NEW YORK-Fast on the heels of resignations by two chief financial officers and a director this year, CellStar Corp. recently braced the investment community for a first-quarter earnings report “significantly lower than analysts’ estimates.”
Securities analysts had estimated that first quarter net income for the cellular products wholesaler/retailer would be in the range of $5.7 million to $6.5 million, for an average of $6.1 million, or 32 cents per share, according to a release issued by CellStar. Net income estimates for the full current fiscal year are between $29.1 million and $31.3 million, for an average of $30.6 million, or $1.58 per share.
“Due to continuing delays caused by systems problems which continue to plague the company,” the CellStar announcement said it hopes to file its Form 10K report with the Securities and Exchange Commission within the permitted five-day extension period from the April 15 deadline. CellStar, which is based in Carollton, Texas, had a first quarter that ended Feb. 29.
“Our financial systems have failed to keep up with our explosive growth,” said Terry S. Parker, president and chief operating officer of CellStar. “We obviously are concerned about the situation and have accordingly undertaken steps not only to identify the problems, but to come up with long-range solutions that can be implemented as soon as possible.”
Last month, CellStar retained consultants from the information technology and business process re-engineering groups of KPMG Peat Marwick LLP, and from JD Edwards, which supplies its software, to identify problems and implement solutions.
“CellStar is only attributing its troubles to poor financial controls and inventory management systems,” said Robert C. Damron, research analyst for McDonald & Co. Investments, Cleveland. “If that were the only problem, why would it have lost two CFO’s and a director within a few months? There probably are more underlying problems that have not yet become apparent.”
Early this year, long-time CFO Ken Sanders resigned. His successor, Gerard Howe, quit after just a few weeks on the job, Damron said. At the same time as CellStar alerted analysts to pending release of poor results, it also announced that Richard A. Harris, one of its outside directors, had submitted his resignation effective immediately.
“The company had an extremely ambitious expansion in the last 18 months, opening numerous retail outlets, as well as a geographic expansion internationally,” said Matthew S. Robison, equities analyst at Montgomery Securities, San Francisco. “It is well-positioned in a lot of growth markets, but it is a question of whether and how long it will take to get the proper resources-staffing and information systems-in place.”
Montgomery Securities has alerted its customers to the problems, and given CellStar a “neutral” rating.
“It is unclear whether CellStar can resolve the situation within the next few quarters,” Robison said. “The dislocation was pretty significant. It has gone from meaningful positive earnings numbers and is now trading at about six times its fiscal year 1995 earnings. For our industry, that’s a vote of lack of confidence.”
CellStar is an independent, non-carrier company that distributes Motorola, Nokia, NEC, Ericsson and OKI brand cellular phones and accessories in the United States, Latin America, Hong Kong, Singapore, Malaysia and the Philippines. Motorola Inc. has an equity interest of approximately $15 million in CellStar, according to Damron.
He and Robison said slowdowns in Motorola cellular product sales may have had an indirect impact on CellStar’s quarterly results.
