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Ultimate Electronics: Back In The Black

Fifteen months after emerging from the abyss, Ultimate Electronics has returned to profitability.

The once-bankrupt business is now leaner (by half), more focused on its core product category (TVs) and for the first time in five years has been posting positive comps. With positive cash flow and projected 2006 sales nearing the $400 million mark, the company may even open a new store or three next year.

Although the final chapters have yet to be written, the rapid turnaround of the nation’s still-largest regional A/V specialty chain by entrepreneur Mark Wattles is proving one of the most dramatic rescues in CE retailing. The tipping point can be traced back to 2001, when Ultimate began an aggressive expansion beyond its Rocky Mountain power base that more than doubled its store count to 65 units in 14 states in four years. But the company became hobbled by a difficult MIS changeover, unfavorable lease terms, a soft economy and increased competition as Best Buy and Wal-Mart traded up their CE mix.

Eventually the till ran dry, credit lines were cut and loan defaults loomed. Enter Wattles, founder of the Hollywood Video rental chain, who in January 2005 bought a controlling interest in the now-bankrupt company, brought in a new management team, and invested $31 million of his own cash to keep it afloat.

Despite his best efforts the business failed, and in April Ultimate was put on the auction block. Bidders included Best Buy, Circuit City, CompUSA — and Wattles. “My original plans were different than how it turned out,” he recently told TWICE. “Not all of my ventures have worked, and by February and March of last year my doubts were great. I was then very worried about not winning the bids in April.” But a bankruptcy court judge approved Wattles’ $47 million cash offer for the 32 best-performing stores (funded by the sale of his Hollywood Entertainment stock), and Ultimate emerged from the ashes with a clean slate and a new lease on life.

“The vendors lost money, I lost money, everyone lost money,” he said of the bankruptcy. “Now everyone’s making money, except for me. I’ve put tons of money into this company, significantly more than I originally planned.”

But Wattles is certain of an eventual payout thanks to the advent of HDTV, which is what attracted him to Ultimate in the first place. “Given my movie background, I believed HDTV would see significant growth. It’s a phenomenal product, the greatest to come along in a long, long time. There’s no comparison to anything in the past. Consumers aren’t complaining about the price differential, and the CE industry will see the largest growth in its history as we enter the next phase and consumers start putting them in ancillary rooms. This is not just a three- to five-year trend.”

And despite past performance, he said, “Ultimate Electronics is in the sweet spot.”

Indeed, Wattles’ turnaround strategy is deceptively simple: refocus on HDTV. “At the core, we’re a TV company,” he explained. “I’m a firm believer in the category-killer concept, whether it’s ice cream or videos or TV. We’ve got the best TV selection — two to three times that of Best Buy or Circuit City — and the difference is that HDTV is our business, rather than just a piece of it.”

To communicate its command of the category, Wattles has made significant capital investments in flat-panel and rear-projection inventory, store remodels and marketing programs that hammer home the message that “these guys have a ton of HDTVs, with more brands in more sizes than anyone else,” he said. “One of the biggest challenges is getting people in the stores, but once inside we have an extraordinarily high conversion rate.”

The strategy, in tandem with the downsizing and freshly cleaned balance sheet, is clearly working. Losses went from $40 million in 2004 to $25 million last year, and Ultimate is back in the black in 2006. Yet deep pockets aside, Wattles takes little credit for Ultimate’s turnaround, arguing that he bought into an essentially sound business that would have righted itself eventually.

“We’re not geniuses,” he said. “This is not the story of a new owner coming in and fixing everything. We didn’t discontinue anything. I had admired the business and had been a customer for years. They simply ran out of money at the wrong time and had a bunch of bank debt. I just gave them capital.”

The distractions, he said, “got the company off track from its core focus of being the premier provider of TVs.”

Looking ahead short-term (“I don’t look out six years,” Wattles said), the private company has begun casting about for real estate as it prepares for a controlled expansion beginning in 2007. “We won’t get aggressive like the past,” he promised. “I don’t want a giant company. Maybe we’ll open two stores a year, maybe six. It depends on real estate opportunities.”

Wattles will primarily backfill existing markets at first, and then open new stores in “un-served pockets” while sticking with Ultimate’s traditional 30,000-square-foot to 35,000-square-foot footprint. “To be a category killer in TVs requires a big box,” he said. “In retrospect, I wish we had kept some of the stores we closed.”

The expansion will be funded initially by Wattles, but eventually will be fueled from the company’s cash flow, while all profits will be plowed back into the business.

And what of the competition? Given the explosive growth of HDTV, Wattles believes there’s room at the table for all, and has even invested in rival CE chains. “A rising tide lifts all boats,” he said.

Ultimately, however, it all comes down to breadth of assortment. “Everyone’s on parity on price,” he observed. “The single most important differentiator is selection.”

Retailers To Watch

TWICE’s annual Retailers To Watch feature, now in its fourth year, showcases dealers who through marketing, store design, service, selection and/or business model have created successful niches within the marketplace.