NEW YORK (CNN/Money) -
It looks like Sharper Image's popular Ionic Breeze "silent" air purifier is creating some unsettling noise on Wall Street.
Sharper Image's robust comparable sales trend came to an abrupt stop last month when it posted March sales up just 3 percent, missing analysts' forecast of a 7 percent gain and down dramatically from a 20 percent jump in sales in February.
The retailer's reason for the shortfall was an inventory shortage for its popular iJoy massage chair as it phases out older models to make way for the latest versions of the chair.
The problem with that excuse is that investors and analysts don't seem to be buying it. Instead, they're jittery about an impending battle of the air purifiers with such rivals as Brookstone and Home Depot.
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| The Ionic Breeze GP Silent Air Purifier. (Price:$499) |
One gauge of investor unease with the company is the short interest activity on the stock, which has fluctuated wildly over the past three months. In fact, short interest on Sharper Image shot up to 14 percent in March -- its highest level in a year -- before scaling back down to 6 percent in April.
Short sellers typically borrow stock and sell it, hoping to buy it back and profit if the stock declines. Sharper Image stock is down about 22 percent from its 52-week high hit in February. The stock ran up almost 80 percent in 2003.
Every little breeze
Sharper Image's Ionic Breeze Silent Air Purifier is one of the best-selling products for the company, along with a few other gadgets such as the iJoy Robotic Massage Chair and the nose-hair Turbo-Groomer.
The company won't disclose sales figures for individual products. But Rob Wilson, an analyst with Tiburon Research Group, estimates that the Ionic Breeze Air Purifier -- which sells for about $500 -- accounts for as much as 45 to 50 percent of the company's total sales.
He says this makes Sharper Image's sales too dependent on just one product and vulnerable to a sales shortfall if copycat products flood the market.
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| Brookstone's Pure-Ion UV Air Purifier (Price:$300) |
That concern was exacerbated when Sharper Image's gizmo-selling rival , Brookstone (BKST: Research, Estimates), introduced a $300 Pure Ion air purifier March 1. And Home Depot (HD: Research, Estimates), the No. 1 home improvement retailer, got in on the act by debuting an even cheaper $149 Tower Air Purifier.
"That's what spooked investors. Sharper Image is running scared because both these new cheaper-priced models are hurting their sales," said Wilson. "Sharper Image's air purifier was an exclusive product for the company for the past two years, but maybe not any more. Brookstone stores are getting a lot of cross shoppers from Sharper Image."
Wilson also disagrees with the company's claims of inventory shortages. "At the end of 2003, Sharper Image showed a large increase in inventory on its balance sheet," he said.
Anthony Lebiedzinski, analyst with Siodoti & Company, shares Wilson's view.
"Their inventory control hasn't been good," said Lebiedzinski, who has a "neutral" rating on the stock. At the end of fiscal 2003, inventory was up 47 percent while total revenue grew 27 percent to $42 million.
Said Lebiedzinski, "Ideally for a retailer, you want revenue growth to outpace inventory growth."
Wilson has a "strong sell" rating on the stock. He doesn't believe the retailer will deliver its earnings-per-share guidance of $1.99 to $2.03 a share. "We're forecasting $1.83 a share for the full year," he said.
Sharper Image raised its full-year guidance last month from its previous forecast of $1.96 to $2.00 a share.
"We think Sharper Image will be pressured to delivered improved operating profitability this year," Wilson said.
Retailer undeterred
Sharper Image could not be reached for comment. However, CEO Richard Thalheimer told analysts at the Lehman Brothers annual retail seminar in New York on Tuesday that even though the market for air purifiers was getting bigger and more competitive, the company is "selling more purifiers this year than last year."
"We won't be knocked off from being the best-selling product in the category," Thalheimer said. "At the same time, we're not sitting still or looking at the rearview mirror while running out business. Our air purifier is still in front of the pack and will stay there a long time."
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| Home Depot's Tower Air Purifier. (Price: $149) |
Thalheimer's presentation was monitored via a Webcast from New York.
For its full fiscal year, Thalheimer said the company is targeting a 15 to 20 percent growth and plans to open 26 new stores. San Francisco-based Sharper Image (SHRP: Research, Estimates) currently operates 150 stores around the country.
Said Lebiedzinski, "They've got ambitious growth plans but it could be a challenge for them to find the right real estate locations to guarantee continued success. This is a company that's also trying to expand its store base quickly and that could negatively affect their comparable sales."
Rival Brookstone could not be reached for comment
--Analysts quoted in the story do not personally own shares of Sharper Image and their firms do not have an investment banking relationship with the company.
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