Thursday, February 21, 2008

Roof Sold, and a Hard Rain Is Falling

Yesterday, the credit crisis hit two national retailers: San Francisco-based Sharper Image, which sells high-tech gadgets such as air purifiers and massage chairs, and Lillian Vernon Corp., which sells low-cost gifts such as Easter baskets and welcome mats. Both filed for federal Chapter 11 bankruptcy protection.

—The Wall Street Journal

And so The Sharper Image yesterday declared what it had been rumored for months to be preparing: Chapter 11.

What goes around, as they say, comes around, and in this case, what went around at Sharper Image was a hubris during its salad days when everybody in America plus their cat seemed to need a tall, thin, plastic air filter supplied by Sharper Image.

Back then—only three or four short years ago—the company, which attracted short-sellers the way a cat attracts fleas, actually had a slide in its investor presentation showing the short interest in the stock, which the CFO at the time would cheerfully discuss at length.

The implication being, of course, that Sharper Image shares—despite having begun to suffer from missed earnings and a growing glut of air filters in the market—could be squeezed not by management skill at turning around the business, but by forced short-covering.

Air filter market gone, sales collapsing and the short-bashing CFO long gone, even a new management team, brought in by financial backers who forced out the old CEO and bought his 2.7 million shares of near-worthless stock for $9.25 a share, could not stop the bleeding.

And so today we read that the company’s bank—Wells Fargo—failed to place the last $10 million of financing necessary to avert a bankruptcy filing, and pulled the plug.

The synchronicity here is quite something, for back in 2005 Sharper Image spent roughly $10 million to repurchase its own stock, no doubt to “return value to shareholders,” as the mantra-of-the-month went during the financial salad days of yesteryear, not to mention “squeeze the shorts.”

Yesterday that $10 million could have come in handy.

What other “return-value-to-shareholder,” short-squeezing boards of directors are going to wish they hadn’t sold the roof during the sunny days...just in time for the rain to start falling?

Jeff Matthews

I Am Not Making This Up

© 2008 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. No reader of this material should make any investment decisions based on this commentary. Furthermore, these writings in no way constitute a solicitation of business or investment advice. They are intended solely for the entertainment of the reader, and the author.


justin smith said...

I saw that yesterday and had the same thought (though I didn't know all the background on Sharper), bet they wish they had that cash now.

I starting thinking about Sears (don't hold now, but have been thinking about it a lot lately.)

They are different businesses and capital allocators ENTIRELY but I don’t know that Mr. Market cares about your use of cash. Either way, you’re out of cash.

This isn’t all that eloquent, but it doesn’t matter if you take off your bathing suit to strangle a shark and save a kid’s life or if you take it off to show your stuff to the spring breakers, either way, you’re still naked when the tide goes out.


whydibuy said...

Aside from the phenomenal growth in retail sq footage per person in this country, It seems to me that the internet is still eating into traditional retailers lunch. For ex., within two miles of my home, there are 5 auto part retailers. An Autozone, a Murrays, Advance and two independents. And when I needed a new radiator for my truck, I ordered it from an online place that specializes in radiators. AND they were cheaper by half from what the locals wanted . And its not only me. Many of the guys I know who do their own repairs are using Ebay sellers of various parts more and more frequently because of significantly better prices even after shipping included.

Conclusion, retailing may no longer be the high mark up business it once was. There are just two many sources for things and you can only earn so much out of the ignorance of people who don’t realize better prices can be had elsewhere. Eventually, people learn.

Just an aside on Sears, I was surprised to see Sears once again utilize the free after rebate strategy. This past Sunday they were offering 8 tool items for free after rebate. And I thought that concept was abandoned a few years ago by Staples who used to do it but learned selling(?) things for free is not a great route to profitability. I guess when you need foot traffic you’ll try anything.

Michael said...

So THAT explains why my Info Globe Scrolling LED Message Center just up and started flashing "BK" over and over again.

dblwyo said...


Here, here.

From your perch how widespread is:
a) the buyback squeeze risk and what does the Street know about it and
b) a concern with focusing on business fundamentals ?

Those would be very interesting posts from someone in your chair.