Computer products retailer CompUSA Inc issued a warning Thursday that, based on lower-than-expected sales for the first nine weeks of its third quarter ending March 27, it is expecting to post break-even earnings, before charges. Including the impact of its IT infrastructure initiatives and increased spending on its internet unit – which together should amount to $0.05 per share – the company is projecting a loss for the quarter.
The news comes as a big blow for the Dallas-based company, as analysts surveyed by First Call were looking for earnings of $0.21 per share. The company had said in early February that it expected same-store sales and profit margins to rebound in the current quarter. Making matters worse, CompUSA says that, based on current business trends, it also anticipates a loss for the fourth quarter. Profit in the second quarter had amounted to $0.17, a penny above Wall Street expectations.
A percentage decrease in comparable store sales for the third quarter is now being projected in the high single-digit range – they were down 4.7% in the second quarter – and gross margins for the quarter will be approximately 13.0% to 13.2%. Declining average selling prices have become a disturbing trend for the retailing giant and gross margins have followed them steadily south. For the second quarter they stood at $13.5%, down from 14.7% in the year-ago period.
The extra third quarter IT costs stem from a seven-year outsourcing deal with IBM worth an estimated $200m that will see Big Blue take over all of the company’s application development and data services operations. The other additional spending comes as the company is realigning its organization to make its direct sales operations – both mail order and internet – a stand-alone business. An extra $2m to $3m per quarter is expected to be channeled into the CompUSA Direct unit to prepare it for independence. The company is currently mulling several possible plans, including a spin-off, which a spokesperson admitted is an attractive option given the current valuations of internet- related stocks. Meanwhile, CompUSA shares dropped $1.435, or 15%, to a 52-week low of $8.125 on Thursday.
