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.