Ultimate Electronics, Inc. Business Information, Profile, and History

Company Perspectives:

The company appeals to a wide range of customers with an emphasis on selling mid- to upscale products. The company's stores enable it to differentiate itself from its competitors by providing a comprehensive selection of name-brand consumer electronics, with an emphasis on limited distribution upscale brands, as well as by offering an extensive range of customer services and by displaying multiple home theater and audio demonstration rooms. These factors, together with its open and un-crowded merchandise displays and its policy of matching the lowest prices of its competitors, make it an attractive alternative to appliance/electronics superstores and mass merchants selling consumer electronics.

History of Ultimate Electronics, Inc.

Ultimate Electronics, Inc. is a leading specialty retailer of home entertainment and consumer electronics products in the Rocky Mountain, Midwest, and Southwest regions of the United States. At the end of 2004 the company was operating 65 stores: 54 Ultimate Electronics stores in Arizona, Idaho, Illinois, Iowa, Kansas, Minnesota, Missouri, Nevada, New Mexico, Oklahoma, South Dakota, Texas, and Utah; and 11 SoundTrack outlets in Colorado. The company's stores specialize in mid- to high-end audio, video, television, and mobile electronics products, sold by a knowledgeable staff of commissioned salespeople. Ultimate's future was in doubt, however, following its filing for Chapter 11 bankruptcy protection in January 2005. The filing was precipitated by a brutally competitive environment in consumer electronics retailing, as Ultimate Electronics found its sales and market share declining primarily as a result of the voracious growth of the two industry giants, Best Buy Co., Inc. and Circuit City Stores, Inc.

Pearse Electronics: 1968-93

Ultimate Electronics was founded as Pearse Electronics, Inc. by William Pearse, a business administration graduate of Western Michigan University, and his wife, Barbara. William Pearse was working as a management trainee at the Gates Rubber Co. before he and Barbara started a Team Electronics audio/video franchise store in Arvada, Colorado--a suburb of Denver--in 1968, with $15,000 in personal funds. This franchise was abandoned in 1974, when the retail business was renamed SoundTrack. The second SoundTrack opened in Denver in 1976. During the 1980s six more SoundTrack stores were opened in the Denver area and Colorado's Front Range: in Aurora (1983), Littleton (1984), Boulder and Thornton (1985), a second Littleton store (1986), and Colorado Springs (1989). A Fort Collins store opened in 1990. Audio-related equipment was SoundTrack's core business at this time.

The SoundTrack chain grew not only by the establishment of new stores but also by the expansion of existing ones and the number of products each location carried. Pearse believed his employees, about 70 percent of whom were paid through incentive compensation, could make their own decisions and direct their own efforts without much supervision. Consequently, he kept down overhead by maintaining a management team of only four. All store managers were promoted from within the company. Customer service was given the highest priority: one of the company's top executives told a reporter, "The customer will generally get through [on the telephone] quicker than you would."

Pearse Electronics was willing to spend on advertising, however, publicizing SoundTrack through humorous commercials intended to distinguish the chain from hard-sell price-oriented rivals such as Best Buy and Fred Schmid. In 1990 the company's ads featured a hippopotamus. The following year it introduced a spokesperson/ventriloquist named Taylor Mason and his puppet, Romeo, who wore different costumes, such as a white jumpsuit for an Elvis Presley spoof. Interviewed in the Denver Post, an ad agency executive handling the SoundTrack account said, "Everybody is saying they have the lowest prices in town, so after a while there's a believability gap. We're having more fun and getting across a very competitive message as well."

Pearse Electronics had net sales of $53.7 million in fiscal 1992 (the year ended January 31, 1992) and net income of $1 million. In 1993 sales and income increased to $62.6 million and $2.1 million, respectively. The company changed its name to Ultimate Electronics, Inc. in August 1993 and went public in October 1993, raising nearly $16 million by selling a minority of its common stock at $8.50 a share. The Pearse family, formerly the sole owner, retained about 60 percent of the company stock after the offering, and William Pearse continued to head the company as chairman and chief executive officer. The company said it planned to use the net proceeds of the offering to finance expansion into new markets. At this time SoundTrack was specializing in middle-market to upscale stereo equipment, television sets, and videocassette recorders and had about 375 employees.

Ultimate Electronics: 1993-96

In the fall of 1993 two new stores opened under the Ultimate Electronics name, in Salt Lake City and Orem, Utah--the first company outlets outside Colorado. These were also the company's largest, with about 19,000 square feet in selling space, compared with between 8,000 and 17,000 square feet for the earlier ones. One advantage of locating in Utah was that the market was yet untouched by huge retailers such as Best Buy and Circuit City, although Ultimate's company president pointed out, "There are lots of aggressive independents with low costs that can put products out there at low prices."

As part of a new strategy, the Ultimate Electronics stores expanded the home-office and television selections found in the SoundTrack stores. They added 100 to 200 CD-ROM titles and selections from the top 100-selling personal computer (PC) software titles and gave increased emphasis to PC accessories. The PC lineup was increased from four to five lines, including Packard Bell and Compaq, and from 10 to 15 models. Facsimile machine offerings were boosted from 10 to 15 models, including products from Brother International, Murata, Panasonic, and Sharp. The number of direct-view television sets up to 40 inches was expanded from 100 to 200 models, and a big-screen viewing room had a selection of 35 rear-projection sets starting at 40 inches. Each store had two home-theater rooms packed with audio/visual receivers, speakers, and other products as well as television sets, and two cars placed on the showroom floors to display car-stereo products.

Instant acceptance in Utah enabled Ultimate Electronics to end the fiscal year with net income of $3.4 million on net sales of $88.2 million. In September 1994 the company closed its Denver SoundTrack store and opened a 31,000-square-foot superstore in the city in what had been the Century 21 movie theater. It featured 200 television sets 32 inches or smaller, 40 large-screen projection televisions, a $50,000 home-entertainment system with theater seats, and an automobile displaying a dashboard-mounted TV monitor.

During 1994 Ultimate Electronics opened new stores in Murray, Utah; Albuquerque, New Mexico; and Las Vegas, Nevada. In 1995 it opened stores in Layton, Utah; Boise, Idaho; Tulsa, Oklahoma; and a second one in Las Vegas. The new stores typically incorporated five separate audio demonstration rooms, three car-stereo demonstration rooms, two demonstration cars fully equipped with the latest in mobile electronics, two to three home-theater rooms, and a wide selection of television sets, with particular emphasis on big-screen televisions. Wall-unit furniture was among the product categories added.

Opened on Thanksgiving Day, 1995, the 51,700-square-foot, $4 million Tulsa location was Ultimate Electronics' biggest one yet. It had four auto sound rooms, five home-theater rooms, and at least 45 big-screen TVs. An in-house service department accommodated all products sold by Ultimate except computers (covered by a third-party service contract) and included repairs either under warranty or out of warranty.

During 1995 and 1996 Ultimate Electronics moved its two warehouses near Stapleton International Airport, its Wheat Ridge administrative offices, and its Thornton store to the abandoned 28-acre site of a former Thornton drive-in theater. Here the company built a 285,000-square-foot, $15 million complex, including a new headquarters and distribution warehouse, a service center, and a 40,300-square-foot retail superstore. The latter, which opened in April 1996, had five audio demonstration rooms, three home theaters, two cars on the showroom floor displaying the latest in mobile-audio technology, and a children's play area named "Kid City."

For the Colorado Rockies, the expansion major league baseball team that began playing in Denver in 1993, Ultimate Electronics sponsored an advertising display in the ballpark and player appearances. Popular manager Don Baylor became a spokesperson for the chain. In 1995, and again in 1996, the company ran commercial spots of Baylor to promote its Mitsubishi television products.

Ultimate Electronics' sales increased to $165.1 million in 1995 and to $251.8 million in 1996. Net income, which had been a record $4.9 million in 1995, dropped to $2.8 million, but this partly reflected a charge of nearly $1 million due to a change in the accounting method for preopening expenses. A decrease of comparable-store sales of 2 percent in 1996 compared with a 29 percent gain for such stores in 1995 was attributed to a sluggish retail environment, increased competition in the company's markets, and the opening of new stores within markets the company already served.

Ultimate Electronics adopted a shareholder rights plan in 1995 to discourage the possibility of a hostile takeover. The Pearse family owned about 46 percent of the stock in 1995. Long-term debt, chiefly to finance expansion, grew from $3.3 million at the end of 1994 to $33.7 million at the end of 1996.

1997 Acquisition of Audio King and Its Aftermath

By early 1997 Ultimate Electronics was operating 18 stores in six states. The company made its biggest expansion move yet in June 1997, snapping up Audio King Corporation in a deal valued at about $5.7 million. Like Ultimate, Audio King was a retailer specializing in the middle to upper end of the consumer electronics market. Based in Minneapolis, Audio King operated 11 stores: eight in Minnesota, two in Iowa, and one in South Dakota. It also owned Fast Trak Inc., the Midwest's largest independent audio/video electronics repairs service. Audio King reported a loss of $300,000 on sales of $65.6 million for 1996. Leading the newly enlarged company was Pearse, who remained chairman, and J. Edward McIntire, who was named CEO in August 1997. McIntire had been vice-president of operations, having joined Ultimate in 1995 from Standard & Poor's, a division of McGraw-Hill Cos.

During 1998, six of the Audio King stores were remodeled. Two of them were converted to the larger Ultimate Electronics format. (The largest Audio King unit had been 25,000 square feet in size, whereas the typical Ultimate Electronic/SoundTrack store encompassed 30,000 to 40,000 square feet.) Sales for 1998 jumped 10 percent, reaching $337.4 million, while the closely watched same-store sales figure was up 2 percent. Late in the year, the company shifted its merchandise mix. It got rid of most of its personal computer lines, which were generating little in the way of profits, in favor of an increased emphasis on such high-end products as high-definition television sets, DVD players, digital camcorders, and home theater systems. This overhaul paid immediate dividends. Through the second quarter of 2000, Ultimate Electronics enjoyed six consecutive quarters of same-store sales growth between 13 percent and 20 percent. Fiscal 2000 ended up being the company's best year yet, as net income surged nearly 74 percent to $14.6 million, while net sales amounted to $484.4 million, a 26 percent increase from the previous year. In July 2000 Ultimate expanded into Arizona via the opening of two stores in the Phoenix area. Helping to fund this expansion was a late 1999 secondary stock offering that raised more than $35 million. The proceeds also were used to pay down debt.

Early 2000s: Aggressive Expansion, Downfall into Bankruptcy

Ultimate Electronics launched an aggressive expansion program during 2000. By January 2004 the company had more than doubled in size, opening five new stores in 2000, ten in 2001, twelve in 2002, and seven in 2003. In addition to the aforementioned Phoenix, new markets established during this period were Oklahoma City, St. Louis, Dallas/Fort Worth, Kansas City, Wichita, and Austin. Further funding for this ambitious plan came from another secondary stock offering, completed in May 2002, yielding net proceeds of $84.8 million.

The timing for this expansion was inauspicious. The U.S. economy went into a prolonged slump, consumer confidence fell, and sales of consumer electronics dropped. Competition heated up, not only from arch-rivals Best Buy and Circuit City, but also from mass merchants such as Wal-Mart Stores, Inc. and Target Corporation, which began selling more consumer electronics gear. While the large number of new store openings helped propel Ultimate Electronics to double-digit growth in net sales through 2002, same-store sales fell 2 percent in both 2001 and 2002, a considerable cause for concern.

Ultimate responded during 2003 with a number of initiatives. The company dropped computer products from its stores altogether, converted the remaining Audio King outlets to the Ultimate Electronics brand, and launched several efforts to cut expenses. Despite these efforts, Ultimate suffered a net loss of $16 million for the fiscal year ending in January 2004. The company blamed the loss on continued high expenses, difficulties with a new $27 million management information system, which resulted in some items being out of stock during the all-important holiday selling season, and tough competition. Net sales grew only 1 percent for the year, while same-store sales fell 9 percent.

In January 2004 McIntire retired as CEO and was replaced by David J. Workman, who had served as president and chief operating officer since 1992. Workman placed further expansion on hold while trying to turn the company's fortunes around. Through the first nine months of 2004, however, Ultimate suffered a net loss of $31.1 million. Its cash was down to $1.9 million, suppliers began cutting off its credit lines, and it verged on the brink of bankruptcy. In December 2004 Mark J. Wattles, the founder and CEO of video rental giant Hollywood Entertainment Corporation, paid $1.9 million for a 10 percent stake in Ultimate Electronics. In mid-January 2005 he increased his stake to 31 percent, concurrent with the company filing for Chapter 11 bankruptcy protection. The holiday season failed to save Ultimate, as sales fell 8 percent in November and 18 percent in December. Various observers conjectured that the company had expanded too aggressively during an industry downfall and that the stores were too large to support a product lineup focused on the high end. Speculation about possible store closings began almost immediately. In any event, it seemed certain that Wattles, who was named chairman of Ultimate Electronics, faced a difficult turnaround task given the entrenched competition. Workman remained onboard as CEO, but Pearse resigned, along with the rest of the board of directors, some 36 years after founding the company.

Principal Subsidiaries: Fast Trak Inc.

Principal Competitors: Best Buy Co., Inc.; Circuit City Stores, Inc.

Chronology

• Key Dates:
• 1968: William Pearse and wife Barbara establish Pearse Electronics, Inc. and franchise a Team Electronics store in Arvada, Colorado.
• 1974: The founders abandon the franchise and begin operating the store as SoundTrack.
• 1976: The second SoundTrack store opens in Denver.
• 1993: The company changes its name to Ultimate Electronics, Inc., goes public, and opens its first outlets outside Colorado: two larger-format Ultimate Electronics stores in Utah.
• 1997: Ultimate acquires Audio King Corporation and its 11 stores in Minnesota, Iowa, and South Dakota.
• 2000: The company launches an aggressive expansion program, opening 34 new stores by 2004.
• 2003: The remaining Audio King stores are converted into Ultimate Electronics outlets.
• 2004: Ultimate posts a net loss of $16 million for 2003.
• 2005: Mark J. Wattles buys a 31 percent stake in Ultimate Electronics, which files for Chapter 11 bankruptcy protection.