In search of the ultimate CE niche - Power Retailer Ultimate Electronics

DSN Retailing Today, Feb 25, 2002 by Laura Heller

For a small retailer, Ultimate Electronics has racked up some big-time experience in new-market penetration in the last few years. So it comes as little surprise when a bustling grand opening event like the recent one in St. Louis comes off without a hitch. But St. Louis is no Dallas, one of the most competitive retail markets in the nation, and as the chain prepares for its entry there in the next few months, it will take every last effort to perfect its points of differentiation.

Fortunately for Ultimate Electronics, standing out from the crowd is one of its strengths. Somewhere between the very high-end specialty retailers and the big-box CE formats is a niche waiting to be filled, explained Dave Workman, president and coo. "The industry has a difficult time addressing the two ends of the spectrum," he said. "Typically, those on the higher end don't have volume and traffic, those with volume and traffic don't have the facility to showcase the quality products. We provide a balance between that and this."

And that is exactly Ultimate Electronics' goal as it continues to hone and refine its mix of higher-priced brand-name merchandise and the more mundane household staples such as DVD players. And, for the moment anyway, the strategy seems to be working. "The [management] team has created a higher end-though not intimidatingly so-store format to best show and sell better video product," said David Schick, equity analyst with SunTrust Robinson Humphrey.

Sales for the fourth quarter ended Jan. 31, 2002, were $214.7 million, a 26% increase from sales of $170.2 for the same period the previous year. Sales for the year ended Jan. 31, 2002, were $580.3 million, a 20% increase from sales of $484.4 million the previous year. "We are planning for sales growth to be in the 20% to 25% range for the first half of fiseal 2003, assuming low-single-digit comparable store sales growth," said Alan Kessock, senior vp and cfo. Projections for the second half of the year are even more bullish, once 10 to 12 additional stores have opened and pre-opening expenses are out of the way.

"The new store openings coupled with mid-single-digit comparable store sales growth should allow for total sales increases in the third and fourth quarters of this fiscal year to exceed 30%," Kessock said. "Planned earnings per share growth in the second half of the year would allow our company to earn between $1.25 and $1.35 for the year ending Jan. 31, 2003."

All this in spite of uncertain economic conditions, largely due to Ultimate Electronics' position at the front end of emerging technology, operational initiatives to increase sales in certain underperforming categories and partly due to continued strong consumer spending on home entertainment.

While Ultimate's newest 33,000-square-foot units in St. Louis represent the latest format and merchandising initiatives, "We tweak things every time we do one," said Workman. But central to each store, literally, is what he calls the Town Center: a pinwheel-shaped area created to draw customers into the store, and then show them what's new in technology.

Rising from the middle of the store is a "technology tower," a circular display showcasing the latest and greatest. On the day the St. Louis store opened, the focus was on digital audio and video, including flat panel TVs. "Many new technologies come out as a single product," said Workman, thus presenting retailers with the merchandising dilemma of where to locate the item for best effect. The Town Center serves to solve this problem in an interactive setting, he said. "How can you try an emerging technology if you sit it on a shelf?"

Like many high-end CE stores, Ultimate hosts several private rooms where consumers can experience home theater and audio products in a more controlled environment. "Rather than letting people get all muddled with what the product is, we focus on showing them what the product does," said Workman. "With that in mind, we created the Experience Room."

TVs in general and digital TV in particular are a big part of not only the product mix, but Ultimate's formula to increase sales, as well. Banc of America Securities analyst Shelly Hale believes strong TV sales will be the driving force behind total sales for the retailer in 2002.

"Through the third quarter of 2001, we estimate unit sales of digital televisions have grown an impressive 146% at Ultimate Electronics," said Hale. "Although year-over-year growth might abate some in 2002, we see no reason why the combination of lower price points, Ultimate Electronics' unique position in the marketplace, a greater store base and a stronger economy should not contribute to another year of triple-digit unit growth."

According to Schick, "2002 and beyond will prove to be meaningful HDTV growth years and few retailers are as well-positioned to benefit from this secular trend."

"We are encouraged by the forward momentum of the plasma and flat screen categories," said Workman during the company's third quarter conference call Nov. 26, 2001. "We sold approximately 200 plasma TVs [during the quarter] and our goal of selling 60 to 100 sets per month is well within reach, given the current momentum." At more than $4,000 per set, it should also continue to boost top-and bottom-line growth for the year.