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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: hpeace who wrote (10373)	12/6/1997 4:19:00 PM
From: Mukti Samal	Read Replies (1) \| Respond to of 97611

Headline: Compaq: Assessment of Preliminary Retail Market Data and Implications Author: Kimberly Alexy, Lehman Brothers, Dec 5, 1997 As we enter the heart of the holiday shopping season, we are taking this opportunity to assess the preliminary retail PC market data and interpret the possible implications on Compaq's consumer business for the period. Thanksgiving PC sales data from the retail channel have, to date, been somewhat mixed, both in our retail survey and in management discussions by the major retailers of office suppliers and consumer electronics. Sales of sub-$1,000 PCs remain popular,though higher-end sales have improved. However, recent data suggests retailers are tracking below sales expectations. Although, promotional activity to date has been light and 3 weekends remain left in the season. We would note that Compaq's consumer sales represent only ~20% of the company's revenue. Further, CPQ is dominating the popular sub-$1,000 space, and we believe that margins on these systems are >= margins on its traditional consumer PC systems. * We believe that Compaq continues to track towards strong 4Q earnings results. We continue to believe, however, that CPQ will have difficulty meeting its 4Q channel inventory reduction objectives. This remains our primary concern for the 4Q. ------------------------------------------------------------------------------ Preliminary PC Retail Sales Data:: With the important and highly scrutinized Thanksgiving weekend just passed, and with recent sales commentary recently provided by the management teams of major office suppliers and consumer electronics retailers, we are taking this opportunity to assess and discuss the early holiday retail PC market. We also discuss the possible implications for Compaq's consumer business for the period. As both our retail PC survey and retailer comments have shown, holiday PC sales from the retail channel have yet to fully live up to the high expectations many retailers had prior to entering the period. Inexpensive PCs continue to be popular, though mid-range and higher-end systems have also signs of strength. The promotional environment appears tobe quite tame so far, but we expect it to heat up in the remaining days of the holiday shopping season - particularly given the softer current sales environment. Specific Commentary from Retailers included the following: In its quarterly sales release, Best Buy reported home office sales down as a percent of sales year-over-year, from 41% to 40%. Best Buy management noted that its promotions have not been irrational, but that this lack of promotional activity probably hurt PC revenues in the period while aiding margins. Tandy reported that both Radio Shack and Computer City were adversely affected by a significant reduction in the average selling price of CPUs. Computer City's November same store sales declined 4%. On its conference call, Circuit City reported that November PC business was strong for sub-$1,000 sales, and that sales in the mid-range category were healthy as well. However, substantial ASP declines led to negative dollar comps in PC category for month of November, with dollar comps weakest in home office category. *Compaq Implications:: We would note that Compaq's consumer sales represent ~20% of the company's revenue. We believe Compaq's unit growth is tracking strongly in both its corporate and consumer business lines. On the consumer front, CPQ is dominating the popular sub-$1,000 space. We believe that while ASPs are under pressure, Compaq is generating sufficient incremental unit volume with this category to offset ASP declines. Further, we believe that margins on these systems are >= traditional Intel-based consumer PC sales. Correspondingly, we view that even in a weaker PC retail environment, Compaq will deliver solid 4QEPS. Our primary concern surrounding the 4Q, however, has been and remains Compaq's ability to successfully achieve its channel inventory goals. Currently running at 5 weeks +, the company maintains it's on track to reduce WW channel inventories to 2-3 weeks by year end. We expect that CPQ will have difficulty meeting this objective unless a significant acceleration in sales is achieved in the remaining weeks of the quarter. And while we believe that end demand remains strong, we are not anticipating such an acceleration to occur. Correspondingly, we believe that Compaq will again (similar to the 3Q) fail to meet its channel inventory reduction objectives. This remains our primary concern for the 4Q.