While short-sellers were chased from

Sharper Image

(SHRP)

in Wednesday's rally, weak numbers from its chief rival do little to suggest the stock is a good bet these days.

Sharper Image gained almost 8% Wednesday even as

Brookstone

(BKST)

, another retailer of high-tech gadgets, reported a wider first-quarter loss on declining same-store sales.

Brookstone's hardship, in the midst of being acquired and taken private by an investment consortium for roughly $445 million, hardly bodes well for Sharper Image. Both companies have lost considerable favor with consumers and with Wall Street. Sharper Image's gains look like a short squeeze, with bearish investors covering their wagers after deciding before its earnings that all the bad news is baked in.

Even with Wednesday's gain, shares of Sharper Image have lost about 27% in 2005, putting the stock price at a three-year low at a valuation of around 16 times earnings estimates through 2007.

"There is a large short position in this stock, and we're starting to hit some worst-case valuations, so it doesn't make much sense to be short here going into their conference call," says Richard Weinhart, an analyst with Harris Nesbitt, which holds a neutral rating on the stock and pins its fair value at $16.

"I just don't know how much downside there is from this level unless there is some downward guidance or some really unexpected negativity. There's already a lot of potential for negative news that is already priced in."

Nearly 29% of the company's float is sold short. The position has swelled as monthly sales figures have steadily deteriorated. Same-store sales dropped 18% in April on top of a 3% decline in the same month last year. That followed a 9% decline in March and a 20% drop in February.

Brookstone has suffered similar setbacks. On Wednesday, it said it lost $6.8 million in its first quarter, or 33 cents a share, down from last year's loss of $4.6 million, or 23 cents a share. Analysts polled by Thomson Financial were expecting a smaller loss of 30 cents a share.

The company also expects to lose up to 13 cents a share in its second quarter, while same-store sales are expected to decline in the mid-single digits. Analysts were forecasting a narrower quarterly loss of 4 cents a share. Either way, the results will mark a decline for Brookstone, which posted a loss of 2 cents a share in the prior-year period.

TheStreet Recommends

Brookstone's troubles stem from a same-store sales decline of 3.9% for the quarter. Its total sales reached $80.3 million, up 4% from $77.5 million a year earlier, but below the $80.5 million targeted by analysts.

After its announcement, shares of Brookstone closed down a penny to $19.71 on a day when the

S&P 500

added 12 points, or 1%, to 1185, and the S&P Retail Index was up 2.3%. Meanwhile, Sharper Image surged.

Weinhart questions whether investors were wise to be bullish on Sharper Image on the basis of Brookstone's results.

"They do cater to the same customers, but this is such a product-driven business, and Sharper Image's problems are really focused on its Ionic Breeze sales," says Weinhart, who does not own shares of Sharper Image or Brookstone and whose firm has no investment banking relationships with the companies. "This is not a situation where these guys do well based on how poorly the other does, or vice versa."

The Ionic Breeze line of silent air purifiers, unique to Sharper Image, has been one of its top revenue and profit generators. But the product has been repeatedly trashed by

Consumer Reports

as being ineffective and potentially hazardous to people's health.

The company's founder, chairman and chief executive, Richard Thalheimer, has vehemently denied these charges, but he made a misstep by bringing an unsuccessful lawsuit against

Consumer Reports

that only boosted the magazine's credibility.

In the midst of the difficult retail environment for gadget hawkers, Brookstone recently struck a deal to be taken private by a group of investors composed of OSIM International, a Singapore retailer of massage chairs; Temasek Holdings Ltd., the investment arm of the Singapore government; and J.W. Childs Associates, a Boston-based private equity firm. They offered $20.50 a share in cash for the company, with its 288 stores throughout the U.S., and would assume $8 million of the company's debt.

Sharper Image has no long-term debt, and its name has been circulated as a buyout candidate in the last year. Some analysts say that's an unlikely prospect, since Thalheimer is said to have a sentimental attachment to the company, and chances that he would accept a realistic buyout offer are remote.

After Thursday's closing bell, the company is expected to report a loss of 31 cents a share, marking a drop-off from last year's earnings of 13 cents a share. No one is predicting upbeat guidance for the future either.

"The next few quarters out remain uncertain for them," says Robert Straus, an analyst with the Independent Research Group (which is owned by the publisher of this Web site). "Sales of the Ionic Breeze have continued to decline, and their new product introductions have been lackluster at best. This rally is really coming from momentum in the overall marketplace."