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Ovation still standing: Electronics retailer faces tough decisions after Chapter 11

November 14, 2005

Best Buy now sells television sets that cost almost $10,000. Circuit City shoppers can pull a $400 DVD player off the shelves. Wal-Mart hawks "home-theaters-in-a-box."

Add it all up and it equates to a static-filled picture for Ovation Audio Video Specialists, the retailer of pricey electronic gizmos that filed for Chapter 11 bankruptcy protection last month.

"We're starting to see a diluting effect" as box retailers sell more highend merchandise, said Andy Willcox, president of the Custom Electronic Design & Installation Association, a trade group for companies that specialize in home cinema. "We're recommending that retailers focus more on services and the labor side of things."

That's exactly Ovation's plan. After 19 years in business, the Indianapolis company is adopting a three-prong strategy to return to financial health, President Gary McCormick said.

It won't be an easy trek back. The eight-store chain, which recorded $25 million in sales in its latest fiscal year, lists liabilities of $14.5 million compared with assets of $9.5 million. Its largest creditor, Old National Bank, is owed more than $9 million, bankruptcy filings show.

McCormick said the first order of business will be to turn the company's attention to something he believes it still does better than larger competitors-hooking up the wires behind those wall-size home theater systems.

"Ten or 12 years ago, we installed very little," McCormick said. "It was pretty much you put boxes in somebody's car. If it was big, you delivered it in a truck."

That doesn't mean Ovation shoppers won't be able to pick up state-of-the-art gear unavailable elsewhere-such as Sony Qualia and Pioneer Elite products. It just means McCormick will give an equal amount of attention to the installation side of the business.

And while customers may not notice much difference in the products on the shelves, they'll definitely notice fewer shelves.

Ovation now is in Indiana, Kentucky and Ohio. McCormick says he wants to scale back to five stores and to focus on just two markets, with one of them being Indianapolis.

"I want to assure our customers that we're solid here," said McCormick, who declined to discuss where he'll close stores.

Employees are going to feel the pain. When it entered bankruptcy, Ovation employed 161 people. McCormick said it needs to take a hatchet to the rolls to trim costs.

The skilled technicians that install the company's merchandise are vital to the new strategy, McCormick said. The sales staff also sets the company apart, he argued, by adding a level of knowledge not found at the company's competitors.

That leaves administrative staff-many of whom have worked for McCormick since he founded a predecessor company, Hi-Fi Buys, in Muncie in 1976-to bear the brunt of layoffs. McCormick declined to say how many would receive pink slips.

McCormick hopes the three moves-focusing on installation, closing stores, and laying off administrative staff-are enough to pull the company out of financial straits.

"This is not going to be a United Airlines deal," he said, referring to the Chicagobased company that has been stuck in bankruptcy more than three years. "We'll be in the black in December now that we've cut our costs so much."

Vendors are hoping the turnaround succeeds.

"Ovation has been a great business partner," said Jeff DeClue, Monster Cable Products' Midwest regional sales manager. The California-based company is owed $243,080, making it Ovation's largest unsecured creditor. "We hope to continue doing business with them."

Other creditors, such as Indianapolisbased Klipsch LLC and New Jerseybased Denon Electronics LLC, declined to comment.

Such manufacturers are rooting for Ovation's recovery, because they want outlets for their higher-end products, said Roger Heuberger, executive director of the Pro Buying Group. Ovation is a member of the group, a collective of 17 high-end electronics retailers that band together to get better pricing on merchandise.

"Manufacturers don't just want to sell $79 DVD players," Heuberger said. "That may be a suitable business model, but they need to sell the $299 models because that affords them more margin."

Those expensive models and brands, such as Runco, are available at only a few places in Indiana, including Ovation.

While big-box retailers are the headline reason for Ovation's financial stumbles, they're not the only one. The company overextended itself in 2004 and 2005 by opening stores in Fort Wayne and Cincinnati before getting out of leases for two underperforming stores in Louisville and Lafayette.

"Those old stores cost us between $15,000 and $20,000 a month for nothing," McCormick said.

The fact that most cars today come equipped with window-warbling CD players didn't help matters.

After nearly 30 years in consumer electronics, however, McCormick probably will stay afloat, competitors say.

"He's a smart operator and knows the business as well as anybody," said Mike Alley, CEO of Carmel-based Electronic Evolutions. "My speculation is he'll survive, but perhaps in a more limited scope."

Still, it won't be easy. The highest-end installations, those costing six figures, typically go to specialty dealers like Electronic Evolutions, not to retailers like Ovation. Ovation installations average $5,000 to $10,000, a market where the big-box players now compete.

"From an industry perspective, it's an extremely competitive marketplace, particularly in the space Ovation is in," Alley said. "They compete with the big-box retailers that are able to buy at very low prices because of their volume."

Best Buy made an aggressive move into high-end electronics in 2001 when it purchased Magnolia Home Theater, a California-based chain. Since then, it has opened a number of Magnolia stores inside existing Best Buy stores and used them to sell items that are more expensive than what's in their normal inventory.

In the past month, Best Buy opened its first two Magnolia stores in Indiana-one inside the Castleton Best Buy and one inside the Noblesville location.

McCormick predicted Magnolia's presence would be good for business by attracting more consumers to high-end merchandise. Others, however, see it differently.

"We're at the beginning of consolidation," said CEDIA's Willcox, who also owns Chicago-based ProLine Integrated Systems, a company that specializes in six-figure home theater systems. "There's going to be attrition. A lot of our members may end up working for Best Buy."
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