The Sharper Image

1
The Sharper Image
Feasibility Study
June 24, 2004
Prepared by Jason Linden Rick Kladis Jeff
Zappone April Lewis
2
Company Background

• Company Profile

• Founded in 1977
• Specialty Electronics Retailer
• Sells unique assortment of products in various
  categories such as
• Electronics
• Recreation and Fitness
• House ware
• Personal Care
• Travel
• Toys

3
Company Background
Mission Statement
To share the fun of discovering innovative
products that make life better and more
enjoyable.
4
Company Background
History
-Founded in 1977 by Richard Thalheimer -1979,
Sharper Image Catalogue launched -1981, Opened
first retail store in San Francisco -1995,
Launched Sharper Image internet site
5
Company Background
Corporate Governance
Richard Thalheimer Founder, Chariman, and
CEO Graduate of Yale and Hastings Law School
Tracy Wan President, Chief Operating
Officer Leads Senior Management Team
6
Industry Analysis

• Consumer Electronics and Appliances Retail
• Companies that retail consumer electronics and
  appliances including TVs, VCRs, DVD players, PC,
  wireless and conventional phones, stereos and
  speakers, video game consoles, and various home
  appliances
• Includes Best Buy, Circuit City, Frys, Magnolia
  Hi-fi, Radio Shack, and others

7
Industry Analysis

• PORTERS FIVE FORCES
• Suppliers
• Broad range
• Low and high tech purchases
• Medium power

8
Industry Analysis

• Buyers
• Individual consumers
• Common merchandise
• can be differentiated
• Often price based
• Medium to High power overall
• can be lower for smaller more focused retailers

9
Industry Analysis

• Substitutes
• Service easily replicated
• Other retailers
• Wal-Mart and Fred Myer
• Online retailers
• Overstock.com
• ZipZoomFly.com
• ACCUPC.com
• High Threat

10
Industry Analysis

• Potential Entrants
• Low threat for large retailers like Best Buy and
  Circuit City
• Large capital requirements, economies of scale,
  distribution channels
• High threat for small mom and pop electronic
  stores
• Though sales volume is often small
• Overall a low to medium threat

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Industry Analysis

• Rivalry
• Generally intense for low cost competitors
• Less intense for smaller more differentiated
  retailers
• Both still generally compete with each other in
  many areas
• New growth achieved by gaining market share

12
Economic Analysis

• General economy is recovering

13
Economic Analysis

• Real GDP has increased 4.4 since last quarter
• Personal Consumption of household equipment
  (Durable Goods Sector)
• 10
• Labor Statistics
• Payroll employment 248,000
• Retail sales increased 1.3 last quarter

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ECONOMIC ANALYSIS (LOCAL)

• one of the 100 Best Places for Business and
  Careers Forbes
• one of the hottest places for business
  relocation Expansion Management
• Median household income has increased 33 since
  1995
• Retail sales have increased 11 since 1999

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INDUSTRY LIFECYCLE

• Late Growth to Early Maturity Stage
• Little room for more retailers in already
  established areas
• Establish stores in new locations
• Has become very dependent on cost for similar
  retailers
• Has had to expand to internet retailing

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Financial Analysis

• 2003 marked best year yet for Sharper Image
• Four profitable quarters, outstanding performance
  in each area of business
• Record revenues, net earnings, and earings per
  share

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Financial Performance

• Fiscal Year
• 2003 2002
• Net Sales 630,084,000 498,702,000
• Gross Margin 370,091,000 292,273,000
• Margin 57.2 57.1
• Net Earnings 25,254,000 15,907,000
• Earnings per share
• Basic 1.75 1.29
• Diluted 1.65 1.21

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Financial Ratios

• Net Sales per Square Foot
• (sales/square feet)
• Sharper Image 676
• Hot Topic 660

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Liquidity Ratios

• Current Ratio (current assets/current
  liabilities)
• sharper Image 2.665
• Industry Average 2.144
• Acid Test Ratio ((Current assets
  inventories)/current liabilities))
• Sharper Image 1.205
• Industry Average 1.166

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Profitability Ratios

• Profit Margin (Net Income available to common
  stockholders/Sales)
• Sharper Image 3.88
• Industry Average 13.5
• Return on Assets (Net Income/Total Assets)
• sharper Image 9.41
• Industry Average 9.362
• Return on Equity (Net income/Common Equity)
• Sharper Image 15.03
• Industry Average 14.5

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Market Value Ratios

• Price/Earnings
• Sharper Image 18.17 times
• Industry Average 23.712 times
• Market/Book Value
• Sharper Image 2.23 times
• Industry Average 6.6 times

22
Financial Analysis

• Sharper Image stock currently trading at 30.15

23
Value Chain Analysis

• Inbound
• Getting products to the store
• From supplier and distribution centers
• In the appropriate amount
• Small stores in malls have little room for excess
  inventory
• Operations
• 60 of Sharper Image Sales come from its stores
• Get people in the store
• Entice them to enter by building the right
  atmosphere
• Store layout that emphasizes interaction
• Create an entertaining selling environment
• Maximize space

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Value Chain Analysis

• Outbound Logistics
• Some deliveries
• Product returns
• Marketing and Sales
• Create advertising for local area
• Most advertising done by corporate
• Let consumers know our store exists

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Value Chain Analysis

• Service
• Very important
• Helps to reinforce brand name
• Must have knowledgeable staff
• New products may be confusing
• Customers may not understand how they improve
  their lives
• Sees each customer transaction as their very own

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Value Chain Analysis

• Support Activities
• Much of this is handled by the corporation
• Store will have greatest control over hiring
• Focus on hiring those who share company values
  and show enthusiasm for the Sharper Image brand
  name

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Cultural Analysis

• Relationships and Reputation
• In the end, we know that you live and die by
  relationships and reputation. And we know this
  extends all the way down from our internal
  workings within our company with employees and
  business associates to our investor relations and
  stores and how they treat our customers.  If
  there is ever an issue with a product, we will do
  whatever we can to find a solution to the
  problem. Suzie Tatum (Public Relations)
• Low structure
• Open and friendly management
• Culture of people who genuinely care for the
  customer all the way from our founder to sales
  associates in the stores
• The fact that Richard Thalheimer and Tracy Wan
  President  COO are so friendly, approachable
  and passionate about our products really creates
  an atmosphere of people who love their jobs and
  the brand they represent.
• Processes
• The sharper image has been around long enough to
  have created great processes that allow our
  business and everyday practices to run
  efficiently and effectively, we also have an open
  door policy for feedback and recommendations.
• It is an environment of managers who realize the
  importance of public and employee opinion and
  approval. Therefore we do our best to be open
  enough to be able to adapt when needed while
  having the structure to guide us.

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Cultural Analysis

• What sets them apart?
• ...Dedication to supplying our customers with
  truly innovative products that we know are top of
  the line is one characteristic that sets us apart
  from our competition.

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Competitive Advantage
Valuable Yes, people will pay a large price for
the newest and most innovative products. Also,
they ability to invent and their brand
recognition are very valuable. Rare Yes,
their exact products cannot be found anywhere
else. Difficult to Imitate Yes. The
company itself is hard to imitate because of such
a successful development group, large brand
recognition, and path dependency. Difficult to
Substitute No. No product from the Sharper
Image is a necessity and any way. Sharper Image
products are just known as being more convenient
and easier. There are many other products that
can do the same job.
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Generic Strategy
The Sharper Image Competes on a Broad
Differentiation Strategy.
Differentiation
Low Cost Position
Broad
Focus
Narrow
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Marketing and Promotion Analysis
Products - New, Innovative, High Quality -
Very diverse - Feel Good products -
Little Inventory
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Marketing and Promotion Analysis
Price - Very Expensive Products -
Successful due to extreme differentiation -
Prices are standardized
Reclining Massage Chair 2,000.00 Robot
Vacuum 300.00 Electronic CD Case 150.00 Ionic
Breeze Air Filter 500.00 Sound Soother 100.00
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Marketing and Promotion Analysis
Place - Normally located in Major City
Malls - Small Stores - Little Inventory
- Located in heart of downtown, Spokane -
25,000 people work in blocks surrounding mall -
Retail in relative area is up 32 for a 3 year
period
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Marketing and Promotion Analysis
Promotions and Marketing - Feel good
products -People will pay any price -
Skymall Magazine - Infomercials - Online
Store / Online Auctions - B2B wholesales
Where you can find James Bond Gadgets and a
few that Q could never have imagined.
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Start-Up Statistics

• Cost of facilities
• Cost of equipment
• Cost of employees

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Cost of Facilities

• Leasing Information
• -medium size facility like Starbucks
• - 2500 to 3000 square feet
• - 16 to 22 per square foot
• - total 55,000 to 66,000

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Cost of Facilities

• Additional lease costs
• - common area cost 1.00 to 2.00 per
  square foot
• - marketing association cost
• 2.00 per square foot
• - total 12000
• Total cost of facilities 78,000

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Cost of Equipment

• Three computers 5100
• Fax machine 170
• Three multi-line phones 507
• Total 5,777

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Employee Wages

• Manager 37,000
• Assistant manager 32,000
• Four full-time employees 72,960
• Three part-time employees 27,360
• Total 169,320

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Income Statement

• Revenue
• -Store 2,028,000
• 676 per square foot
• Total expenses
• - 437, 764
• Net Income
• - 1,590,236

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Recommendation
YES