Dueling Fools
Borne in the CompUSA
August 18, 1999
Bear Argument
By
Troubled. Inefficient. Bloated. Disadvantaged. Unprofitable. These are just some of the words I would use to describe CompUSA in 1999. There's a reason the stock is trading at a fraction of its old highs, and I don't see the factors behind CompUSA's tumble abating anytime soon.
One problem I see with CompUSA is that most of its customers are Web savvy and are able to surf the Web for the company's lower-cost online competitors. Why should I spend the time driving to CompUSA when I can stay home and get the exact same merchandise online for generally much lower prices? The company's distributed retail model has a high amount of overhead costs associated with the stores. Meanwhile, thin and efficient e-commerce companies are eating into CompUSA's portion of the pie.
Beyond jettisoning the retail units and going completely online a la Egghead <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGGS)") else Response.Write("(Nasdaq: EGGS)") end if %>, I really see no way for CompUSA to counter the massive advantage its online peers have in regards to cost structure and price. Plus, CompUSA basically gave up on its direct sales model just recently. (More on that later.) CompUSA may have bested the scads of other old world computer retailers who are now six feet under (not a good omen for computer retailers in general), but will the company really be able to outmaneuver its wide variety of new-age competitors including Beyond.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BYND)") else Response.Write("(Nasdaq: BYND)") end if %>, Dell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>, and Amazon <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %>? Somehow, I doubt it.
Down the road, CompUSA may as well start calling itself "ToasterUSA," since computers will be so cheap and everyone will have one. The selling prices of PCs have been in a nosedive for some time, and it's a safe bet they will continue to contract in the future. These lower selling prices directly cut into CompUSA's top line, and it's a trend that CompUSA will have to continue to counter for the foreseeable future. Would you want to own a widget shop when free widgets are available elsewhere?
Here's another question: Beyond both selling Apples, what do grocers and CompUSA have in common? They each have low margins and inventories that go bad on the shelves in an extremely short amount of time. After all, about the only inventory that becomes obsolete faster than computer equipment is fruit. This can be managed if a company keeps close tabs on and quickly turns its inventory, but CompUSA simply does not strike me as the type of firm that has the tight tolerances needed to succeed in such a business.
I do have to admit that I've only been inside two CompUSA's in my life, and my less than ideal experiences there may be part of the reason I agreed to scribe the bear piece here. I even went by one store recently just to make sure my memories were correct. Sadly, they were.
A kind way to describe my local CompUSA would be to say that the unit needed janitorial assistance. The carpet badly needed replacing, the walls needed a fresh coat of paint, and more than a few shelving units looked past their prime. If that wasn't enough to make my shopping experience unpleasant, the surly and disgruntled teenagers working behind the counters put it over the top.
Beyond the less than pleasant aesthetics, I noticed poorly organized inventory stacked to the ceiling or literally just dumped in the middle of the aisles. This struck me as particularly troubling given CompUSA's line of business. As anyone who follows the retail industry knows, keeping close tabs on inventory is key to survival, especially in a low-margin affair such as with computers. When I look at CompUSA, I see anything but a lean, mean and efficient operating machine.
For those hoping for an online rescue, don't hold your breath. CompUSA recently announced it was outsourcing its direct sales operations to Ingram <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IM)") else Response.Write("(NYSE: IM)") end if %>. I know Louis will have his own take on this, but I see it as the company conceding that it can't efficiently manage its direct sales fulfillment. Selling computer equipment is already an extremely thin-margin affair, and now CompUSA will have to share a portion of those meager profit margins with another firm.
To make a long story short, CompUSA is a mediocre middleman in a day and age where technology is making middlemen obsolete. Here's a company that has low margins that look to get lower in an extremely tough business to begin with. Plus, CompUSA has a boatload of cash tied up in bricks and mortar stores when more and more computer buying is going online. Is CompUSA really the type of business that will thrive over the next five or ten years? I think not.
Next: The Bull Responds