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Thursday, June 26, 2008

Sharper Image Lives -- as a Brand

Retailer Sharper Image was left for dead in February. Now, four months later, the bankrupt purveyor of air purifiers and nose-hair clippers is coming back to life.

This time, though, it won't have stores with $5,000 massage chairs where customers can relax. Instead, Sharper Image will live on as a virtual brand name, its moniker rented to other retailers that want to spruce up the appeal of a vacuum cleaner, pet robot or pair of sunglasses.

This Sharper Image retail store in International Plaza in Tampa, Fla., is one of the outlets left in the chain that is scheduled to be closed down.

Leading the revival are the country's two largest retail liquidators, Hilco Organization and Gordon Brothers Group LLC. Historically, these companies have served as a stockroom Grim Reaper, squeezing the last few dollars from a dying retailer's inventory.

But over the past 15 months, the two have moved aggressively into the brands themselves. So far, they have spent a combined $250 million on brand acquisitions, largely via bankruptcy-court auctions. Last fall they acquired furniture chain Bombay Co. In recent months, Hilco has purchased fashion brands Ellen Tracy and Halston.

In their largest acquisition to date, Hilco and Gordon Brothers had to beat back eight other bids for Sharper Image. They paid about $49 million, including roughly $33 million for the Sharper Image brand name. The companies partnered with brand-management firms Windsong Brands LLC and Bluestar Alliance on the deal.

The San Francisco-based retailer, which started in the late 1970s as a quirky catalog company that sold jogging watches, grew into a national chain, cornering the market on Ionic Breeze air purifiers and other high-tech gadgets. The store made it into the film "When Harry Met Sally..." when Meg Ryan and Billy Crystal tested a home karaoke machine. Sales tumbled in the last few years after a Consumer Reports article questioned the safety and effectiveness of the air purifiers.

"The store always generated a lot of foot traffic. But some brands are retailers, and some are better as wholesalers. Sharper Image is better as a wholesaler," says Hilco Consumer Capital Chief Executive James Salter. He adds that the brand will probably need a $5 million investment to analyze new products and market the name to product makers and other retailers who might use it.

Mr. Salter envisions Sharper Image products being sold around the world via infomercials, Web sites and catalogs. Or they could be set up in the aisles of a Target or Best Buy. One possibility: a Sharper Image treadmill with a computer and GPS system that would allow a user to race against others around the world in real time.

Mr. Salter says the high-tech name could generate annual retail sales of $1 billion. That would be a huge leap from its sales of $375 million in 2007 -- and from its sales in any recent years. A branding company typically earns 2% to 3% of a brand's revenue in royalties.

Hilco and Gordon Brothers are by no means the first to pursue a brand-licensing investment strategy. Publicly traded companies like Iconix Brand Group Inc. and Cherokee Inc. are leading players in an increasingly crowded field.

Sharper Image's new buyers take inspiration from such exhumed brands as Polaroid, which was bought out of bankruptcy in 2001 by a private-equity firm. Today, Wal-Mart Stores Inc. and Target Corp. do a brisk business selling an array of Polaroid products, including digital cameras and LCD television sets.

The strategy is not without risks. Nexcen Brands Inc., a publicly traded brand-management firm that owns fashion label Bill Blass and interior-design brand Waverly, recently told its shareholders that it faces a cash squeeze and is laying off workers and selling off assets to raise capital.

But dormant brands are more valuable than ever as mass-merchant retailers look for new ways to lure customers into their stores. Kohl's Corp. this month announced a licensing agreement to revive and sell the Hang Ten surfing brand in its stores. Earlier this year, Wal-Mart relaunched the Ocean Pacific apparel brand, which is owned by Iconix.

Mr. Salter says that earlier this year Hilco spent about $17 million for Ellen Tracy, a women's clothing line, and that it expects to double its return. One deal already in place is a five-year contract with G-III Apparel Group Ltd. to sell Ellen Tracy coats.

But before Sharper Image's new owners reinvent the brand, they're spending the summer winding down business at the remaining 80 stores of what was once a 180-store chain.

On a blisteringly hot day in Manhattan earlier this month, Gordon Brothers principals Bradley Snyder and Stephen Miller -- the duo that led the Sharper Image acquisition -- stopped in at the chain's flagship store on 57th Street. With the store's air conditioning broken, Mr. Snyder tried to cool off in front of a Vornado art-deco-style fan marked down from $130 to $100. He also explained the sensitivity of this particular closeout sale.

"No bright orange signs. You can't be too schlocky," said Mr. Snyder, standing underneath signs proclaiming "Nothing Held Back" and "Entire Store 20-40% Off." "You want to move the merchandise, but you can't impair the brand."

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