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How Mark Wattles Fixes Broken Retailers

Part 2 of a series. (See Part 1, "Will Ultimate Electronics' Wattles Get Circuit City?")
If Mark Wattles pulls off a deal to acquire Circuit City, we can make some educated guesses at how the company might right itself by looking at his last two ventures -- Hollywood Entertainment and Ultimate Electronics. Both suggest that Wattles would be likely to close lots of stores, focus merchandise on a few key categories, and create a plugged-in salesforce to match.

CircuitsWattles started Hollywood Video in Portland, Ore., in 1988, modeling stores on Wayne Huizenga's Blockbuster chain and competing aggressively for the best locations. Hollywood grew, then got off track after the disastrous $100 million purchase of According to the Portland Oregonian, Hollywood shares plummeted in late 2000, then recovered as Wattles restructured its debt and refocused the company on brick-and-mortar stores.

Said the Oregonian's Andy Giegerich: "He is a man who seems impossible to typecast. He's a devout Mormon who surfs. He's a no-nonsense businessman who loves 'Dumb and Dumber.' He's a video/DVD/video game magnate who doesn't play video games or consider himself a film buff.

"Yet he's also extremely honest, a rarity in the entertainment industry and a trait that came in handy when market forces led to Hollywood's financial retooling from the ground up."

In 2005, Wattles quit amid a three-way takeover battle for Hollywood Entertainment -- archrival Blockbuster and Leonard Green & Partners lost out to a smaller competitor, Movie Gallery. Hollywood (2000 video stores and 700 Game Crazy stores by then) sold for $1.25 billion and Wattles turned his attention to Ultimate Electronics, a bankrupt Thornton, Colo., electronics retailer with 65 stores in the Midwest and Southwest. Ultimate grew rapidly through acquisition, then choked on new-store growth and slumping sales after 9/11.

In 2006, Alan Wolf of This Week in Consumer Electronics called Wattles' work with Ultimate "one of the most dramatic rescues in CE retailing." Fifteen months after Wattles bought 32 stores out of bankruptcy, jettisoning the rest, Ultimate was showing positive comps and a focus on televisions, especially HDTV:

"But Wattles is certain of an eventual payout thanks to the advent of HDTV, which is what attracted him to Ultimate in the first place. 'Given my movie background, I believed HDTV would see significant growth. It's a phenomenal product, the greatest to come along in a long, long time. There's no comparison to anything in the past. Consumers aren't complaining about the price differential, and the CE industry will see the largest growth in its history as we enter the next phase and consumers start putting them in ancillary rooms. This is not just a three- to five-year trend.' And despite past performance, he said, 'Ultimate Electronics is in the sweet spot.'

"Indeed, Wattles' turnaround strategy is deceptively simple: refocus on HDTV. 'At the core, we're a TV company,' he explained. 'I'm a firm believer in the category-killer concept, whether it's ice cream or videos or TV. We've got the best TV selection -- two to three times that of Best Buy or Circuit City -- and the difference is that HDTV is our business, rather than just a piece of it.'"

Stores under various names (SoundTrack in Colorado, Audio King in Minneapolis) were rebranded as Ultimate Electronics, which launched a clever ad campaign in late 2005, imploring customers to "Technologize Responsibly" by buying at a store that knew its stuff.

"If the guy who sold you your car stereo isn't old enough to drive, you're intechxicated," the ads said. "If you buy electronics where you also buy bulk lunchmeat, you're intechxicated. If your electronics salesperson uses 'like' like 20,000 times a minute, you're, like, intechxicated."

That $200 million blank check offering by Wattles Acquisition Corp. is described as a war chest for future acquisitions in "consumer products, retail or entertainment industries worldwide." The company's directors include Wattles/Ultimate Electronics insiders Alexander Bond, Timothy Price and Thomas McKivor; Mark Stephens of Challenger Capital Group; David Jacquin of North Point Advisors; and Edward Shapiro of PAR Capital Management. Bond's name was withdrawn from Wattles' original board slate, leaving him free to engage in an acquisition of the company.

Ultimate Electronics CEO Bruce Giesbrecht told the Denver Business Journal that before the retailer was purchased by Wattles Capital Management in April 2005, Ultimate Electronics suffered from years of declining sales "caused by problems in merchandising, marketing and store operations. Since then, we have fixed the product assortment, rationalized the pricing and promotional strategies, and rebuilt a sales culture in the stores."

Why not do the same for Circuit City? It's a crazy idea, but it just might work.

Part 2 of a series. (See Part 1, "Will Ultimate Electronics' Wattles Get Circuit City?")
Image: Circuit board by Mathias Mildenberger, via Flickr CC 2.2

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