What can a PC company do when it guesses wrong on inventory and sees hefty losses ahead due to its low-margin business model? Blame some of its woes on Fed chief Alan Greenspan.
That's what eMachines tried to do yesterday when it told Wall Street it would miss estimates by a mile. EMachines, which sells inexpensive PCs, said it will report second quarter loss of 30 cents a share to 33 cents a share, excluding charges. Sales will be in the $115m to $125m (£76.27m to £82.90m) range.
Earnings tracking firm First Call projected a loss of a penny a share. The pain will extend at least through the third quarter.
To the many investors who were skeptical about eMachines from day one, the profit warning isn't that surprising. What was interesting was CEO Stephen A Dukker's novel explanation.
"Consumer demand for personal computers in the second quarter has been significantly below market expectations. The drop in that demand has coincided with concerns about interest rates, the state of the economy, and the growing instability of the public securities markets," he said.
Since Greenspan is the guy pulling the trigger on interest rates, the economy and market volatility, it's surprising Dukker didn't mention the Fed chief by name. We can see consumers second-guessing home purchases, or a new car, but an eMachines PC is hardly a Mercedes.
Yes, PC demand -- especially on the low-end -- is sluggish, but the fundamental flaws in eMachines' business are more to blame than macroeconomic trends. EMachines is a low-margin enterprise focused on the commodity driven low-end of the PC market. A lot of things have to go right for eMachines to make a buck.
Here are the real reasons behind the eMachines meltdown:
Inventory problems: EMachines couldn't have guessed that May and June sales would have been twice as bad as the usual seasonal slowdown. But if the company wasn't dependent on retailers to push its products it would have been able to adjust quicker. EMachines doesn't deserve the 'e' because you still can't buy one of its PCs directly through its Web site. EMachines is more of a traditional box maker than a Web-savvy direct vendor such as Dell. Dukker said eMachines has five to six weeks of inventory in the channel.
EMachines also has an inventory glut because it has new products coming in the third quarter. It has to move what it hasn't sold -- $199 PCs anyone?
Thin margins: EMachines' goal is to sell PCs on the cheap and make money through advertising and Internet service bounties. The problem is margins. In eMachines' first quarter, gross margins were a paltry 5.8 percent -- and that was good news. Component shortages, consumer demand and memory prices all have a magnified effect on eMachines. EMachines is gaining market share and losing money.
Retailers have tough comparisons: Dukker said on a conference call yesterday that the company will have to sweeten the pot for its retailers to push eMachines PCs. Best Buy, Circuit City and others have tough sales comparisons from a year ago. These retailers need to push more expensive items to keep the growth coming. That means a Best Buy salesman is more likely to push one of Apple's iMacs over an eMachines PC (with good reason too). Dukker said eMachines has reworked programs to make retailers more motivated to sell its PCs.
Stiff competition: Compaq and Hewlett-Packard have been very aggressive on the low-end of the PC market. The difference? Compaq and HP consider PCs priced between $600 and $1,000 cheap. That's a high-end PC for eMachines. According to Dukker, HP and Compaq also have bloated inventories. Misery loves company, but HP and Compaq are diversified and may be able to make up the difference elsewhere. EMachines can't.
Diversification: The competition drives home the other key point -- eMachines isn't diversified. Dukker said the company will move into the Internet appliance market with Microsoft and America Online, but Gateway and others are out in front already.
Sometimes you just have to wonder ...
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