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Ultimate Electronics Profit In Red

11/26/2003 11:57:00 AM Eastern

Denver - Hampered by slow store traffic and unexpected issues relating to its conversion to a new management information system (MIS), Ultimate Electronics reversed its net profit fortune in the third quarter, moving to the negative side of the ledger.

The company recorded a $6.2 million net loss, compared with a net profit of $422,000 in the same period in 2002.

Sales for the three months, ended Oct. 31, decreased 10 percent, as reported earlier, down to $159.7 million, compared with $177.8 million in the year-ago period. Comp-store sales slid 12 percent.

Gross profit margin in the three months slipped from 34 percent the previous year, to 33.2 percent. This was negatively impacted by the decrease in year-on-year sales, the retailer's exit from the computer category and the shortfall in revenue from its repair service business associated with the conversion to the new MIS.

Business expenses for the third quarter increased as a percentage of sales, to 39.4 percent in the three months, up from 33.6 percent in the prior-year third quarter. Fixed costs as a percentage of sales climbed by 4.3 percent in the three months, due mainly to lower-than-anticipated sales as well as costs associated with new stores.

'While we believed that we had put the critical issues behind us, we continue to experience gaps in the expected performance of the [MIS] system,' said Ed McEntire, CEO. 'We continue to allocate significant resources to resolve these performance issues. We believe that until the performance issues are resolved, they could continue to have a negative impact on our overall results.

In a conference call, president/COO Dave Workman attributed half of the sales shortfalls to the MIS issues, and half to the drop-off in traffic. The latter, he said, was caused in part by a misguided 'Experience More' branding campaign that shifted the company’s focus and funding away from product assortment and competitive pricing.

'Sometimes you get seduced by the agencies,' Workman said. 'They told us, 'Tell them what you stand for and they’ll flock to your doors.’ But it all comes back to having the right price and the right product to bring people in and allow them to experience what you do.'

Workman added that business was also surprisingly soft in Ultimate's new Dallas stores, and inexplicably unchanged in its Las Vegas remodels. However, thanks to a 'new management structure' in its month-old Austin, Texas and Kansas locations, the pace of custom installations is double the chain-wide average, and all categories are running ahead of plan.

Ultimate also re-launched its e-commerce site on Nov. 1 to shore up its informational aspects.

McEntire noted that 'For the first 25 days of our fourth quarter, total sales are down 1 percent [year over year], and comp-store sales for the quarter to date are down 10 percent, a slight improvement from the third quarter.'

Ultimate's television/DBS category, mainly digital TV, continued to account for nearly half of total sales, with third quarter figures climbing to 49 percent, up from 45 percent in the same period in 2002. Flat-panel TV accounted for 9 percent of total company sales.

Audio sales dropped from 17 percent in last-year's third quarter, to 16 percent in the same three months this year. Video/DVD sales also dropped 1 percentage point in the period year on year, down to 12 percent, from 13 percent.

Mobile sales held firm at 9 percent in third quarter, compared with the prior year, while home office sales slipped from 3 percent to 2 percent in the same comparative periods, reflecting the discontinuation of its PC business. The Other business, which includes installation, software, warranties and furniture, dropped from 13 percent to 12 percent.

Faced with a difficult performance situation heading into the key holiday selling days, Ultimate is working to rebuild traffic and sales momentum by committing an additional $2 million to its marketing efforts on promotional sales in the areas of high definition television, DVD recorders and gift-oriented categories. The funds will be spent on print advertising and a direct-mailed catalog in December.

The chain also is testing various SKU counts of DVD software, and it is encouraged with the sales increase in its homebuilder business and the related product sales. It expects sales to continue to increase as it focuses additional resources on the growing opportunities in the homebuilder market.

Inventory also took a hit during the third quarter, finishing at $138 million for the three months, up 24 percent, compared with the same three months a year ago. This was due to the shortfall in sales experienced in September and October and reduced inventory visibility during the system conversion. The company is working to get the percentage of its discontinued inventory down to 6 percent to 8 percent of overall inventory.

Borrowings in the third quarter reached about $60 million, due to the sales shortfall, increase in inventory levels and capital expenditures for construction of six new stores opened during the three months.

For the nine months, Ultimate sales climbed 2 percent, reaching $469.6 million, up from $462 million in the period in 2002. Comp-store sales dropped 10 percent.

The retailer reported a net loss of $9.5 million for the nine months, compared with a net loss of $848,000 in the same period in 2002, which includes a charge of $1.6 million.

Gross profit margin for the nine months slipped from 33.6 percent the previous year, to 33.2 percent, while business expenses rose to 36.4 percent, compared with 33.3 percent in the same nine months a year earlier.