Financial Update: For B-to-B Catalogers, Cost Cuts Lead to Small Victories

The publicly traded business-to-business and computer marketers tracked by Catalog Age continued to rein in costs in the second quarter, largely by tightening circulation.

So it’s no surprise their bottom lines fared much better. Just two of the 15 marketers, Port Washington, NY-based Systemax and Rochester, NY-based Transmation, ended the quarter in the red. And while 33% of the catalogers reported a weaker bottom line for the second quarter of 2002 than for that of 2001, last year 60% of the marketers tracks had been in the same position.

All of which points to an imminent recovery — possibly by the fourth quarter, contends Jim Adams, managing director at Wellesley, MA-based investment bank Tulley & Holland, which tracks the companies for Catalog Age.

But marketers should be ready to increase circulation again. “Catalogers need to have prospects in the pipeline so that when a recovery does happen, they’ll see growth,” Adams says. Indeed, for many of the catalogers, profit improvements came at the expense of revenue: 60% of the marketers tracked reported lower or flat sales for the quarter.

CATALOG AGE’S SPOTLIGHT ON SECOND-QUARTER FINANCIALS

Sport Supply Group is in the black

Quarter ended: June 28

Sport Supply Group, which sells athletic equipment to schools and other institutions, suffered a 4% decline in second-quarter net revenue, to $26.8 million from $28.0 million last year. The Farmers Branch, TX-based company blames the revenue shortfall on cuts in school and youth organization funding. But its operating income for the quarter was $513,000, an improvement from the $266,000 operating loss posted for the second quarter of last year. By consolidating several plants, exiting certain unprofitable product lines, and improving product sourcing, Sport Supply Group added to gross profit margin: As a percentage of net revenue, gross profit increased to 30.4% from 28.4% last year

The skinny: SSG’s associate program, which began last year and has about 28 million members, continues to gain momentum. The program allows schools and organizations to use SSG’s electronic catalog to market its products. In exchange, SSG gets a cut of the revenue generated from the sites.

Zones posts earnings improvement

Quarter ended: June 30

Renton, WA-based computer reseller Zones showed an impressive improvement in profits. Second-quarter net income soared 305%, to $373,000 from $92,000 last year. The growth came despite a 26% decline in net sales, to $107.8 million from $145.2 million. Sales to small and midsize businesses, enterprise accounts, and the education and government market were up 6%, to $90.7 million in the second quarter, representing 84.1% of total net sales.

The skinny: “It is becoming increasingly apparent the highly anticipated second-half acceleration in IT spending is being deferred,” president/CEO Firoz Lalji said in a statement. In a phrase, businesses aren’t buying.

PC Connection feels the industry’s pain

Quarter ended: June 30

Continued weakness in demand for information technology products hurt Merrimack, NH-based PC Connection. Net sales fell 2%, to $292.2 million for the quarter from $297.3 million last year. Net income tumbled 77%, to $325,000 from net income of $1.4 million. PC Connection’s only solace was that online sales increased 64%, to $42.9 million.

The skinny: The marketer’s March acquisition of MoreDirect, a Boca Raton, FL-based e-procurement supplier of IT products to businesses and the government, is already starting to pay dividends. The average order size at PC Connection has increased 26% since the first quarter.

Black quarter at Black Box

Quarter ended: June 30

Like PC Connection, the usually reliable Black Box Corp. saw its quarterly sales fall — in this case, 25% — due to a lack of corporate spending on IT projects. For the quarter, Black Box reported sales of $154.4 million, compared with $207.1 million for the second quarter of last year. Net income dipped 3%, to $14.7 million from $15.1 million.

The skinny: “Our goal entering this quarter was to eliminate the significant sequential decline in our top line,” CEO Fred C. Young said in a statement. “While $154 million is not $160 million, it does represent the smallest sequential percentage and dollar revenue decline for our last five quarters. We see this as step one in the process of returning to growth.”

Say it ain’t so, MSC

Quarter ended: June 1

Melville, NY-based MSC Industrial Direct’s second-quarter net sales decreased 4%, to $208.6 million, compared with $216.4 million a year ago. Yes, net income increased a whopping 352%, to $11.2 million from $2.5 million last year. But the increase is due to MSC’s write-down last year of Internet investments. Without the write-down, net income would have dropped 10%, from $12.4 million last year.

Worse yet, MSC reported that it overstated profits by roughly $8.3 million during the past three and a half years due to incorrect entries related to inventory purchases. The company said the entries, which primarily affected fiscal years 1999 and 2000, resulted in an understatement of the cost of goods sold and accounts payable. The company plans to restate all its results from 1999 through year-to-date 2002 following a reaudit by Ernst & Young.

The skinny: Guess which embattled accounting firm conducted MSC’s original audits?

FINANCIAL REPORT
REVENUE $000 NET INCOME $000
12 months prior Current quarter Improvement (decline) 12 months prior Current quarter Improvement (decline) Info as of quarter ended P/E (as of 8 /14/02)
BUSINESS-TO-BUSINESS Henry Schein $606,285 $671,432 11% $20,910 $28,066 34% 6/29/02 21.30
Moore Medical Corp. 32,620 33,441 3% (760) 281 NM 6/29/02 32.62
MSC Industrial 216,335 208,592 (4%) 2,482 11,223 352% 6/1/02 14.64
New England Business Service 145,641 133,613 (8%) 3,570 6,611 85% 6/29/02 14.41
Sport Supply Group 27,955 26,773 (4%) (333) 210 NM 6/28/02 N/A
Systemax 363,506 363,771 0 (2,583) (8,827) NM 6/30/02 N/A
Tessco Technologies 59,894 69,135 15% 283 1,133 300% 6/30/02 10.46
Transmation 17,140 14,243 (17%) (439) (6,617) NM 6/30/02 N/A
COMPUTER PRODUCTS Black Box Corp. 207,116 154,412 (25%) 15,083 14,665 (3%) 6/30/02 11.36
CDW Computer Centers 995,045 1,056,820 6% 43,030 44,053 2% 6/30/02 23.29
Insight Enterprises 504,826 737,065 46% 11,898 13,143 10% 6/30/02 13.19
PC Connection 297,338 292,188 (2%) 1,436 325 (77%) 6/30/02 73.00
PC Mall 171,980 204,945 19% 585 456 (22%) 6/30/02 6.68
Programmer’s Paradise 48,291 34,473 (29%) (718) 529 NM 6/30/02 N/A
Zones 145,163 107,771 (26%) 92 373 305% 6/30/02 N/A
MARKET INDICES Dow Jones Industrial Average 22.71
Standard & Poor’s 500 Index 37.6
Notes: Price-to-earnings ratios are from various sources
NM = not meaningful NA = not available
Source: Tulley & Holland

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