June 15, 1998
SHARPER IMAGE CORP (SHRP)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table is derived from the Company's Statements of Operations and shows the results of operations for the periods
indicated as a percentage of total revenues.
Percentage of Total Revenues
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Three Months Ended
April 30,
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1998 1997
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Revenues:
Net store sales 66.7% 70.7%
Net catalog sales 32.0 28.2
Other revenue 1.3 1.1
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Total Revenues 100.0% 100.0%
Costs and Expenses:
Cost of products 52.2 53.9
Buying and occupancy 15.9 15.7
Advertising and promotion 11.4 9.8
General, selling
and administrative 29.3 30.4
Other Expense 0.4 0.1
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Loss Before Income Tax Benefit (9.2) (9.9)
Income Tax Benefit 3.7 3.9
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Net Loss (5.5)% (6.0)%
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Revenues Net sales for the three-month period ended April 30, 1998, increased $3,357,000, or 9.4%, from the comparable period of
the prior year. Returns and allowances for the three-month period ended April 30, 1998, were 13.0% of sales, as compared with 12.9%
of sales for the comparable prior year period. For the three-month period ended April 30, 1998, as compared with the same period last
year, net store sales increased $864,000, or 3.4%, comparable store sales were even with last year and net catalog sales increased
$2,493,000 or 24.3%.
The increase in net store sales for the three-month period ended April 30, 1998 as compared with the same prior year period reflects a
8.8% increase in average revenue per transaction, partially offset by a 4.9% decrease in total store transactions. The increase in net
catalog sales for the three-month period ended April 30, 1998 reflects an increase of 31.1% in total catalog orders, partially offset by a
3.4% decrease in average revenue per order, compared to the same prior year period. The increase in net catalog sales is due to
increases in sales for both The Sharper Image and The Sharper Image Home Collection catalogs, reflecting increased circulation and
improved productivity. The increase in The Sharper Image catalog sales also reflects the emphasis and the increase in sales of the
Company's Sharper Image Design proprietary products. The increase in net store sales for the three-month period ended April 30, 1998
is attributable to the new stores opened during the last nine months of the prior fiscal year.
Cost of Products Cost of products for the three-month period ended April 30, 1998 increased $1,180,000, or 6.0%, from the
comparable prior year period. The increase was due to higher sales volume compared to the same period last year. The gross margin
rate for the three-month period was 47.1%, which was 1.6 percentage points better than the 45.5% for the same period last year. The
higher gross margin rate reflected an increase in sales of the Sharper Image Design proprietary products, which generally carry higher
margins.
Buying and Occupancy Buying and occupancy costs increased $630,000 due primarily to increased store occupancy expenses. Store
occupancy expense for the three-month period ended April 30, 1998 increased $531,000 or 9.8%, from the comparable prior year
period. The increase primarily reflects the occupancy costs associated with the six new stores opened during the last nine months of the
prior fiscal year, which was partially offset by the elimination of the occupancy costs of the two Sharper Image stores closed during the
three-month period ended April 30, 1998.
Advertising and Promotion Expenses Advertising and promotion expenses for the three-month period ended April 30, 1998 increased
$966,000, or 27.2%, from the comparable prior year period. The increase in advertising and promotion expenses for the three-month
period ended April 30, 1998 reflects primarily a 10.0% increase in pages circulated for The Sharper catalog and an increase in
circulation of the Sharper Image Home Collection catalog from the same period in the prior year.
General, Selling and Administrative Expenses General, selling and administrative expenses (GS&A) for the three-month period ended
April 30, 1998 increased $625,000 or 5.7%, from the comparable prior year period. The increase was primarily due to the increases in
overall selling expenses related to the increase in net sales and certain additional administrative support costs.
Liquidity and Capital Resources The Company met its short-term liquidity needs and its capital requirements in the three-month period
ended April 30, 1998 with available cash, trade credit, and borrowings under the credit facility. During the three-month period ended
April 30, 1998, the Company's cash decreased by $3,018,000 to $483,000 primarily due to the funding of working capital for the
period.
The Company has a revolving secured credit facility with The CIT Group/Business Credit, Inc. (CIT) which expires September 2003.
The credit facility has been amended on several occasions and, as of April 30, 1998, the agreement allows the Company borrowings
and letters of credit up to a maximum of $28 million for the period from October 1, 1998 through December 31, 1998, and $20 million
for other times of the year based on inventory levels. The credit facility is secured by the Company's inventory, accounts receivable,
general intangibles and certain other assets. Borrowings under this facility bear interest at either prime plus 0.50% per annum or at
LIBOR plus 2.50% per annum. The credit facility contains certain financial covenants pertaining to interest coverage ratio and net worth
and contains limitations on operating leases, other borrowings, dividend payments and stock repurchases. For the period ended April
30, 1998, the Company was in compliance with all covenants. At April 30, 1998, the Company had $7.6 million outstanding on its
revolving credit facility. Letter of credit commitments outstanding under the credit facility were $1.7 million.
In addition, the credit facility provides for term loans for capital expenditures (Term Loans) up to an aggregate of $4.5 million.
Amounts borrowed under the Term Loans bear interest at a variable rate of either prime plus 0.75% per annum or at LIBOR plus 2.75%
per annum. Each Term Loan is to be repaid in 36 equal monthly principal installments. Notes payable included a Term Loan which
bears interest at a variable rate of prime plus 0.75%, provides for monthly principal payments of $55,555 plus the related interest
payment, and matures in October 1999. At April 30, 1998, the balance of the Term Loan was $1 million.
Notes payable also included two mortgage loans collateralized by certain property and equipment. In connection with the expansion of
the Company's distribution center in 1995, the Company refinanced the mortgage loan. This $3 million note bears interest at a fixed rate
of 8.40%, provides for monthly payments of principal and interest in the amount of $29,367, and matures in January 2011. The other
note bears interest at a variable rate equal to the rate on 30-day commercial paper plus 3.82%, provides for monthly payments of
principal and interest in the amount of $14,320, and matures in January 2000.
The Company's merchandise inventories at April 30, 1998 were approximately 7.8% higher than that of April 30, 1997. Management
believes that the increased inventory levels during the three-month period ended April 30, 1998 had a positive impact on the improved
sales.
During the three-month period ended April 30, 1998, the Company closed two stores located in Escondido, California and Gurnee
Mills, Illinois. The Company is currently evaluating its plan to open four to eight new Sharper Image stores during fiscal 1998. Total
capital expenditures estimated for the new and existing stores, including the remodel of a number of existing stores, corporate
headquarters, and the distribution center for fiscal 1998 are between $6 million to $8 million.
The Company believes it will be able to fund its cash needs for the remainder of the fiscal year through internally generated cash, trade
credit and the credit facility.
Seasonality The Company's business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales
and earnings during the Christmas season. The secondary peak period for the Company is June, reflecting the gifting for Father's Day
and graduations. A substantial portion of the Company's total revenues and all or most of the Company's net earnings occur in the
fourth quarter ending January 31. The Company generally experiences lower revenues and earnings during the other quarters and, as is
typical in the retail industry, has incurred and may continue to incur losses in these quarters. The results of operations for these interim
periods are not necessarily indicative of the results for the full fiscal year.
Year 2000 Compliance The Company recognizes that the arrival of the year 2000 poses a unique worldwide challenge to the ability of
all systems to recognize the date change from December 31, 1999, to January 1, 2000. The Company has assessed its computer and
business processes, and is reprogramming its computer applications to provide for their continued functionality. An assessment of the
readiness of the external entities with which it interfaces is ongoing.
The Company expects that the principal costs will be those associated with the remediation and testing of its computer applications. This
effort was begun in 1996 and is following a process of inventory, scoping and analysis, modification, testing and implementation.
These efforts will be met primarily from existing resources through reprioritization of technology development initiatives. The Company
expects to complete the majority of its efforts in this area during 1998 with final completion in mid-1999. The estimated cost for this
project is between $500,000 and $1,000,000 and is being funded through operating cash flows. The cost of the project and the
expected completion dates are based on management's best estimates.
Uncertainties and Risk The foregoing discussion and analysis should be read in conjunction with the Company's financial statements
and notes thereto included with this report. The foregoing discussion contains certain forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ materially from those set forth in such forward-looking statements.
Such risks and uncertainties include, without limitation, risks of changing market conditions in the overall economy and the retail
industry, consumer demand, the opening of new stores, actual advertising expenditures by the Company, the success of the Company's
advertising and merchandising strategy, availability of products, and other factors detailed from time to time in the Company's annual
and other reports filed with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date thereof. The Company undertakes no obligations to publicly release any
revisions to these forward-looking statements or reflect events or circumstances after the date hereof. |
