Flawed Expansion Strategy Blamed Partly for Ultimate Electronics Bankruptcy

Ultimate Electronics’ plunge into bankruptcy comes less than a year after the chain embarked on an ambitious expansion plan that lacked the infrastructure to support it, industry executives told Consumer Electronics Daily Thursday. Ultimate executives didn’t respond immediately to requests for comment.

The chain -- which emerged from its first bankruptcy in 2005, after Mark Wattles bought 32 of 62 stores -- pulled back on its growth plans last summer after adding four locations in Massachusetts and three in New York state. Wattles had focused part of his expansion strategy on scooping up former Circuit City locations. He had waged a proxy battle for control of Circuit City in 2008 and gained inside knowledge the stores’ financial performance. Wattles once blamed the “aggressive growth strategies” of previous management of Ultimate for the chain’s first bankruptcy filing (CED Feb 17/05 p1). In his hands, the 46-store Ultimate chain had about $400 million in annual revenue, bankruptcy court documents said. It ran a single distribution center in Denver.

Wattles “ended up with a real estate-driven expansion strategy, and that’s probably where he went wrong,” a CE executive said. “He had this knowledge of Circuit City stores and their performance, and he was constantly shopping for locations somewhat irrespective of the infrastructure costs of placing those. That’s how you end up with hodge-podge expansion strategy built around what real estate was available. He had certain terms and conditions that, if met, motivated store openings, rather than what was logical for the business."

Vendors said the bankruptcy filing late Wednesday took many of them by surprise. Several CE suppliers reported stopping shipments to Ultimate on Monday amid “chatter” about the chain’s financial struggles. Wattles typically played things close to the vest, keeping an inner circle of former Hollywood Video executives and rarely disclosing financial data outside the group, executives said. Hollywood Video, founded by Wattles, was acquired by Movie Gallery in 2005 and liquidated last year.

Wattles was expected to meet Thursday with the chain’s regional managers, sources told us. Jim Pearse, senior vice president of merchandising and son of the chain’s founder, William Pearse, resigned his post this week, they said. Pearse was named Ultimate’s president in 2008 but was demoted to senior vice president last year.

Whether Ultimate emerges from bankruptcy a second time will hinge on Wattles’ willingness to continue investing in the company, speculated executives we polled. They noted that Wattles has lost several costly bets. Besides his unsuccessful proxy bid for Circuit City, Wattles also invested in Tweeter Home Entertainment, which liquidated, and Blockbuster, which filed for bankruptcy protection last fall. According to court documents, Wattles owned 71.25 percent of Ultimate, while Hewlett-Packard had 25 percent and CEO Bruce Giesbrecht, 3.75 percent.

Ultimate will use the bankruptcy process to “streamline operations,” including by closing “underperforming” locations and negotiating “more favorable” leases to help improve the company’s profitability, Giebrecht said in court documents. He blamed the bankruptcy filing partly on vendors’ refusal to provide the chain with open credit. Vendors have agreed to re-open credit lines if Ultimate pays for orders placed before the bankruptcy filing, Giebrecht said. Ultimate has a $150 million loan and security agreement with GE Capital maturing June 23, under which it has borrowed $64.8 million, court documents said.

Vendors we polled traced some of chain’s troubles to its return to selling PCs and the addition of major appliances, which posed a tactical challenge for a chain with only one distribution center. “There is nothing wrong with bringing in new categories, but they have to be the right ones,” a CE executive said.

Court documents said Ultimate’s top unsecured creditor is Video Product Distributors (owed $6.14 million), followed by Valassis Communications ($5.6 million) and a roster of CE and major appliance suppliers. They include distributor New Age Electronics ($5.4 million); Sony ($4.75 million); GE Money Bank ($3 million); Monster ($2.37 million); Klipsch ($1.87 million); Mitsubishi ($1.6 million); Toshiba ($1.46 million); Haier America ($1.37 million); Whirlpool ($1 million); Omnimount ($913,074); GE Appliances ($890,517); Yamaha ($772,451); Definitive Technology ($642,077); Hewlett-Packard ($521,187); and Denon ($358,854).