SAN FRANCISCO-Struggling innovative-product retailer Sharper Image Corp., known for its massage chairs and ionic breezers, is taking a thrifty approach to the coming year after receiving a damning proposal from Knightspoint Partners II, LP. The proxy solicitation, dated March 9, offered several strategic suggestions, including replacing the retailer’s board of directors.

“I respect the point of view that a strong and independent board is a vital asset,” responded Sharper Image CEO Richard Thalheimer late Monday, “and I am always interested to hear new and positive contributions to the company’s strategy. Accordingly, we are giving very serious attention to the Knightspoint proposal and their points of view.”

In addition to retaining JPMorgan to advise the company on the proposal, the company has outlined several strategic moves including Thalheimer’s voluntary 50% pay cut, and voluntary reductions in pay for many members of the company’s management team and the entire board of directors.

The company has also slowed planned new store openings to six to eight in 2006, compared to 19 in 2005 and 28 in 2004; reduced corporate office and distribution center headcount by more than 20%; reduced advertising expenditures by 30% for the fourth quarter of 2005 and budgeted a further 30% reduction in advertising for the fiscal year 2006; and reduced capital expenditures from approximately $39 million in 2005 to a planned $12 million to $15 million in 2006.

Further, the company has reduced inventory levels, which at year-end were down 12% to $15 million compared to the same time last year. Thalheimer said continued reduction in inventory levels is planned for fiscal year 2006 and currently, inventory levels are more than $20 million below last year.

“We have taken proactive and vigorous steps to significantly lower our expenses to manage to a leaner time,” the CEO said. “We are maintaining intense efforts on good merchandising, marketing and the gauging of customers’ tastes and demands.”

For the fourth fiscal quarter ended Jan. 31, 2006, total company sales were down 13% to $253.9 million compared to $291.9 million in the previous year. Total store sales for the quarter slipped 9% to $170.4 million compared to $187.2 million in the prior year, and comparable store sales for the quarter decreased 15%.

For the 2005 fiscal year, company sales fell 12% to $648.9 million compared to $740 million in the previous year. Total store sales dropped 6% to $407.1 million compared to $434.7 million, while comparable store sales for the year decreased 16%.

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