Audio King Corporation

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Audio King Corporation

3501 South Highway 100
Minneapolis, Minnesota 55416
U.S.A.
(612) 920-0505
Fax: (612) 920-0940

Division of Ultimate Electronics, Inc.
Founded: 1953
Sales: $65.6 million (fiscal year ending June 30, 1996, as
Audio King Corporation)
SICs: 5731 Radio, TV & Electronics Stores; 7699 Repair
Shops & Related Services, Not Elsewhere Classified

Audio King Corporation, which operated high-end consumer electronics specialty stores and the Midwest’s largest independent audio/video electronics repair service, was purchased by Ultimate Electronics, Inc. in 1997. The two regional marketers merged to keep a footing in the $70 billion industry which was dominated by giant mass merchandisers Best Buy Company and Circuit City Stores. Ultimate Electronics, Inc. operates businesses under the names Ultimate Electronics, SoundTrack, and Audio King.

Hi-Fi Company Branches Out: 1950s-80s

Audio King, founded in 1953 by Albert C. Kempf, initially sold cameras as well as audio products. Operating from a single Minneapolis location, the business went on to build a reputation among audiophiles and other seekers of high fidelity equipment. Sales grew to around $1.6 million by the mid-1970s. When Randel S. Carlock became a partner in the company in 1977, he pushed for a broader range of products and additional stores. By the time Carlock bought out Kempf in 1985, Audio King was a chain of seven stores. The company further expanded its business with the purchase of an audio service center in early 1986. Sales for fiscal 1986 were about $10.4 million.

Image Retailing Group, Inc., a holding company formed in 1985, acquired Audio King for about $2 million in September 1986. The company planned to add similar consumer electronics specialty stores and open additional Audio King outlets. In rapid order, Audio King expanded outside the Twin Cities metropolitan area, opening stores in Rochester and Mankato, Minnesota, and Sioux Falls, South Dakota.

Audio King lured “discriminating” home electronics customers with its limited distribution, brand name products, and professional service. Its principal vendors included Alpine Electronics of America, Inc., Bang & Olufsen of America, Inc., and Yamaha Electronics Corporation. Through its Audio Video Environments unit, the company offered custom design and installation of home entertainment systems. Audio systems, burglar alarms, and cellular phones for automobiles and recreational vehicles were sold and installed at two service locations. A merchandise clearance center sold trade-ins and floor samples, and customer insurance claims were handled by an insurance replacement division.

In May 1987, the privately held company announced plans for a public stock offering. At the time of the sale, Carlock held 25 percent of Image Retailing stock and served as president and chief executive officer. Image Retailing secured $3.2 million through the sale of 800,000 common shares, but the offering brought in less capital than the company had expected. The consumer electronics industry, which had been experiencing rapid growth, began to slow down about the time Image Retailing took the company public. The stock dropped to $3.50 per share and then fell to $1 per share when the stock market crashed in October.

The consumer electronics market was hit by plummeting sales growth in the late-1980s. Audio King had opened another store in November 1987, but flat industry sales forced the company to hold back on further expansions plans. Sales were up by 33.4 percent to $15.9 million in 1988, but net income fell by 90.5 percent to only $8,000. The company improved its 1989 numbers by drawing in more first-time customers with the addition of popular brand name products such as Sony televisions. Audio Video Environments’ custom design service and the Fast Trak unit repair service also helped boost performance. Net income rebounded to $122,000.

Top consumer electronics specialty retailers were luring in customers with the promise of exciting and entertaining shopping environments. Image Retailing planned to exploit that tactic by renovating and enlarging some of its existing stores. In 1989, a prototype Audio King was introduced. The store featured a BMW equipped with a $7,000 car stereo and alarm system, a home theater demonstration room with an array of large screen televisions and speakers, and listening rooms with state-of-the-art audio equipment.

Continuing Pressure on Retailers: Early 1990s

In March 1990, Audio King President H. G. (Gary) Thorne succeeded Randel Carlock as president and chief executive officer of Image Retailing. Carlock moved to the newly created position of chairman of the board. The company was nearing the completion of its $2 million store remodeling program, but the depressed retail environment hurt profitability and net income slumped again in fiscal 1990. On a brighter note, Audio King was named one of the country’s top 10 audio/video retailers by Audio Video International magazine, and the company had added another store, bringing the number of retail stores to 11.

Michigan-based Highland Superstores, Inc. pulled out of Audio King’s primary market area in 1991. Highland’s 1990 Twin Cities-area sales were approximately $45 million, while its chief competitor, Bloomington, Minnesota-based Best Buy, Inc., had area sales of about $140 million. By contrast, Audio King’s total sales for 1990 were $22.3 million. According to an article by Dan Wascoe, Jr., Best Buy, Montgomery Ward’s Electric Avenue, Sears’ Brand Central, Dayton’s electronics departments, and Audio King would be among those competing for Highland’s former customers.

A crucial part of Image Retailing’s plan to remain competitive in the consumer electronics market was to acquire other high-end specialty stores. In May 1991, Image Retailing announced a proposed merger with Sound Advice, Inc. The 18-store Florida retailer of middle-to high-end electronics had average store sales of $5.4 million or more than double that of Audio King, which had average store sales of $1.9 million. According to a May 1991 article by Sally Apgar, Carlock saw the merger as an opportunity for Audio King to increase its financial and marketing strength, while continuing to distinguish itself from the discounters. But the merger failed to materialize, and Audio King continued to be Image Retailing’s only chain of stores.

The company’s master plan was faltering. According to a 1992 article by Marc Hequet, not only had consumer electronics acquisition opportunities dried up, but Audio King had failed to build ample sales growth from its traditional customer base. Under a new plan, the “promoting specialist strategy,” Audio King continued to emphasize professional service but modified its high-end image via increased advertising, expanded mid-priced product lines, and more revamped stores. To accommodate increased inventory, the company upgraded its warehouse and ordering systems.

Image Retailing Group, Inc. changed its name to Audio King Corporation in 1992. CEO Gary Thorne said in a March 7 Star Tribune article, “We have operated our stores for 39 years with the Audio King name, and we believe that name awareness will help our stock in the public market.” The stock had been trading around the $2 mark.

In fiscal 1992 the company expanded one store. Three stores which had either provided excess market coverage as other stores were expanded or could not be expanded themselves had been closed. The total number of Audio King stores was down to nine. A private stock sale brought in more funds for the expansion and remodeling of existing stores. Audio King began reaping some success from its efforts: net income nearly doubled, and its stock price rose by 213 percent during the calendar year.

Competition Heats Up: Mid-1990s

Audio King continued to switch existing stores to the larger format, expand its product offerings, and increase advertising expenditures. The company launched its first television ads in 1993 in anticipation of the entry of Circuit City Stores, Inc. into the Twin Cities market. The Richmond, Virginia-based retailer had been adding about 60 stores per year to its chain, while Best Buy was adding about 45. The Audio King showroom opened in Des Moines, Iowa, in 1994, was the first new store added in several years.

Circuit City differentiated itself from other consumer electronics discounters by promoting the quality of its product and service in addition to pricing. Tony Carideo wrote in April 1994 that this positioned the company directly against the much smaller Audio King: “Thorne does, in fact, anticipate some margin squeeze, estimating that about 20 percent of the company’s mix—primarily in its Sony and RCA lines—is vulnerable to competition. These products represent about 15 percent of sales, he said, and 10 percent of earnings.”

Audio King marked its fourth consecutive year of growth in 1994: net sales were up to $45.8 million, and net income was $637,000. In 1995, the company opened another new store in Iowa and announced plans to replace its oldest store, in Edina, Minnesota, with its largest store to date. Sally Apgar wrote, “This will be the flagship of the chain’s 11 stores and will feature interactive displays ranging from a home theater demonstration to cars rigged with the latest audio and security products.” Audio King had been using these marketing tools from the beginning of the decade, but discounters had begun to add similar displays.

Sales continued to rise, but net income held about even in 1995. The situation worsened in 1996 when the company reported losses of $251,000 on revenue of $65.6 million. Audio King contributed the losses to lower than expected sales and gross margins in the expanded stores. A drop in electronics prices, a dearth of new products, increased competition, and decreased consumer spending added to the stress on the company’s profits.

Audio components and systems, which continued to be sold primarily on a limited distribution basis, contributed 31 percent of net sales for fiscal 1996. Automobile audio products, which were sold on both a limited and broad distribution basis, brought in 24 percent. Video products—color televisions, big screen televisions, video cassette recorders, camcorders, and digital satellite systems—which competed directly with department and chain stores as well as electronics superstores, produced 35 percent of net sales. Customer service and repair accounted for the remaining 10 percent. Nine of the 11 Audio King stores had been converted to the new format by fiscal 1996.

Audio King, faced with sliding consumer electronics prices, cut its workforce from 400 to 360 to lower costs. However, the company continued to struggle with flat sales, falling earnings, and a depressed stock price during the first half of its 1997 fiscal year. Thorne predicted better days for the company and the industry with the introduction of new products such as Digital Video Disc (DVD) players. Audio King was among the first to begin selling the high-priced technology which produced top-notch sound and images.

New Ownership for the Future

In March 1997, the company announced that it had agreed to be acquired by Colorado-based Ultimate Electronics, Inc., a 1,200-employee, home entertainment and consumer electronics retailer operating 18 high-end stores and six service centers in six western states. The merger talks had actually begun nearly a year earlier, in May 1996, when William J. Pearse, Ultimate chairman and CEO, contacted Carlock. A wave of consolidations had hit the consumer electronics industry as smaller specialty retailers were banded together in an effort to survive in the highly competitive market.

Pearse and his wife, Barbara, began the business as a Team Electronics franchise operation in 1968. In 1974, they changed the name to SoundTrack and opened additional audio specialty stores in Colorado. They added products and capitalized on the surge in sales of VCRs and CD players in the 1980s. In 1993, the company went public under the name Ultimate Electronics, Inc. The inflow of cash allowed Ultimate to open a new generation of stores called Ultimate Electronics and extend the business outside Colorado.

Ultimate then moved to expand existing outlets. “We’ve had phenomenal success with the new [larger] stores,” said Pearse in a June 1997 Star Tribune article by Janet Moore. “Basically, the new stores were designed to be upscale electronics superstores with a large selection of audio and video, including computers.” Ultimate planned to bump the Audio King outlets up to the larger format.

As a regional retailer, Ultimate faced the same market woes as Audio King. Giant competitors and slow industry sales contributed to a drop in earnings in 1997. While sales climbed to $261 million, income fell to $0.8 million from $2.8 million the previous year. According to the Moore article, analysts said that to survive the new company would have to continue appealing to consumers seeking the newest products while drawing a larger consumer base with competitive pricing. In line with that philosophy, Pearse had years earlier founded the Progressive Retailers Organization (PRO), a group of upscale companies which joined together to boost their buying power.

The merger, valued at about $5 million in cash and stocks, was completed in June 1997. Pearse, named chair and CEO, held about 40 percent of the stock. Top Audio King executives relinquished their management posts. The newly combined company operated 30 stores in nine central region states and had annual sales of $306.3 million in the fiscal year ended January 31, 1998. Six Audio King stores were remodeled during the year. Two of the six, those located in Iowa, reopened as Ultimate Electronics stores.