How Did Santa Carry All Those Computers?

They flew out of stores--and retailers made money

For many retailers, this Christmas didn't live up to expectations. Unseasonably high temperatures put the kibosh on holiday sales of coats, sweaters, and gloves. And without an unlimited stock of Furbies, toy stores saw below-average traffic, too.

But the folks selling personal computers had no such complaints. Business was good--and continues to be, as consumers seek out post-Christmas bargains. After all, with prices starting as low as $399 and a blizzard of mail-in rebate coupons, who can resist?

LOTS OF TRAFFIC. As a result, market researchers such as PC Data Inc. are looking for a strong December to produce a record volume year for computer retailers. The Reston (Va.) firm says U.S. unit sales at yearend will be up more than 20%, to 7 million.

The question is: At these prices, did retailers make money? Analysts and dealers say yes. Look at Best Buy Co. and Circuit City Stores Inc. The two largest national electronics chains announced record sales and earnings for the quarter ended in November, and analysts are predicting that December revenues will be up 7% in both categories. In fact, overall, this year's retail PC sales are expected to match the $8.2 billion set last year. "There's simply more traffic than last year," says Harold F. Compton, executive vice-president at CompUSA Inc., the Dallas-based superstore chain.

The traffic rose as the prices fell: In November, the average selling price of a PC without monitor dropped below $1,000 for the first time, driven by low-end computers priced at less than $599. The volume is "awesome," says Stephen A. Dukker, CEO of emachines, a Fremont (Calif.) startup that makes computers selling for as little as $399. Since the company started shipping in mid-November, it has sold 200,000 computers, Dukker says, and could have sold twice that number with more production.

In the past, falling prices have squeezed retailers: They somehow had to work off bloated inventories of higher-cost machines. But this year, they reined in stocks and say they got reasonable terms from PC makers, which have a big interest in keeping PC stores whole. And then there are all those rebate coupons, which allow stores to advertise superlow prices--but still sell at retail. It's up to the consumer to collect the difference from the manufacturers. A system from Packard Bell NEC Inc. with a monitor and a color printer, for example, listed for $1,399. But it could be advertised as a sub-$1,000 PC because of its five separate mail-in rebates: $100 each from Circuit City, NEC, and Internet service provider EarthLink Network, plus $50 each on a printer from Lexmark International and a built-in disk drive from Imation.

What's more, stores are willing to accept relatively low margins on computers--in the 6%-to-8% range--because they can make up profits from higher-margin software, monitor upgrades, and extended warranties.

The bargain-PC trend is great for appliance merchants such as Circuit City and Best Buy. The cheapest PCs are often bought by first-timers, who are more likely to shop where they buy other appliances rather than at a specialized computer store. "They're making a family type of purchase rather than a home-office purchase, and Best Buy and Circuit City are their kind of store," says Douglas A. Gordon, an analyst at NationsBanc Montgomery Securities Inc. in San Francisco. "At Circuit City, it's the strongest piece of the store."

The trend, however, is not good news for the likes of CompUSA, which is already struggling to make a comeback from the 65% drop in earnings it suffered in its quarter ended Sept. 26. That hit was caused by lower prices, a slump in sales to businesses, and the purchase of its biggest competitor, the Computer City chain, from Tandy Corp. In trying to consolidate and pare overhead, CompUSA shuttered 55 Computer City stores. All told, the deal slashed earnings by 5 cents a share, or $4.5 million, and the company says that it expects profits to be off by 1 cents or 2 cents in each of the next three quarters as well.

Still, CompUSA volumes are up, Compton says. As for dollars, he is waiting for the end of the year. "Traditionally, Santa always comes, but sometimes I hold my breath right up to the end," he says. Then again, there's always January, which brings in the buyers holding out for even lower prices. And, once again, they are finding them.

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