A disastrous February at Sharper Image ( SHRP) inspired a dissident shareholder to get blunt with the floundering gadget seller.

Knightspoint Group, a New York-based firm of former investment bankers, said Thursday that it has accumulated a 12.8% stake in the company, and it plans to launch a proxy battle to replace Sharper Image's seven-member board with its own slate of directors.

In a press release, the firm said, "Sharper Image has been slow to respond to changing market dynamics, has inefficiently deployed financial and other resources, and has pursued a flawed new product development and merchandising strategy that has led to undue reliance on a narrow set of key product categories."

The prospect of a shareholder revolt at Sharper Image sent its shares up $2, or 20%, to $11.96. Even with that gain, the stock is down more than 63% since the beginning of 2004. That drop happened as the retailer's sales and earnings declined, as its key product, the Ionic Breeze air purifier, received scathing reviews from consumer groups.

In February, the company's same-store sales plunged 31% on top of a 20% drop in the same month last year. Catalog sales shed 45% and Internet sales were down 32%. Those results continued a series of double-digit declines in monthly same-store sales. Meanwhile, it reported its third quarterly loss in a row late last year, and it's expected to post a loss for 2005.

Harris Nesbitt analyst Richard Weinhart called the performance a "total meltdown," showing that easier year-over-year comparisons will not slow the company's sales declines and that its liquidity issues are serious.

"The short-term bullish thesis on Sharper Image is dead," Weinhart said in a note to clients after the February sales report. "Long-term holders now have reason to be concerned. Short covering may prop up the stock today, but the fundamentals clamor for far more downside in the days and weeks ahead."

He expects the retailer to post a loss of 95 cents a share for 2006 and another loss of 50 cents a share in 2007.

"More radical and, likely painful, changes are necessary to preserve the brand and the company," Weinhart said.

Despite these conditions, Knightspoint Group's bid to force change at Sharper Image could meet fierce resistance from Richard Thalheimer, the company's founder, chairman and chief executive. Thalheimer, whose longtime connections to the company he created make it unlikely he would give up control, owns a 12% stake in the Sharper Image, and other insiders own around 1%.

One of the Knightspoint's nominees for Sharper Image's board is Jerry Levin, the former chairman of Revlon ( REV).

"Sharper Image is a great consumer brand, historically providing consumers with innovative, quality products," Levin said in a press release. "However, the company's results have demonstrated that its strategy has stagnated."

A Sharper Image representative couldn't be reached for comment.
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