CompUSA To Spin Off Direct Group
(02/04/99, 3:25 p.m. ET)
By Mark Harrington, Computer Retail Week
CompUSA Wednesday night confirmed it will separate its direct businesses into a stand-alone company strongly rooted in the Internet. Wall Street was mixed in its assessment.
CompUSA president and CEO Jim Halpin said the company will devote "substantial resources" in people, infrastructure, and marketing to the new operation, totaling between $2 million and $3 million a quarter. Meanwhile, the company next year will hold the number of new store openings to about 15, compared with the 50-plus stores it added this year with the Computer City buyout and new CompUSA locations.
Halpin told analysts Internet sales grew more than 100 percent in January, but declined to release a sales figure. He vowed to make CompUSA's site a considerably more popular destination.
The company will build a "tightly integrated" management team and add "several key members to management in the Boston market" to run the spin-off. CompUSA already operates an office for direct sales in Boston. Halpin owns a home in the region, as well.
The CompUSA Direct division produced $83 million in sales during the latest quarter, a 48 percent increase over the previous year. Most of that was mail order, but, Halpin said, "The Internet is one of our fastest-growing businesses."
Analysts said they expect the move to give CompUSA's stock price a boost Thursday. "It's logical for them to do it," said Harry Katica, vice president of equity research at Prudential. "I can't imagine a company that sells PC products not having a high-profile presence on the Net. I think a spin-off is reasonable."
Mark Mandel, senior retail analyst with investment company ABN Amro, said the Internet play could prove attractive, but he has fundamental concerns. "I think there are a lot of unanswered questions about where their customers will be purchasing products," he said. "It seems to me, their business-store volumes are down in an environment that's red hot. Could the Internet business ultimately cannibalize the [stores' business]?"
Halpin said prices on the Internet tend to be lower than those in stores, and success in the channel will "end up being a volume game."
The CompUSA PC, which Halpin called the "best-quality PC we sell today," also stands to gain from a spin-off. Online and direct sales of CompUSA PCs will be handled by the new entity. CompUSA has the capacity to produce 50,000 desktop PCs and 10,000 notebooks per month, the company said, in newly acquired Computer City facilities in Texas.
In other news, CompUSA told analysts its technical-service business produced $35 million in sales in the most recent quarter, up 50 percent over the previous year, while its training division produced $27 million in volume, a 20 percent increase. It's the first time CompUSA has announced numbers for these segments of its business.
Average sales per store for all CompUSA locations dropped to $8.1 million, compared with $9.1 million in last year's quarter, CompUSA said. Excluding Computer City stores, average sales per store were $8.9 million, the company said. Former Computer City stores produced an average $4.5 million per store during the quarter, as well as an operating profit, Halpin said. He said he expects the stores to eventually produce profits on par with mature CompUSA stores.
"We've stopped the bleeding," Halpin told analysts.
Halpin also said CompUSA will soon announce initiatives to increase customer-service levels in stores, saying the company will test them in two markets over the next 90 days. He expects to show "dramatic" improvements as the plan is introduced. He disputed one analyst's contention that service was lacking. He said CompUSA received 450 letters last month with positive comments about its service, and said the company's website recently ranked above those of Dell and Gateway in an unspecified national survey.
CompUSA said new iMacs are selling well, even though it has yet to advertise the product. The company also said it is seeing a modest pickup in its corporate sales, though nothing to "get giddy" about.
The retailer reported strong business in the education sector, and is eagerly awaiting Intel's Pentium III launch to help offset average selling prices that will otherwise continue falling modestly, or remain flat, for the third quarter.
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