Electronics retailer blames IT system for financial woes

Problems installing new software are partly to blame for Ultimate Electronics’ disappointing financials, according to Dave Workman, president and CEO of the Denver-based consumer electronics retail chain.

Ultimate Electronics reported this week that it lost $6.3 million in its fourth quarter, which ended Jan. 31; comparable store sales declined 9%. The 65-store retailer says its gross profit margins suffered in part because of “higher inventory shrink” – which generally refers to products that are stolen or lost along the supply chain – due to integration issues experienced with the company’s new management information system.

The company did not immediately respond to requests to identify the vendors that supplied the troublesome applications. However, filings with the U.S. Securities and Exchange Commission indicate the system wasn’t inexpensive. In its 10-Q filing for the quarter ended July 31, 2003, Ultimate Electronics reported spending about $23.5 million on the new management information system from inception of the project through the end of July, plus about $500,000 in August and September to finish the rollout and provide implementation training.

“We are extremely disappointed with our sales, profit and operating results from last year,” Workman said in a statement announcing Ultimate Electronics’ fourth-quarter results. He cited struggles in the first part of the year, including ineffective advertising, slowing demand, competitive pressures and a dilution of skilled personnel resulting from corporate expansion.

New software exacerbated the problems: “In the third and fourth quarters, these issues were compounded by the unexpected problems we experienced following our September conversion to a new management information system,” Workman said. “We experienced problems with inventory visibility, product distribution, commission calculations, reporting and processing of service repairs.”

For the year ended Jan. 31, Ultimate Electronics lost $15.8 million, compared to year-earlier profit of $4.7 million. It finished the year with $113.9 million in inventory, up 7% over the previous year’s closing inventory levels.

Ultimate Electronics hopes to make 2005 its turnaround year and is identifying and implementing sales, operational and cost-cutting initiatives, Workman said. The company also retained a turnaround specialist, Peter Hanelt.

Orchestrating a comeback will require making up for a slow start to fiscal 2005, however. Workman said sales for the first two months of the fiscal year declined about 6% over the same period last year, and comparable store sales fell about 15%.

Plus, IT glitches still exist. “Although we have corrected most of our system issues, we continue to encounter problems with our management information system related to inventory and distribution and are working on resolving these issues,” Workman said.