HES Presents Q4 Outlook, Reasons for Optimism

Before presenting the financial outlook for a fourth quarter that coincides with an economic crisis, Home Entertainment Source (HES) executive director Jim Ristow told dealers it's not time to panic.

He quickly added that it's also not a time for "false optimism."

The specialty electronics retail channel will be down in the high single digits, "probably 7 or 8 percent," Ristow told dealers in the 500-plus member buying group during its "Q4 Webinar."

"I think some of our markets will be down more than others, but I suggest you plan on being down 10 to 15 percent," Ristow said, citing predictions from industry experts.

That was the gist of Ristow's advice: plan for the worst, tighten your belts as much as possible and you'll come out on top.

"This is actually not a bad thing. Now is a chance to make our companies stronger. We're going to come out stronger."

Potential Circuit City Closings Create Opportunity

The credit crunch, which Ristow said is making institutions so reluctant to extend credit that "banks are afraid to lend money, even to other banks," will affect HES dealers' competition more than themselves.

"Weaker dealers around you will go out of business," Ristow said.

He raised the possibility that Circuit City stores may close in many markets. The significance, he said, is that if the country's No. 2 electronics retailer (behind Best Buy) goes out of business, "it's billions of dollars of consumer business that has to go somewhere."

He suggested one of three scenarios will likely play out:

1. Circuit City can get a boost from its reported plan to close the stores, liquidating merchandise to stock the remaining stores. He doesn't think this scenario is likely to work, suggesting it's more of a measure to stave off trouble until after the holiday shopping season.
2. Circuit City will wait until after the holiday shopping season and file for Chapter 11 bankruptcy, get a bridge loan and come out a different company. "Most think this isn't an option given the current credit market."
3. Somebody buys Circuit City after its Chapter 11 filing, and it emerges restructured with far less stores.

The trend though, Ristow said, isn't for companies to bounce back effectively after bankruptcy. Tweeter Newco, which recently replaced CEO George Granoff with "chief restructuring officer" Craig Boucher, is in the same boat, according to Ristow.

While the faltering of far-reaching dealers like Circuit City and Tweeter could create more business for HES stores, they might create challenges in the short-term. The beleaguered dealers might lower prices to "predatory" levels, Ristow suggested.

"Everybody will have to keep a close eye on what they're doing."

Optimistic Outlook

Good news regarding the holiday season comes out of the Consumer Electronics Association, which predicts a 3.5 percent increase in holiday electronics shopping versus last year.

"This means there actually could be a holiday season after all," Ristow quipped.

Ristow offered dealers these reasons to be optimistic.

• The upcoming analog-to-digital transition will provide a boost.
• The federal government is considering another stimulus package that could spur spending.
• "Staycation," also known as cocooning, seems to be a growing trend that HES dealers could benefit from.
• If competition in their market goes out of business, they may be the ones left standing to pull in business.
• It's a good opportunity to innovate, get back to basics and re-learn how to run lean.

Finally, Ristow gave these suggestions to HES dealers on how to "come out on top" after the economic crisis.

Tighten belts — "Look at places to cut costs. I suggest inventory. It's time to do whatever you can to liquidate that inventory you have in stock. Consolidate brands—Be more important to fewer brands."

Move to JIT — Shifting toward a "just in time" inventory model is the way to go.

Leverage promotions — He encouraged dealers to use HES financing programs and direct mail, plus the ones provided by manufacturers. "It's time to use all the buying group's resources." (At fellow buying group Home Theater Specialists of America's dealer summit last week, executive director Richard Glikes emphasized the same point.)

Use instant rebates — "They're here to stay for box stores. They're here to stay for us."

Be open — "Put your pride in the back storage room. Call in [to HES] and get a fresh set of eyes on your business. Now is the time to really work on your business."