COMPUSA PREPARING TO COMPLETE PURCHASE OF GOOD GUYS

Good Guys shareholders are scheduled to vote on CompUSA’s proposed $50 million acquisition of the chain on Dec. 18. Good Guys is expected to emerge as a somewhat autonomous chain, but with the strength of CompUSA’s buying leverage, CompUSA CEO Larry Mondry told us in an interview on Fri. Mondry declined comment on any planned personnel changes, but said that CompUSA will deepen Good Guys selection of “hot product categories” like LCD and plasma TVs.

“We believe we'll have the opportunity to broaden and deepen their mix because they've been put in situations where they've had to make financial decisions that didn’t allow them at times to have the optimal mix [of products] for their customers,” said Mondry, who replaced Hal Compton as CompUSA’s CEO last week. No decisions have been made as to whether Good Guys will resume carrying PCs, category it dropped several years ago amid a downturn in sales.

Indeed, many vendors tightened credit terms with Good Guys in recent months, something that’s expected to ease with the injection of new ownership, industry officials said. As if to underscore the potential to improve Good Guys financial plight, CompUSA parent U.S. Commercial Corp. said shareholders had approved a $15 million increase capital as part of a share restructuring. The money will be used to provide funding for the Good Guys acquisition and working capital. U.S. Commercial Corp. is part of Mexican billionaire Carlos Slim’s retail operations, which purchased CompUSA in 2000.

The ultimate fate of Good Guys under CompUSA’s ownership remains to be seen, but for now it will operate under CEO Kenneth Weller, whose contract with the chain extends through Aug. 2006, according to a proxy statement filed in advance of the shareholders meeting. Although Weller was granted options for 1 million shares of Good Guys stock under terms of an agreement signed in Aug. 2000, those will be cancelled once the merger is complete, SEC documents state. Other top- level Good Guys executives including CFO Thomas Herman and Vp Cathy Stauffer will receive severance equal to 12-18 months salary if they are dismissed without cause within 12 months of CompUSA’s completing the purchase of the chain.

CompUSA’s pursuit of the Good Guys began in July 2002 when U.S. Commercial Corp. contacted the chain. Discussions ended in Sept. 2002 after Good Guys, which had made progress in returning to profitability, dismissed a $2.25 per share offer as “inadequate,” according to the SEC filing. Talks resumed, however, in July after Good Guys hired Jeffries & Co. as a financial adviser. U.S. Commercial made a $2 per share offer in Sept., a bid that was later increased to $2.05 and coupled with a $5 million investment in Good Guys in the form of an unsecured convertible promissory note, according to the SEC filing.

In addition to addition to battling a struggling U.S. economy, Good Guys also was faced with declining same-store sales that would have “adversely affected” its ability to fund working capital, the SEC filing stated. Good Guys also hd “already tested” a possible sale, merger or strategic investment in the company and hadn’t reached an agreement, according SEC documents, which don’t identify potential suitors. Weller, however, had floated the idea of combining Good Guys with Ultimate and Tweeter to form a single national CE specialty chain, but discussions never got off the ground.

As it prepared to complete the acquisition of Good Guys, CompUSA also as added 1,600-2,000-sq.-ft, CE sections to 183 of its 226 stores in mid-Nov., CompUSA has been seeking out a niche between national powers Best Buy and Circuit City and a cadre of regional chains led by Ultimate Electronics and Tweeter. And while Home Electronics Div. Mgr. Henry Chiarelli maintains the chain isn’t seeking to go head-to- head with Circuit or Best Buy, it took an aggressive stance in Black Fri. promotional wars, carrying an Apex 43W analog rear projection TV at $699 and a 42W Daewoo plasma TV at $2,499.

But Chiarelli maintains that the low-end pricing was a one-shot opportunity designed to raise its profile in a new product category. While CompUSA had been testing the sale of CE goods including projection TVs and DVD players in more than a dozen stores for a year, it’s only in the past 6 months that it began coalescing around a CE strategy.

“From a positioning point of view, we don’t want to be duking it out with the Wal-Marts, Targets and, to some degree, the Best Buys and the Circuits,” said Chiarelli, a former RadioShack executive. “We're trying to find a space that a lot of regional guys are playing in like Tweeter, Ultimate and the Good Guys.”

Some of CompUSA’s competitors are skeptical of its new CE strategy. “It will be very interesting to see how they do,” Ultimate Electronics Pres. David Workman said. “Other companies have tried to copy other business model and have failed. It’s not an easy one to execute.”

For its part, CompUSA is carrying an assortment of 50-70 CE SKUs ranging from rear projection TVs and flat-panel displays from Hitachi and Philips to Wharfdale receivers, Harman International’s Infinity speakers, EchoStar and DirecTV satellite receivers and TiVo and ReplayTV PVRs. It also has an assortment of private label goods sold under the U.S. Logic brand including portable DVD players with 7” and 8” LCDs that are sold as entry-level products under similarly featured Audiovox models.

“We're trying to be meaningful to the partners we have,” Chiarelli said. “We have a very deliberate SKU selection that’s designed to help the customer understand the choices between good, better and best in each of the price categories. We have to go after the complex categories and stay away from the ‘consumer-friendly’ ones because I don’t think we can add any value there.”

In taking on complex product categories, CompUSA will stress home networking. At the start home network will be manifested in CompUSA’s packaging of A/V products. In-store displays for its flat-panel TVs, for example, contain signs listing recommended suppliers for wall mounts (Sonus), video stands (Bello) and remote controls (Sony, Sima and others). CompUSA also is conducting product seminars each week on Tues. and Sat. and offering a free service for setting home entertainment products.

“We're trying to tell the whole convergence story,” Chiarelli said. “We're taking some baby steps in the beginning, but as we get into next year, we'll start to get into more complex connectivity issues.”

While some manufacturers moved quickly to establish direct sales with CompUSA, others have been more cautious and are waiting to see if the chain can distinguish itself from Best Buy and Circuit City. “Right now we don’t feel that we have a lot to gain by selling them and we think that it could cannibalistic to our other business,” an executive at a major CE manufacturer said.

Mondry, however, said he was aware of vendor’s concerns, but maintained that they were misplaced. CompUSA’s strategy won’t be in “ the sweet spot of where our major competitors are,” Mondry said. “Is there some overlap or concern of those things by vendors? I'm sure there is, but at the same time we're not focusing in the same places that they [Best Buy and Circuit City] are.”

In making room for CE products, CompUSA was able to “keep most of its SKUs by changing “some product adjacencies,” Chiarelli said. CompUSA will eventually bring CE to all of its stores, but for now it hasn’t added the category to single-store markets where it’s “hard to get advertising leverage,” Chiarelli said. CE will expanded to “substantially the entire company in a big way” within 6-12 months, Mondry said. “It was our intention to get a majority of it done before Christmas, but there were some limits on time,” Mondry said.

In a setting course for CE at CompUSA, Mondry will likely draw on his experience at Highland Stores, a high- profile Midwest chain where he worked prior to its closing and his joining CompUSA in the early 1990s. “The key thing for us is following our customer which means making sure we have leading edge technologies and that we ultimately sell solutions,” Mondry said. “That means we don’t look at our customers transaction-by-transaction, but rather look at them in a relationship.”