3Q Sales Grow at the Expense of Profits

For business and computer catalogers, increased sales came at the expense of profits during the third quarter.

Among the 14 publicly traded companies tracked for Catalog Age by investment bank Tully & Holland, 86% reported third-quarter sales gains. For the same period of last year, only 57% had grown sales.

The increased marketing costs involved in gaining revenue ate up many companies’ bottom lines, however. A scant 43% of the catalogers tracked reported improved profits or narrower losses, compared with 86% a year ago.

But Jim Adams, managing director of Wellesley, MA-based Tully & Holland, says that the hit of profits isn’t cause for concern. If anything, it suggests that business conditions are improving: After months of cost reductions, catalogers and their customers are spending again. The increase in catalogers’ marketing expenditures is “necessary because you’re constantly trying to freshen your house file,” Adams says.


Black Box Struggles

Quarter ended: Sept. 28

The numbers: Pittsburgh-based Black Box Corp. suffered double-digit declines on both sides of the ledger. Net income for the provider of networking products and services fell 20%, to $12.1 million from $15.0 million a year earlier. Revenue decreased 21%, to $129.3 million from $163 million last year.

The skinny: Free cash flow — cash provided by operating activities minus net capital expenditures, plus proceeds from option exercises — was $20 million, compared with $19 million last year. Black Box used the cash to fund a $17 million stock repurchase; reduce debt by $2 million; and pay dividends of $1 million on its stock.

Insurance Claim Boosts Tessco’s Bottom Line

Quarter ended: Sept. 28

The numbers: Hunt Valley, MD-based Tessco Technologies benefited from a $3.1 million insurance payment following an October 2002 public water-main break that severely damaged the wireless-equipment marketer’s central sales, support, data, and phone center. The payout helped raise income 96%, to $2.3 million from $1.2 million last year. Revenue increased as well — 16%, to $81.9 million from $70.4 million a year ago.

The skinny: Tessco reopened its damaged global logistics center in December. The rebuild expanded Tessco’s distribution center. During the rebuild, Tessco had opened a 500,000-sq.-ft. logistics center in Reno, NV. Tessco will use both facilities for distribution, sales, and marketing functions.

Systemax Emerges in the Black

Quarter ended: Sept. 30

The numbers: Port Washington, NY-based Systemax turned around a third-quarter loss of $727,000 in 2002 to post net income of $1.9 million for the third quarter of 2003. Operating income increased from $1.6 million to $3.6 million (including a $1.3 million reversal of liabilities no longer required as a result of the settlement of litigation). Net sales for the multititle manufacturer/marketer of computer, warehouse, and office equipment increased 9%, to $405.0 million from $372.1 million. Sales in North America grew 14%, primarily in the consumer sector. Excluding the impact of a weaker U.S. dollar, European sales decreased 8%.

The skinny: Systemax says it plans to use its Websites to reduce costs and monitor conditions in all its markets.

Sport Supply Group Sinks into the Red

Quarter ended: Sept. 30

The numbers: Revenue at Sport Supply Group, which sells sporting goods to schools and institutions, inched upward 1%, to $25.9 million from $25.5 million the previous third quarter. But whereas the Dallas-based company had netted $22,225 for the third quarter of 2002, it lost $290,257 for the comparable quarter of 2003. It plans to sell certain operations to reduce its debt and operating expenses and return to profitability.

The skinny: In September, Sport Supply Group began closing some of its team dealer stores. The September sale of a Little Rock store resulted in a year-to-date aftertax charge to earnings of $289,000.

New Markets Cost Moore Medical

Quarter ended: Sept 27

The numbers: The 3% sales gain reported by New Britain, CT-based Moore Medical was below its expectations. And net income fell 25%, in part because of what Moore calls “aggressive pricing” associated with entry into newer specialty markets. But the cataloger of medical supplies says it saw encouraging sales gains in some of the new markets, such as podiatry and corrections. All told, Moore netted $484,000 on sales of $38.1 million. For the comparable quarter of 2003, it had posted net income of $643,000 on sales of $37.0 million. Higher costs related to pension expenses, professional service fees, and increasing property and casualty insurance premiums also eroded the bottom line.

The skinny: Moore did manage to whittle its sales and marketing expenses for the quarter to $2.68 million from $2.69 million a year earlier.

Safeguard Boosts Sales at NEBS

Quarter ended: Sept. 27

The numbers: New England Business Service (NEBS), whose multiple titles sell business stationery, promotional apparel, and other supplies for smaller companies, had a whopping 30% revenue increase — the largest of all the companies tracked. But the increase came from a business that doesn’t have a print catalog: business forms manufacturer/marketer Safeguard Business Systems, which Groton, MA-based NEBS acquired in June. Excluding Safeguard, sales were relatively flat. What’s more, direct marketing sales fell 3%, to $61.6 million from $63.8 million. And net income for the quarter dropped 17%, to $5.8 million from $7.0 million last year. Included in the quarter was a $502,000 charge related to restructuring and integrations costs.

The skinny: Based on better-than-expected results from Safeguard, NEBS has raised 2004 sales expectations 25%-30%, to $690 million-$715 million.

12 months prior Current quarter Improvement (decline) 12 months prior Current quarter Improvement (decline) Info as of quarter ended P/E (as of 11/21/03)
BUSINESS-TO-BUSINESS Henry Schein $759,073 $892,718 18% $39,228 $44,347 13% 9/27/03 21.87
Moore Medical Corp. 37,032 38,102 3% 643 484 (25%) 9/27/03 N/A
MSC Industrial 201,741 208,767 3% 8,952 13,691 53% 8/30/03 33.84
New England Business Service 128,851 167,288 30% 6,974 5,812 (17%) 9/27/03 21.16
Sport Supply Group 25,544 25,897 1% 22 (290) NM 9/30/03 N/A
Systemax 372,139 405,011 9% (727) 1,907 NM 9/30/03 39.49
Tessco Technologies 70,376 81,928 16% 1,169 2,289 96% 9/28/03 22.20
Transcat 14,445 11,896 (18%) 509 355 (30%) 9/27/03 11.07
COMPUTER PRODUCTS Black Box Corp. $162,731 $129,268 (21%) $15,035 $12,051 (20%) 9/28/03 19.73
CDW Computer Centers 1,150,970 1,222,785 6% 54,894 44,604 (19%) 9/30/03 28.56
PC Connection 341,039 349,420 2% 2,206 2,180 (1%) 9/30/03 24.38
PC Mall 230,076 231,996 1% 764 703 (8%) 9/30/03 19.20
Programmer’s Paradise 15,798 18,355 16% (210) 333 NM 9/30/03 88.23
Zones 102,365 112,697 10% 124 134 8% 9/30/03 N/A
MARKET INDICES Dow Jones Industrial Average 20.8
Standard & Poor’s 500 Index 29.96
Notes: Price-to-earnings ratios are from various sources
NM = not meaningful NA = not available
Source: Tully & Holland

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