Wednesday, February 20, 2008

Sharper Image Bankrupt As Consumers Turn Cautious

Sharper Image’s surprise bankruptcy filing yesterday seems to be the result of the same trends in consumer spending that emerged elsewhere around November and December. Consumers are cautious and trying especially hard to spend wisely and purchase things that have clear practical value. We saw this, for example, in the sudden shift toward gift cards after Black Friday, then in the fact that consumers have been unusually slow to spend the gift cards they received in December. Now Sharper Image faces a “severe liquidity crisis,” in the words of its CFO, meaning it finds itself with way too much inventory and not nearly enough cash.

I have to guess that Sharper Image overextended itself for the holiday season, perhaps relying on the economic reports during the early fall that said the economic slowdown did not seem to be affecting luxury goods at all. By December, luxury goods were tanking, and the bloated markups that made Sharper Image profitable in the past were driving customers away. In the end, holiday sales could not bring in enough money to pay the bills.

If this scenario is correct, then Sharper Image’s troubles are a classic boom-and-bust story. People in a hurry to get ahead of the competition (“boom”) go too far in the wrong direction and are forced to come to a sudden stop (“bust”). In this case, it seems Sharper Image was betting too heavily on gimmicky image-boosting products (well, that’s their name, after all) in a time of uncertainty that led consumers to look for practicality instead.

Reports from two other retailers are consistent with this picture of consumer sentiment.

Wal-Mart reported a nice gain in revenue for the fourth quarter — a gain that came right after the retail giant gave up on a two-year campaign to raise its prices. Wal-Mart’s move back to lower prices came at just the right time to catch up with consumers’ move in that direction, and the higher profit shows that it was the right decision.

Lillian Vernon, a painfully unattractive gift catalog that got by for years on its homey style and low prices, has also filed for bankruptcy. Lillian Vernon today is featuring ceramic Easter baskets and fake-rose mailbox decorations, and items like these are a tough sell, despite their low prices, when consumers turn cautious.