Compaq's First-Quarter Profit Plunges 96% Amid Inventory Buildup and Price Cuts

Strategic Insights -

Compaq Computer Corp.'s first-quarter profit declined by 96% due to a significant buildup in inventory and price cuts, which led to a surge in corporate customer purchasing. The company's net income fell to $16 million, or 1 cent per diluted share, from $414 million, or 27 cents per diluted share, in the same quarter last year. Compaq's inventory fell by 20%, or $314 million, from the fourth quarter, and the company expects its distributors to hold two to four weeks' worth of PCs by June.

Key Takeaways:

  • Compaq's first-quarter profit declined by 96% to $16 million due to inventory buildup and price cuts.
  • Net income fell to $16 million, or 1 cent per diluted share, from $414 million, or 27 cents per diluted share, in the same quarter last year.
  • Inventory fell by 20%, or $314 million, from the fourth quarter.
  • Compaq expects its distributors to hold two to four weeks' worth of PCs by June.
  • Sales rose 7.9% to $5.69 billion from $5.27 billion.
  • Gross profit margin narrowed to 17.9% from 26.9% in the year-ago quarter due to price cuts and competition in the server market.
  • Expenses, including cost of sales, selling, general and administrative costs, and research and development costs, rose faster than sales.
  • Analysts expect Compaq to turn in a stronger second half as inventories come under control and corporate and consumer demand picks up for the back-to-school and holiday seasons.
  • Compaq plans to unveil new products in the second quarter to boost earnings and manage inventory.
  • The company introduced several new DeskPro corporate computers Wednesday.

Statistics:

  • Net income: $16 million (DOWN 96% from $414 million)
  • Diluted earnings per share: 1 cent (DOWN 96% from 27 cents)
  • Inventory: fell by 20%, or $314 million, from the fourth quarter
  • Sales: $5.69 billion (UP 7.9% from $5.27 billion)
  • Gross profit margin: 17.9% (DOWN from 26.9% in the year-ago quarter)
  • Cost of sales: $4.66 billion (UP 21% from $3.86 billion)
  • Selling, general and administrative costs: $785 million (UP from $639 million)
  • Research and development costs: $245 million (UP from $189 million)

Sources:

  • Bloomberg News
  • Compaq Computer Corp.
  • First Call Corp.
  • IBES International Inc.
  • Loomis, Sayles & Co.
  • Wasserstein Perella Securities