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'Stuffed' Compaq brings lower than expected Q1 results

'Stuffed' Compaq brings lower than expected Q1 results

Blaming fierce price competition in North American markets, Compaq Computer issued a warning last week that its first-quarter 1998 financial results will fall short of expectations.

Revenues for the quarter will be about equal to the $US4.8 billion reported in the same quarter last year, while earnings will roughly break even, the company said in a statement.

At least one analyst said Compaq's announcement is further evidence that PC makers last quarter pushed more computers into their distribution channels than they were able to sell in an effort to bolster sales figures.

Compaq's revenues for the previous quarter were about $US7.3 billion, 34 per cent higher than the company expects to report in the first quarter of fiscal 1998. Earnings for the first quarter of 1997 were $US387 million, or $US1.36 per share.

"Middle management is sometimes motivated to push product into the channel to meet short- term goals, and this has a tendency to damage longer-term goals," said analyst Roger Kay of International Data Corp.

Compaq's distribution channels are currently "stuffed", meaning the company must reduce shipments this quarter, which in turn will bring in less revenues, Kay said.

The situation is compounded by the fact that PC makers including Hewlett-Packard, IBM and Compaq have been moving towards more efficient production models that stress low inventories and fast turnaround, he said.

Compaq is rumoured to have more than a month's worth of product in its distribution channels, while an ideal turn rate would be about two weeks, Kay added.

Compaq acknowledged it has more inventory in its distribution channels than is required to meet the goals of its streamlined distribution model. The company is implementing price reductions and promotions in this quarter and the next to reduce that inventory, Compaq said in a statement.


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