CATALOG STOCKS RISING – slowly

At first glance, the numbers indicate that direct marketing stocks are on a roll: up 64.1% over the past 12 months, much higher than Standard & Poor’s retail sector. But catalog stocks been suppressed for so long that there’s nowhere to go but up. And some catalogers are still scratching their heads as to why their stocks aren’t doing better.

While investors traditionally looked at stocks in terms of price-to-earnings (P/E) ratios, such has not been the case with Web stocks – largely because very few dot-com companies have earnings to examine. So investors determine the outlook of Web stocks such as behemoth Amazon.com by what its sales might be in the future, explains, Kevin Silverman, an analyst with Chicago-based investment bank ABN-AMRO.

In the past, investors were willing to overlook the earnings performance of Web companies in hopes of a big payoff down the road. But judging by the recent performance of some Internet stocks – as of late June, for instance, Amazon.com was trading at $44 a share, down from a 52-week high of $113 in December – investors are losing patience.

Theoretically, this should benefit publicly traded catalogers; they already have the direct marketing expertise and infrastructure in place, which translates (at least most times) into earnings rather than losses. That advantage, however, has been slow to translate to higher catalog stock prices.

“We don’t understand what’s happening with our stock price,” says Brian Harris, chief financial officer for Weehawken, NJ-based Hanover Direct. For its fiscal year 1999, the company’s Hanover Brands catalog division – which includes home decor books The Company Store and Turiya, specialty-size women’s apparel book Silhouettes, and men’s clothing title International Male – showed a profit of $10.4 million, a $23 million turnaround from its loss the previous year. Including its fledgling fulfillment division, the company still managed to pare its net loss from $25.6 million in 1998 to $16.3 million.

But at press time, Hanover’s stock price was languishing at $1.63 per share, off its 52-week high of $3.88 in December ’99 – three months before the company reported its improved financials. “We had a tremendous swing in profitability, yet our stock price went down,” Harris says.

Sector by sector

Of course, a cataloger’s market sector plays a crucial role in determining the stock price as well. Several of Hanover’s catalogs, for instance, sell apparel, and that’s a market segment that has taken a beating of late. Sure, there are some successes, such as Hingham, MA-based cataloger/retailer Talbots, Warren, PA-based Blair Corp., and Sandpoint, ID-based Coldwater Creek, but more are struggling.

According to ABN-AMRO’s Silverman, the stocks of the nine apparel catalogers he follows were down 13.5% over the 12-month period ended June 5. “Apparel stocks have not been a commodity,” he notes. “In apparel, there are so many issues that could negatively affect sales, such as fashion and color trends.”

For instance, Dodgeville, WI-based apparel marketer Lands’ End’s stock price fell 24.7% over the past 12 months, to $32.38 in June from its 52-week high of $83.50. Although Lands’ End reported e-commerce sales of $138 million for the fiscal year ended January 2000 – more than double the $61 million in Web sales the previous year – some observers worried that the cataloger, which had cut catalog circulation 9%, may have been relying a bit too heavily on the Web to deliver profits. If that is a reason for the company’s drop in stock price, that would tie in with the mistrust investors now seem to feel toward e-commerce on the whole.

The b-to-b advantage

But not all catalog stocks are suffering from the taint of e-commerce. In fact, the Internet has been downright hospitable to some business-to-business catalogers, namely computer resellers such as PC Connection and CDW Computer Centers. For the 12 months ended June 5, Vernon Hills, IL-based CDW outperformed the S&P 500 by a whopping 151.9%. What’s more, the cataloger’s June 5 stock price of $123.19 was near its 52-week high of $131.88.

The stock price of Merrimack, NH-based PC Connection really took off this spring, doubling from the low $20s in January to its 52-week high of $48.88 in April. (Because ABN-AMRO does not follow PC Connection, the company does not appear on the accompanying charts.) Strong Web sales and the company’s outbound sales program deserve much of the credit.

Despite the lumps that some direct marketing stocks have taken, they are a good buy, insists Kenneth Gassman, an analyst with Richmond, VA-based Davenport & Co. In fact, Gassman says we could see a spate of catalog company acquisitions by some of the dot-com players – if the Web pure-plays can keep afloat long enough. “It’s a natural evolution for the e-commerce companies to buy catalogers, but that’s not happening because many of these e-tailers are running out of cash,” he says.

In the age of multichannel marketing, catalogers are well positioned to adapt to e-commerce, and most already have – which could boost catalog stock prices in the future, Gassman says. “E-commerce is generating a whole new surge of customers for direct marketing companies,” he says. “Catalog companies are managed by merchants who understand retailing, including e-tailing, and catalogers have the fulfillment and logistics infrastructure necessary to support e-commerce.”

As evidenced by the recent print catalog mailings of i.merchants such as gardening product marketer Garden.com and high-end gifts seller Red-Envelope, and by several recent catalog acquisitions, such as that of Micro-Warehouse, by private equity firms, catalogs and catalogers are slowly commanding more respect. The catalog industry has done a credible job of communicating with and selling to customers via multiple channels. Now if only the industry can communicate and sell that message to Wall Street.

Investors love the solid fundamentals at Irvine, CA-based Newport Corp., which manufactures and markets instruments for fiber-optic and semiconductor companies. For the quarter ended March 31, Newport’s net sales were $45.6 million, up 55% from a year prior. Even better, net income totaled $3 million, up from $914,000. Investors have rewarded the b-to-b supplier with a whopping 1,305% increase in its stock price over the past 12 months.

Targeting small and midsize businesses – an ever-growing niche – has benefited CDW Computer Centers; its stock has soared 178.4% over the past 12 months. The marketer now has to worry about the slew of competing computer companies – including market leader Dell – that are determined to claim their portion of the market.

Could it be that exiting the catalog business has helped the stock price of Damark International? In January, the Minneapolis-based company said it would close its $292.8 million discount electronics and general merchandise catalog business to focus on its profitable $138.2 million membership services business, which will be renamed Insyte, and its $17.1 million e-commerce business. Damark’s stock price is up 165% over the past 12 months.

On the flip side, the stock price of Washington-based U.S. Office Products Co., which sells supplies to corporate, commercial, industrial and educational customers, plunged 80% over the past year. The company lost of a number of large office supply accounts in North America, and for the year ended April 29, sales were down 6%, while the net loss rose 3%, to $202.9 million.

New York-based teen apparel marketer Delia’s has had difficulty managing its multichannel business. Its stock price fell more than 77% over the past 12 months. Although first-quartersales grew 17.3%, to $49.1 million, its net loss climbed to $8.7 million, including $5.3 million in losses at its Web subsidiary iTurf.

And after years of growth, Hingham, MA-based women’s apparel marketer J. Jill Group hit a bump in the road. In ’99 it folded the Nicole Summers book and home decor title People Places Things, the better to focus on its core brand. In fact, it opened the first of several planned J. Jill stores as well. But investors didn’t reward the moves: The stock price plummeted 58% over the past 12 months.

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