to manage supply-chain. You need to properly advertise. You need to properly manage overhead. You need to have a broad product selection. All of these, except the last one are true. A broad product selection is not necessary for a specialty retail store like Sharper Image.

I’m not saying to put only five items into a retail store. What I am saying, is that you have a retail store that sells your hottest selling items. You provide enough space in the store to fully showcase those items. Then sell the rest of the products, the $19.95 items on the Internet. I know the first argument will be that of square foot analysis.

Square foot analysis is essential the retail store equivalent to square inch analysis in the catalog industry (which is where Sharper Image came from). The idea is as follows: you provide only enough space in the store for how well the item sells. Like most economic formulas, it is very easy to calculate. You figure out the overhead you need to pay for and allot space according to the profit you make on the item. And like most economic formulas, it is fundamentally flawed.

The biggest problem I had with economics when I was pursuing my Bachelors in Economics was that it always seemed like economic theories were developed in Fairyland! Well, that is precisely where all economic theory is developed. Terms like “Ideal Conditions” are constantly used in economics. But I digress.

Getting back to Sharper Image. I visited a couple of Sharper Image stores this weekend, hoping to find the coolest gift item I’ve seen all season: The Voice Activated R2-D2 robot. I couldn’t imagine that having not been a top selling item for the holiday. It was only 120 bucks, received good reviews, and is just about the coolest thing I’ve seen in years. I had played with one at a Sharper Image store earlier in the year. R2 responded to me, was trained by me, played games with me. R2 was definitely going to be part of my holiday shopping.

However, Sharper Image is out of stock. Hammacher Schlemmer is out of stock (although they only sell online, so that wouldn’t do me any good anyway). Now, since Hammacher’s website is showing a ship date of 2/16/07, I’m guessing that his is a supply issue with the R2 robot. Maybe Lucas doesn’t want to make a ton of money this year so he is only selling a handful of the robots. Something tells me that this is not the case. Instead, what I think happened is that Sharper Image just failed to project sales on this item correctly. The result: no R2 robot for the millions of Star Wars fans out there but plenty of dancing iPod dogs.

So, when you check the sticker for Sharper Image next year, don’t be surprised if they post disappointing earnings for Q406. Despite ousting Richard Thalheimer, Sharper Image continues to focus on stuffing more products into their stores that everyone else is already selling. Rather than focusing on innovation, which is what made Sharper Image the behemoth it is today, they are focusing on firing the right people. Don’t expect any good news from Sharper Image for ’06, and I’d venture to say that we should probably expect plenty of disappointing news in ’07 as well.

Happy Holidays!

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