CompUSA Woes Reflect a Changing Computer Market

The deepening woes of CompUSA, the nation’s largest computer retailer, raise questions about the future of stand-alone computer stores in a rapidly evolving technology marketplace.

CompUSA, which saw its shares plunge more than 20% Friday, is losing buyers of sophisticated, custom equipment to such direct merchants as Dell Computer Corp. while it is also losing entry-level shoppers to electronics superstores such as Circuit City, which compete aggressively on price.

“Fundamentally, we see that the way they are approaching retailing is very much an old-world view,” said Charles Smulders, a senior industry analyst at Dataquest in San Jose. “They are failing to differentiate their retail offering in any shape or form.”

Indeed, as the marketplace shifted around it last year, CompUSA acquired one of its biggest rivals, increasing its investment in bricks-and-mortar. And after acquiring Computer City from Tandy Corp., CompUSA proceeded to close more than half the stores picked up in the transaction.

CompUSA has 208 stores.

Adding to CompUSA’s problems are falling computer prices and an overall weakening in demand from corporate clients. Many businesses have already invested in new equipment or are hesitant to upgrade systems at the same time many are preparing for possible year 2000 computer problems, analysts said.

Although those issues affect many other computer sellers, CompUSA has the added burden of higher overhead than its direct-merchant competitors; it also has less room for a price drop than competitors such as Best Buy, which have other merchandise to help make up for tighter margins.

It also has a growing reputation for poor service and less-than-knowledegable staff. The company said its direct sales grew last quarter to $83 million but added that the bulk of those sales were still phone orders, not from the 2-year-old Web site it developed to compete for the online business.

“We’re taking measures to see what we can do to boost retail sales. We’re also looking at our marketing and advertising,” said CompUSA spokeswoman Suzanne Shelton. “We’re analyzing our merchandise assortment [and] looking at possible line extensions.”

CompUSA’s stock hit its lowest point in four years on Friday, after yet another round of grim reports this week about declining sales and falling profit.

The Dallas-based chain’s stock closed at $6.38, down $1.75 but up from a low of $5.88 earlier in the day. In 1997, CompUSA hit its all-time stock high at $38.

Earlier in the week, CompUSA reported that the third-quarter sales percentage in stores open at least a year would be down in the high single digits. The company also said that including costs of about 5 cents a share, it will have a loss for the quarter, which ends March 27.

The company also forecast another loss in the fourth quarter.

Moody’s Investors Service said Friday it might cut the rating on CompUSA’s debt of $410 million.

Meanwhile, it appears unlikely that some of the problems intrinsic to the personal computer business will abate any time soon. Analysts expect PC prices to continue their decline--a blessing to consumers but not stores such as CompUSA.

In January 1996, the average price of a computer was $1,933, according to PC Data, a Reston, Va.-based research firm. By the end of last year, that figure had fallen to $1,043, the firm reported.

“We are now seeing pretty darn powerful, full-fledged computers with everything you need for $600,” said Dan Tynan, an executive editor at PC World magazine in San Francisco. “That was totally unheard of two years ago.”

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Double Dip

CompUSA’s fortunes have fallen as its niche has become smaller. General-merchandise discount stores are selling computers at ever-lower prices, and Internet sources are providing convenient shopping for higher-end customers who know what they want.

CompUSA’s Stock Has Fallen ...

Monthly closes and latest: Friday: $6.38

... as Have Computer Prices

Monthly average prices: Dec. 1998: $1,043

Sources: Bridge, PC Data