Compaq reclaims PC sales crown from rival HP

Houston-based Compaq walloped HP during July, an important sales month for both companies and the first period testing new back-to-school PCs introduced in June, according to July sales figures from market researcher PC Data.

Compaq's retail resurgence came after the company slashed prices to regain market share at the expense of profits, analysts said. Compaq sacrificed profits at the same time rival HP emphasized them, PC Data analyst Stephen Baker said. Compaq kept its average selling prices lower, around $812 in July, while HP's moved up to $950 last month from $854 in June.

"That certainly would help explain why HP lost some of the market share they did," Baker said.

For Compaq, the gain in market share is potentially the best news since HP stole Compaq's perennial PC retail sales crown in February.

Compaq had 40.9 percent market share in PCs sold in retail stores, compared with 32.9 percent for HP, according to PC Data. A month earlier, HP had nearly 40 percent, compared with Compaq's 30.6 percent. In terms of revenue in July, Compaq led HP 40.6 percent to 38.2 percent.

With margins razor-thin, the roughly $140 price gulf likely means bigger profits for HP than for Compaq, even though HP ceded market share in the process--profits the company may not be able to afford to lose, warned Technology Business Research analyst Lindy Lesperance.

Compaq's consumer operating profit--what it makes, minus expenses--fell to a dismal 1.9 percent in the second quarter, down from about 4.5 percent in the first quarter and 3.8 percent a year earlier. Lesperance warned this low-profit trend could continue unless Compaq adjusts its sales strategy.

Signs of trouble emerged in the second quarter when Compaq's consumer division saw revenue rise by 32 percent but profits decline by about a third. The consumer division pulled in revenue of $1.6 billion, with operating income down $15 million to $31 million.

"One of the things they talked about in the (second-quarter) earnings conference call was a lot of price competition, where their competitors overstocked the sales channel, and one of those was definitely Emachines," said Lesperance.

In an interview last month, Mike Larson, senior vice president of Compaq's consumer division, said pricing action taken in May and June, and particularly an unexpected sales slowdown in May, hit his group hard. Compaq's own figures had sales in April up 39 percent year-over-year; in May, up 4.2 percent; and in June, up 35.4 percent.

"Compaq may have responded in its pricing to beat out Emachines and also ended up beating out HP," Lesperance said. "Having a big spike in market share with profit going down is clearly a strategy for buying share." The downside "to buying share is profit," she added.

Reclaiming profit
In the short term, Compaq pays a profitability penalty but could recover that down the road, Baker said.

"Probably the first thing they need to do is regain some of that share back," he said. "That's pretty important, especially since it's a two-horse race, primarily. That preserves their shelf space and gives them a chance later on of going in there and raising the prices a little bit."

In the battle of new consumer PC models, Compaq has an early lead over HP. In mid-June Compaq unveiled two new consumer PC lines: the Presario 5000 and 7000 series. The following week, HP also launched new consumer Pavilion models.

In form and appearance, new Compaq and HP models share striking similarities. Both Pavilion and Presario PCs offer colorful panels that can be swapped to match customers' decor; customizable keyboards for accessing email and Web sites and for controlling advanced PCs; built-in CD caddies; and features such as CD-RW and special audio jacks for MP3 players.

But Compaq bested HP in print and TV ads and slashed prices to meet earlier cuts made by Emachines.

This showed in robust sales of Presario 5000 5BW120 and 5BW130 models, Baker said. Compaq also gained share by clearing out old Presario 7594 stock.

"If you look out there at what's moving, it tends to be the really low-end stuff, and that's not necessarily good," Baker said.

The W120 sells for $649 and the W130 for $849.

Gartner analyst Kevin Knox said Compaq's larger problem is that it is focused too much on market share and hardware sales and not enough on true profitability and intangibles such as service and training.

"Gateway is an extremely interesting contrast," Knox said. "On the consumer side, 40 percent of the revenue is coming from non-PC-related sales. So they're selling a ton of (Internet service provider) services and support options, a ton of stuff that's not even hardware. That's a pretty impressive number, and that's where you're going to make a ton of money. That's where the margin is going to be."

Compaq's beyond-the-box sales doubled in the second quarter from a year earlier to about 20 percent of revenue. But Lesperance said that is not enough, particularly given Gateway's strengthening position selling to consumers.

Training programs offered online and Gateway's nearly 300 Country Stores yield gross margins in the 75 percent to 80 percent range, Lesperance said.

"Beyond the box is the true profitability picture, where Gateway is and Compaq is not," she said.