CellStar Corp. said it has a tentative Fortune 500 buyer for its kiosk business located in 347 Sam’s Club stores nationwide, the expenses of which led to the company’s disappointing first-quarter results.
The investment community had estimated CellStar’s net income would be at least $5 million for the first quarter ended Feb. 29. It had been $5.1 million, or 28 cents per share, the same time a year earlier, and $7.6 million in the fourth quarter ended Nov. 30.
But first-quarter net income came in at $700,000, or 4 cents per share, due primarily to the increase in operating expenses associated with the Sam’s Club operations, said Alan Goldfield, CellStar’s chairman and chief executive officer.
The company said it knew the Sam’s phone centers would not be immediately profitable, but profitability was coming more slowly than hoped. A big push to have plenty of Sam’s centers operating in time for the Christmas/Hanukkah season last December translated into higher-than-expected advertising costs in addition to employee costs for overtime and sales incentives.
On the positive side, activation income increased 52.8 percent during the first quarter and residual income increased 10.3 percent. But at the same time, expenses increased from $17.5 million in first quarter 1995 to $28.9 million.
Expense isn’t the only reason CellStar wants to sell, said John Bain, CellStar’s director of investor relations.
“We’re finding that companies we want to do business with, at the wholesale level, have a problem with Sam’s Club competition. And the opportunity is so great for us in wholesale right now, it makes sense to refocus on the growth engine that originally drove this business-wholesale,” Bain said.
Sam’s Club is a division of Wal-Mart Stores Inc. CellStar has a five-year contract through 1999 to operate communications centers in Sam’s stores nationwide.
At the Sam’s booth, CellStar sells phones from various manufacturers and activates service for one of the two carriers in the market. Activation contracts are exclusive and do not allow CellStar to activate service for the competing carrier.
Since CellStar is bound to 22 such exclusive activation contracts throughout the country, sale of the communications centers is a complex matter, Bain said.
“It’s hard to imagine a buyer who would not have conflicts somewhere around the country,” Bain said. “This may appear to be a straight-forward transaction, but we are not expecting a definitive agreement anytime very soon.”
For example, there could be a conflict if AT&T Wireless Inc. wanted to buy the Sam’s Club business. AT&T and Southwestern Bell are the two cellular operators in Dallas; CellStar has an exclusive activation contract with Southwestern Bell in that Sam’s Club market.
“There is no discussion of price or terms at this time because it all depends on working out so many things,” Bain said.
CellStar is a public company located in Carrollton, Texas, just north of Dallas. It was formed in 1981. It is owned about 41 percent by the public, 37 percent by Goldfield, 12.2 percent by Audiovox Corp. and 3.6 percent by Motorola Inc.
Richard M. Gozia recently was hired as the company’s new chief financial officer, executive vice president and director. Gozia formerly was an executive with pay-per-view provider SpectraVision Inc.; he replaces longtime CFO Ken Sanders, who resigned earlier this year.
CellStar buys phones from more than 50 suppliers, but primarily from Motorola, Ericsson Inc., Nokia Mobile Phones and NEC Corp. It distributes the phones in the United States, Latin America, Hong Kong, Singapore, Malaysia and the Philippines.
