The Good Guys rescued by infusion of cash, new business strategy

Discount Store News, Sept 6, 1999 by Robert Scally

SAN FRANCISCO -- The cash cavalry has come to the rescue for The Good Guys.

Financially battered at a time when other consumer electronics retailers are prospering, The Good Guys has landed a private placement valued at $16.25 million and adopted a new business strategy that includes abandoning unprofitable merchandise lines and halting all store remodeling.

"Our three-year goal is to return to profitability in the upcoming fiscal year, meet or exceed industry average earnings in year two, and by year three be recognized as the best-run consumer entertainment electronics specialty retailer in the world," said Ron Unkefer, founder, chairman and ceo of The Good Guys. He rejoined the company on July 1.

Cash from the recent private placement and a new three-year, $100 million line of bank credit that is currently being negotiated may be the most important factors in helping The Good Guys regain its financial health.

Under the terms of the private placement agreement, investors purchased 3.25 million restricted shares of the company's common stock at $5 per share and received warrants exercisable for three years to purchase 1.625 million additional common shares at a price of $6.125 per share. Net proceeds to the company from the offering will be approximately $15.35 million.

The Good Guys, a regional chain that operates 79 stores in California, Washington, Oregon and Nevada, desperately needed bold measures to help secure the firm's financial future.

The Good Guys has been losing money and has reported lackluster same store results for the past three years despite the fact the chain was already in the process of rolling out a new store design.

Computer and home office products will be dropped so the chain can expand its wireless phone business and create a department that will showcase new technologies such as Internet-related products and services, including digital cable set-top boxes, broadband service and Internet appliances.

"Minuscule computer industry margins, quick obsolescence of inventory and unique service challenges have collectively made this category a financial drain on the company," Unkefer said.

Unkefer is also chopping overhead with a plan to reduce general and administrative costs by nearly 20%, or approximately $8 million.

Changes include eliminating two vice president positions, closing its real estate department and consolidating facilities management under operations.

Unkefer has opted not to close any of the chain's 79 stores, which were once highly profitable.

"Of our 79 stores, 78 make a contribution to operating profits [before allocation of corporate overhead], and the one exception is expected to begin contributing in the next few months, Unkefer said.

However, all plans for expansion and remodeling have been halted.

Unkefer also announced plans to increase the company's advertising and marketing budget by more than 20%. San Francisco-based advertising agency Citron Haligman Bedecarre has agreed to take an equity interest in The Good Guys.

A new advertising campaign due to hit in November combined with improved flow of goods to stores and improved assortment per store should give The Good Guys a boost going into the holiday selling season, said David Childe, retail analyst with Morgan Keegan & Co.

"The new advertising alone should help," Childe said.

The Good Guys will need all of the resources it can gather to right itself and remain competitive. Best Buy, which is enjoying record profits, just entered The Good Guys' core market around San Francisco, and Circuit City remains a tenacious competitor in most of the chain's markets.