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Sharper Image Affirms Guidance

But analysts say the specialty retailer is too cautious about its profit outlook.

Who to believe?

Sharper Image

(SHRP)

affirmed that it expects higher fourth-quarter and full-year profit in line with or above Wall Street's consensus, citing solid results in its first three quarters and an "excellent" start to the fourth quarter. But analysts believe the company's estimates err on the side of caution and say there is room for upside.

The San Francisco-based specialty retailer famous for selling robots and gadgets now expects to earn $1.32 to $1.36 a share in the fourth quarter, up from last year's $1.26 a share. Analysts, on average, expect $1.33 a share. Previously, the company forecast earnings of $1.29 to $1.34 a share.

For the full year, the company sees a profit of $1.55 to $1.59 a share, compared with analysts' projections for $1.55 a share and above its previous-year earnings of $1.21 a share. A previous estimate had been for EPS of $1.45 to $1.50.

Wedbush Morgan Securities analyst Gary Holdsworth believes the company's guidance is conservative, saying he expects "continued sales momentum heading into holiday to provide the opportunity for upside surprise in the fourth quarter."

Brian Tunick, an analyst at J.P. Morgan, agrees that there is upside potential in the company's fourth-quarter results. "The wall of worry around Sharper Image's tough January comps should be a key driver to further upside," he said. The company expects comps to increase 3% to 5% in January.

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Tunick raised his fourth-quarter EPS estimate to $1.37 from $1.36, his 2003 estimates to $1.58 from $1.50, and his 2004 expectation to $1.89 from $1.82.

Sharper Image is "one of the best-positioned retailers to benefit from a strong holiday selling season," said Holdsworth, who reiterated his buy rating on the company and has a target price range of $34 to $37. "With its differentiated products and aggressive advertising calendar, we expect the company's current sales momentum to carry well into 2004."

The analyst lifted his fourth-quarter earnings estimate to $1.35 a share from $1.29 a share. For 2003, Holdsworth now expects a profit of $1.59 a share, from his prior expectation of $1.49 a share, and for 2004, he sees $1.85 a share, up from previous estimate of $1.66 a share.

Additionally, Holdsworth increased his fourth-quarter comparable-store sales guidance to an increase of 6% in November from a previous estimate of positive 5% comps and to a 5% rise in December from an initial positive 4% expectation. (Wedbush Morgan makes a market in Sharper Image securities.)

Tunick, who has an overweight rating on the company, also noted that Sharper Image's brand has shown strength because its average revenue per transaction has increased 13% year over year at retail stores, and average revenue per transaction in its catalog sales has risen 7% year over year. (J.P. Morgan does investment banking for Sharper Image.)

On Thursday, shares of the company closed down $1.41, or 4.5%, at $29.99 despite

reporting an in-line third quarter profit from a loss a year ago on a 24% rise in sales. Analysts believed investors were worried that the company's third-quarter inventory levels were too high.

"Our inventories are 45% higher than last year as of Oct. 31, 2003, but last year's inventory levels at a 15% increase over 2001 were much too low because of the 2002's labor disruptions in West Coast ports," said Richard Thalheimer, founder and chief executive of the company, in a Friday press release.