CompUSA turns to CE for a power surge

Discount Store News, July 12, 1999 by Laura Heller

DALLAS -- Computer retailing is suffering, and the nation's only remaining computer superstore is suffering along with it. CompUSA has posted disappointing sales and earnings for more than a year now, and in an effort to stop the bleeding, management has announced a round of significant changes in both operations and product selection, store closings and employee layoffs.

With its stock trading between $7 and $8, down from a 52-week high of $22 on July 16, 1998, management is brainstorming ways in which to cut its losses and turn around a business that has seen its share of ups and downs.

"For the past several years, we have been concentrating on rapid growth and most recently, the acquisition of Computer City," said Jim Halpin, president and ceo, in a statement. "We are redesigning our training and technical service business in an effort to make them more profitable. We are outsourcing the fulfillment of products for our direct sales customers, which we believe will decrease costs and minimize our inventory exposure."

The first round of changes were swiftly implemented. CompUSA laid off 7% of its work force in early July, centralized training and announced plans to close four stores and possibly shutter up to 10 more underperforming units.

"We will move very quickly," Halpin said.'

CompUSA also is adding a broader selection of CE products to its merchandise mix, including handheld devices; digital cameras, camcorders and peripherals; an expanded gaming selection; and DVD hardware and software and MP3 technology. The selection of merchandise targeted at the small business customers also will be expanded.

"These changes allow us to reduce our dependence on low-margin desktop personal computers," Halpin said.

There is plenty of room in the store to add new products without reducing the selection of existing computer equipment, he said. But he was vague on just how CompUSA will project this new merchandise and image to the consumer, saying only that a new marketing campaign will be launched in the fall after stores are reconfigured.

He also said the company is testing a variety of in-store presentations but again declined to go into details.

In an effort to reduce operating costs, the company is shifting to a single-source distribution model for direct sales customers. This represents a switch from its current practice of supplying business, government and education customers from individual stores or CompUSA's distribution and configuration center in Grapevine, Texas, near company headquarters.

It also will outsource direct sales product fulfillment and integration businesses in an attempt to reduce inventory and at press time said it would announce a new partner in early July.

In-store training facilities are being retooled. Each CompUSA store offered training services to customers but will now centralize training into a single location serving a wider area. CompUSA will begin outsourcing some computer repair services currently done in-house to third-party providers.

"I'm not sure that outsourcing by itself saves money," commented Dennis Telzrow, an analyst with Hoak Breedlove in Dallas, who believes CompUSA's biggest challenge is bringing more customers into the stores. Part of the company's first round of changes includes some customer service initiatives such as boosting employee training programs, expanded floor staff and bringing customer service contacts in-house from the current third-party provider.

In 1994, when Halpin replaced Nathan Morton as president and ceo, he and his team inherited a floundering company. The chain roared back to life, stock rose 60% in 1995 and the company looked to be on solid ground.

But computer retailing has changed, margins have withered, and competition from other sectors has gotten fiercer.

After acquiring the Computer City chain from Tandy in 1998, for $211 million, everything seemed to stall. In the fiscal year ended June 27, 1998, net income was $31.5 million, a 66.5% drop from $93.9 million in 1997. Net sales increased 15% to $5.29 billion, but comps increased an anemic 1.7%. Expansion was curtailed as the company began declaring lower-than-expected earnings for several consecutive quarters.

Wall Street at first remained bullish about CompUSA's future, expecting it to recover once the lower returns were annualized. But the problems have persisted into another fiscal year. For the first nine months ended March 27, net income was $18.8 million, off 77.3% from $83 million for the first nine months of 1998. Net sales increased 19% to $4.86 billion from $4.10 billion, and comps decreased 4.7%.

Halpin claims the company is financially stable. CompUSA has yet to release earnings for its fiscal year 1999, which ended June 26. However, by press time the company had announced that net sales were up 20% for the year even as the average selling price for computers dropped a corresponding 20%. The chain posted comp store losses of 3.4% even as it saw gains of 29% in technical services and 17% training sales.