After Grueling Woes, CompUSA's Revival Efforts Fail to Spark Faith

DALLAS -- Three years ago, it was the red flag from company workers about falling PC prices. Then came more insider warnings about inefficient selling practices and antiquated computers. Finally, there was the poor service that was sending customers away in droves.

But inside a gleaming Dallas high-rise, senior CompUSA (CPU Quote) executives ignored or minimized the danger signs, say six former and current employees. The result: A company that once sat near the pinnacle of the home-computer industry is scrambling for its life.

For investors, what happened to CompUSA is more than a tale of a fallen Goliath. Some of the problems were out in the public eye -- for retail investors to see. But Wall Street overlooked them, at one point driving the stock up to a market cap of around $3.5 billion back in December 1997.

Now, that market cap hovers under $500 million. And with losses piling up -- fiscal 1999 produced $46 million in red ink, after charges -- the stock of the PC retailer is languishing around its 52-week low of 5 1/8, just set Tuesday. Wednesday evening's sales report -- of disappointing figures -- wasn't much help.

"I don't see a rapid turnaround in their core business,'' says Scot Cicarrelli, an analyst with Gerard Klauer Mattison, a firm that hasn't done underwriting for CompUSA. He projects losses of $20 million this fiscal year, on a 9% sales decline to $5.7 billion.

CompUSA Company snapshot
	FY 99	FY 00 (estimates)
EPS (loss)	50 cents*	(.21 cents)
Revenue	$6.3 billion	$5.7 billion
Market cap as of 12/30	$481 million
Headquarters	Dallas
Employees	20,000
Stores	210
*After charges. Fiscal year ends June. Source: Company and analyst reports.

So how did it happen? TheStreet.com talked with current and former employees, corporate clients and retail customers. The picture that emerges is one of a poorly managed company that tolerated too many mistakes.

Now, CompUSA is set on turning itself around. Trying to cut $100 million in costs, management has announced plans to improve customer service, update stores, make better use of the Web, install new software systems and revamp sales.

But to some observers, the game is up.

Ready, Shoot, Aim

Lots went wrong at CompUSA these past few years. But some critics point first at CEO James Halpin and his team's management practices.

Lawrence Mondry, vice president of merchandising, says, "If we have a fault, we act sometimes before we're completely ready."

According to a former executive who declined to be named, employees derided management's tactics as "ready, shoot, aim."

"New endeavors would start, and there was no plan to execute them," the former executive says. "We often didn't have systems or infrastructure to get things done."

The former executive points to an example where the company developed a build-to-order PC plan to compete with Dell (DELL Quote) and Gateway (GTW Quote) without having the manufacturing and sales teams in place to support the product.

A spokeswoman disagrees, saying extensive research was conducted and all manufacturing and sales plans were laid out before the product was unveiled.

According to others, CompUSA's corporate division was so rife with inefficiencies that each store had its own corporate sales people and support staff, as if running hundreds of mini-companies. In addition to duplicating back-office costs, markets with multiple stores often saw salespeople competing for the same corporate customer, says Jim Swartout, a onetime district sales manager.

It wasn't until this summer, when the corporate division lost an estimated $75,000 on $2 billion in sales for the fiscal year ended in June, that management made serious changes. Gone were 1,800 of 3,600 in the division. In place of the decentralized structure were 200 area managers supported by a call center.

Even this necessary step was bungled, say former employees and corporate customers.

Without any warning that changes were afoot, a computer buyer for a large medical organization arrived at work one Monday in August to find she was unable to contact CompUSA, her longtime supplier. "It took them five days before they gave me a phone number so I could check on the status of some goods I'd ordered," says the buyer, who asked not to be identified. "I tried to cancel the order, but they wouldn't let me."

Fed up, the organization, which had purchased more than $7 million worth of hardware from CompUSA annually, stopped doing business with the company in September.

Halpin, CompUSA's CEO, says that the account likely was an unprofitable one, among many that the company has cut off. As a result, corporate sales are expected to decline 60% this year, and Halpin says he's unsure where they will bottom.

Management structure wasn't the retailer's only trouble. For a company that billed itself as a computer superstore, CompUSA's own systems were so antiquated that salespeople had to manually input invoice numbers, says a former corporate sales manager. "We had 50 to 60 computers going out at one time," he says. "Someone had to sit there and key in every serial number."

CompUSA has since invested $130 million in new systems -- money that could have been spent sooner if the company hadn't doled out $175 million to buy the ailing Computer City chain from Tandy (TAN Quote), the executive says. (CompUSA defends the acquisition, completed in August, as a chance to eliminate a competitor.)

Meanwhile, for all the talk of improving customer service, not much had changed when Joe Faber, a 24-year-old Manhattan resident, visited a CompUSA store in northern New Jersey last month in search of a 19-inch monitor for his mother's Macintosh computer. After purchasing the monitor, Faber realized it was too large to fit in his compact car. So he took it back inside and asked a clerk to deliver it the three miles to his mother's house. The delivery charge was $80.

Frustrated after spending an hour and a half in the store, he returned the monitor and left empty-handed. A few days later, he logged on to outpost.com, owned by Cyberian Outpost (COOL Quote) and bought the monitor for the same price. Overnight shipping was free. "I will never shop at CompUSA again," Faber says.

Halpin's response to the incident: Delivering that item may have eaten up the margin.

Not a Dinosaur

It's this kind of history that makes Wall Street question if CompUSA can come back.

"My bet is that they'll get bought by someone eventually,'' says Arvind Bhatia, an analyst with Southwest Securities, who thinks the stock is cheap for an outfit with a solid brand name. Bhatia, whose firm hasn't done underwriting for CompUSA, rates the shares accumulate.

If CompUSA is indeed a takeover target, Halpin won't discuss it.

Indeed, Halpin, CompUSA's chief exec since 1993, is the picture of determination, bristling at suggestions that he's at fault for the downfall.

And to be sure, outside forces such as the collapsing price of PCs made Halpin's job all the more difficult. After selling $500 worth of computers, CompUSA is lucky to have $40 left in gross profit. By comparison, a clothing retailer would have about half of the $500.

How Low Can You Go? CompUSA stock price vs. average retail PC price

Source: PCData and Baseline

Even so, Halpin remains an optimist. After all, he brought the company back from the brink before. He reversed a fiscal 1994 loss and presided over the company through its glory days.

"We have a drawer in the office filled with candy --- to keep the energy up,'' he says, invoking a can-do theme in senior ranks. "The changes we made in the last 12 months would take a lot of companies five years to make.''

Indeed, there are some signs of improvement. Gross margins, which had dropped as low as 10% and rose to 15% in the September quarter, are expected to set a new high of 16% for the December quarter, Halpin says.

Samuel Crowley, vice president of operations, points to a particularly pleasing sign: Customer complaints are down by half compared with a year ago. He cites better training and complaint tracking, use of company shoppers to measure service and spot telephone checks of customer satisfaction.

Beyond these steps, CompUSA is branching into DVD players and digital cameras to become more of a technology superstore and is planning to spin off its e-commerce site, cozone.com, in an initial public offering in the coming year.

"We're not a dinosaur," Halpin says.

Perhaps not. But CompUSA can't afford any more faulty circuits.