Denver - Gains in large format and flat-panel televisions smoothed over disappointing business in home audio, video and home office, helping Ultimate Electronics register a 10 percent sales increase during its fiscal first quarter.
However, with selling, general and administrative (SG&A) expenses soaring in the first quarter, and with gross profit margin flat, the retailer increased its net loss to $1.4 million, up from a net loss of $341,000 in the same quarter in 2002.
Revenue climbed to $155.7 million in the three months, ended April 30, up from $142.2 million in the year-ago period. Comp-store sales were off 8 percent in the first quarter.
'Obviously, the impact of the war in Iraq had an effect on our quarter,' said Dave Workman, president/COO. 'Our largest sales promotion during the quarter coincided with the beginning of the conflict in early March.'
Ultimate, which anticipates increased consumer interest in the A/V categories following future acceptance of digital radio, server technology and recordable and multi-channel DVD, has decided to focus on these products and to fully support these new technologies.
At the same time, the specialty retailer plans to eliminate core computer products from its offerings during the second and third quarters of this fiscal year. Sales of core computer products currently represent only 2 percent to 3 percent of total chain sales. Cost for the phase-out is expected to be between $400,000 and $700,000, but following this clean-out, no significant impact on earnings is anticipated.
Overall home office business in the first quarter accounted for 3 percent of Ultimate's sales, down from 4 percent in the same period the previous year. Television/DBS, by far the largest category, increased its percentage of overall sales to 42 percent in the first quarter, year-on-year. Audio dropped from 19 percent in last year's first quarter, to 18 percent this year. Video/DVD also lost a percentage point in the current three months, down to 15 percent, from 16 percent in the year-ago period. Mobile remained steady at 10 percent of sales, both in the current quarter and the same three months in 2002.
Ultimate recorded a 32.7 percent profit margin in the first three months, down 10 basis points from the 32.8 percent for the first quarter a year ago. SG&A - battered by higher fixed expenses, mainly associated with 12 new store openings in the second half of last year as well as higher healthcare costs - climbed 290 basis points in the first quarter, to 34.2 percent.
'As we continue with the expansion of our business, we maintain the goal of increasing gross margins, while reducing our overall cost of operations,' said Ed McEntire, CEO. Measures for increasing gross margin include fine-tuning the commission structure to reduce discounting and improving product distribution, he said.
'Our goal is also to reduce SG&A by 200 basis points over the next two years by creating efficiencies in advertising, store openings and repair services,' said McEntire. 'Ultimate's success will depend, in large part, on our sales. We are assuming comp-store sales will be at more normalized levels of positive 2 percent to 3 percent.'
May 2003 sales have improved, relative to the comp-store sales of negative 8 percent in the first quarter, down in the low single digits, McEntire said. The retailer has a goal of adding 50 basis points to its margins over the following 12 to 24 months.
Ultimate, which operates 58 stores, including 40 Ultimate Electronics units, plans to open seven new locations in the second half of 2003, one in the Minneapolis/St. Paul metro area; two in Austin, Texas; three in Kansas City, Mo; and one in Wichita, Kan.