Apple's shares fell from a 52-week high of 47.3123 to 41.375 by the close of trading due in part to concerns the company will have a hard time managing inventory of its popular iMac computer. Some 15.4 million shares traded hands today, making Apple's stock one of the 10 most actively traded stocks in the U.S. market.



New iMacs come in five colors.

More than 100,000 of the original iMacs may be still out there, which may require further price cuts than Apple has already made. Apple has to make way for new models of the iMac coming out now. The current quarter is also historically a slow one for PC manufacturers.

Excluding a one-time gain, the company earned 78 cents per share in its first fiscal quarter, still easily topping Wall Street expectations of 70 cents per share. (See related story).

At least five Wall Street analysts remained upbeat enough about the company to reiterate "buy" ratings on Apple, and one influential bank, Donaldson, Lufkin & Jenrette, upgraded Apple to a "buy" from a "market perform."

In spite of the strong earnings, though, Rich Gardner, an analyst at Salomon Smith Barney in New York, today cut his rating on Apple shares to "neutral" from "buy." Broader market concerns contributed to the downward slide, analysts said, as well as profit taking after the stock's long upward run prior to the earnings announcement, but Gardner's downgrade also had a significant impact on the stock today.

In a research report issued today, Gardner estimated retailers may still have between 100,000 to 200,000 of the 519,000 iMac computers shipped during the quarter left to sell. Without more significant price cuts, the systems may not sell well enough for the company to reach more optimistic earnings estimates in the high end of 55 cents per share and up.

Gardner said retailers are averaging five weeks of iMac inventory, and that number would have been higher had CompUSA and BestBuy not engaged in a quasi-price war. There wasn't a significant boost in demand until the iMac was dropped to $1,099, and the new models may experience a slackening of demand until priced at or below that point, he hypothesized.

"We were disappointed in Apple's unwillingness to reduce iMac prices during the December quarter," Gardner said in the report. "During the seasonally weaker March quarter, the iMac will have even more intense competition from Intel-based PCs since Intel appears to have over-produced Celerons which must now be sold at reduced prices during the March quarter."

"It's going to get more challenging in 1999," said Kimberly Alexy, an analyst at Prudential Securities, who rates Apple "hold." "I don't see how this gets better from here."

Adding to Apple's inventory challenge is the fact that it's now selling the same computer in five colors: strawberry, blueberry, tangerine, grape, and lime. Forecasting how many of which model to produce without having too many leftover systems in unpopular colors could pose a problem for the company.

Some analysts strongly discount worries over inventory management, and have even raised earnings estimates today.

"We think that Apple's momentum this year continues to be strong," said Lou Mazzucchelli at Gerard Klauer Mattison, who raised his price target on Apple shares to $60 from $55 and upped earnings estimates as well.

"I don't think the channel was stuffed," Mazucchelli said. "Apple stopped production three weeks before the quarter ended" as it transitioned product lines and business management software, he said. "There would've been a gaping hole had Apple not put stuff into the channel."

For the most part, inventory of the multi-colored iMac's hasn't arrived at dealers yet, and neither have the new Power Mac G3s, he said, all indications that inventory levels are normal. "We think the product transition worked fine," Mazzucchelli stated.

Peter Godfrey, chief executive of computer retailer Micro Warehouse, said: "Between the new iMacs and lower prices for the old ones, we're going to see an expansion of the market that will take care of anything left in the pipeline." Macwarehouse is currently selling the oldest model of the iMac for $999, down from the original price of $1,299.

Apple CFO Fred Anderson attempted to address analyst concerns yesterday in a conference call.

Currently, the new iMacs are sold in "five-packs, one in each color," he said, which will minimize Apple's risk in getting stuck with unpopular colors, though not the dealer's. Early research shows that blueberry and grape are the two most popular iMac colors right now; are dealers going to get stuck with a stockpile of lime?

Eventually, Apple expects to be able to take orders for individual colors--a harbinger of a model in which Apple moves completely to a configure-to-order model of manufacturing similar to direct vendor Dell.

"There's always potential forecast risks," Anderson cautioned. Still, analysts were told the company's goals are to maintain four to six days of inventory on its books, which would still "place us in an industry leading position," he noted.

As for iMac pricing, Anderson said: "Certainly we view the iMac family as our growth product family, so we need to be aggressive going forward in terms of pricing," while declining to state when or how aggressive Apple would get.

Bloomberg contributed to this report.