You can't blame investors in Ultimate Electronics (NASDAQ:ULTE) for feeling like they've got whiplash. The stock has been gyrating wildly lately: up 50% one day, down 54% the next, up 22% the day after that. While some might call it a roller-coaster ride, I prefer to liken it to a company's death throes, and with this high-end electronics retailer we may just be witnessing its last, final gasps for solvency.
Ultimate Electronics requested an extension to file its quarterly report, noting that because of weak holiday sales, it is probably going to be in default on several loans. If it couldn't get a waiver from its lenders, it was going to "explore all of its strategic alternatives." Ultimately, bankruptcy might be the choice for Ultimate Electronics.
The holiday sales season has been particularly hard on the company. Intense competition from Best Buy (NYSE:BBY), Circuit City (NYSE:CC), and Tweeter Home Entertainment (NASDAQ:TWTR); discount retailers Costco (NASDAQ:COST) and Wal-Mart (NYSE:WMT); and even specialty retailers such as Conns (NASDAQ:CONN) has cut into sales for Ultimate Electronics, which tried to jump into the big leagues by going on an acquisition spree and opening a slew of big-box stores. Over the past four years, it has opened or acquired 33 stores, nearly doubling its size to 64 stores in 14 states.
Part of Ultimate Electronics' problem stems from those stores. While the company's average size of 30,000 square feet is common for such retailers, industry leader Best Buy is counting on future growth coming from stores about two-thirds that size and in smaller markets. And because all but one of Ultimate Electronics' stores is being leased, they are eating up cash. Ironically, should Ultimate Electronics file for bankruptcy, its stores might be an attractive asset to someone precisely because of their size.
As of Oct. 31, the retailer had reported a nine-month net loss of $31 million with less than $2 million in cash. It also reported an 8% drop in same-store sales for the quarter, on top of a 12% drop last year. The lower sales and revenue potentially put the company in violation of its loan covenants at the same time its lender is asking for substantial additional cash reserves through January.
The stock has whipsawed lately. Just two weeks ago, it shot up 50% on the news that the company was trying to stabilize its shaky base with sales of plasma TVs to home builder Pulte Homes for a promotion. On Monday, it fell 54% on the news of Ultimate Electronics' delay in filing its financials. And just yesterday it jumped back up 22%, well, just because.
Delayed filings are nothing new for Ultimate Electronics, which earlier this year disappointed investors when it delayed its reports because of a computer program glitch. Computer problems can be remedied. Declining sales, hemorrhaging cash, and mounting debt are more intractable. Ultimately, investors may decide it is more prudent to put their money elsewhere and save roller-coaster rides for the amusement park.
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Best Buy and Costco are both Motley Fool Stock Advisor recommendations.
Fool contributor Rich Duprey rides roller coasters with his eyes closed and a white-knuckle grip. He owns shares in Wal-Mart but does not own any of the other stocks mentioned in this article.
