High Inventories Spell Chaos for Apple as Economy Chills

Gatewayis warning on Wednesday that they will miss 4th quarter earnings in a big way has galvanized the financial analystsi forecasts: Things are going to get worse for PC manufacturers before they get better, especially for Apple.

The inventory gluts at Apple and Compaq have set the companies up for even more pain than the average PC vendor, as PC demand wanes.

According to a C/NET News article, "Market researcher ARS reports Apple is sitting on 11 weeks of inventory and Compaq on 10.5 weeks, well above the industry average. Hewlett-Packard sells to the same market but apparently has done better at keeping its inventory under control. Generally, companies seek to keep inventory at four weeks or below."

The article continues, "Apple and Compaq saw huge (inventory) jumps from September to October: 5.7 weeks to 11 weeks for Apple and 4.5 weeks to 10.5 weeks for Compaq. By comparison, HP rose a more modest 3.5 weeks to 5.6 weeks during the same period, according to ARS."

As announced by Steve Jobs in September, Apple is planning to take a major earnings hit this quarter in order to liquidate the backed-up inventory quickly instead of letting it linger for months. The strategy is to get back on track in just one quarter, a daunting task in the best of times.

Instead it appears that Appleis inventory problem may be worse now than it was in September. C/NET claims, "sources close to dealers and distributors report little change in Appleis inventory levels," through October.

With the economy slowing and consumer confidence falling, Appleis bloated back log of Cubes and Power Macs could jinx earnings and alter Cupertinois product introduction strategy well into 2001.

Gateway reported a 30% dip in sales over the Thanksgiving weekend compared with last year. PC Data, a market research firm, says consumer PC sales are off about 25% in the week before Thanksgiving. Gatewayis CFO, John Todd is predicting "an aggressive price war" early next year.

DPD Intellect, another market research firm, reports that Appleis sales are off 37% in September and October from last autumnis level.

The extra-weak PC demand wasnit widely expected when Mr. Jobs announced Appleis push to clear backed-up inventory in September. Although it should be noted that in recent years PC sales usually pull back in the September-October period by about 20 to 30%. The difference this year is the lack of a demand bounce back around Thanksgiving.

Some analysts have suggested that PC demand in the U.S., where most homes already have a PC, may be reaching a saturation point as CPU MHz boosts —the traditional driving force behind PC sales — increasingly make little performance difference to the average user. The only solution may be time, expansion into new geographic markets and innovative new products that free PC users from their desktop chain and ball.

For other stories regarding Appleis stock activity, visit our updated Apple Stock Watch Special Report.

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