Still no respect

Aug 01, 1999 9:30 PM  By

Though many catalogers are producing strong sales and earnings figures, the stock performance of most publicly traded catalog companies continues to lag behind that of their retail and industrial counterparts. But at least apparel catalog stocks are finally getting their due recognition from the investment community. “This year, fundamentals have been solid, the economy remains strong, and some apparel catalog companies such as Lands’ End and Spiegel have improved their margins,” says Kevin Silverman, managing director of Chicago-based investment bank ABN-AMRO. “This combination has led the apparel catalog group to outperform the market. By contrast, last year was such a tough one for the stock prices of apparel companies that many of them were discounted significantly below fair market value.”

Just ask Peter Canzone, president/CEO of New York-based multititle apparel and home mailer Brylane, about his company’s stock in 1998. “Last year, the apparel stocks were not in favor,” Canzone says. “Our first quarter in 1998, we had an 8% increase in sales and a fairly substantial increase in operating income, but our stock dropped 10 points.” (Brylane was a public company until it was bought by French cataloger/retailer Pinault-Printemps-Redoute in March.)

A shift in 1999

But times, and the stock market, are changing. According to ABN-AMRO, which tracks the stock performance of 35 direct marketers, during the first quarter of ’99, many apparel catalog stocks have outperformed their retail counterparts. And in April, clothing catalog stocks were up an average of 8.8% from March, vs. a 1.3% gain for apparel retailers, and a 2.6% gain for the S&P 500.

Take the case of $1.37 billion Dodgeville, WI-based Lands’ End. After plunging to $15.38 a share in October, its stock was trading at $42.75 as of May 28. Some credit the stock rebound to David Dyer, Lands’ End’s CEO as of October 1998, who has reduced circulation and is heavily promoting the cataloger’s Website.

Because 40% of its selling, general, and administrative costs are associated with printing, mailing, and creating the paper catalog, Lands’ End can save considerably as it shifts customers to the Web, says Derek Leckow, an analyst with Chicago-based investment bank Barrington Research Associates. By cutting catalog circulation, among other improvements, Lands’ End has saved $12 million-$15 million.

But Lands’ End wasn’t the only cataloger to enjoy a boost in stock price following restructuring. With management changes and new merchandising strategies to target a younger audience, Downers Grove, IL-based cataloger/retailer Spiegel appears to have resurrected a sinking ship. The company ended 1998 with its first profit in four years. “Wall Street believes there’s a trend developing with Spiegel,” says Ken Gassman, an analyst at investment firm Davenport & Co. in Richmond, VA. “Its core business has really solidified, which is fueling the stock growth.”

And as of May 28, Spiegel’s stock was trading at $7.38, up from a 52-week low of $2.38 in October 1998. The stock has also outperformed the S&P 500 over the past year at an 18.4% growth clip.

B-to-bers have the blues

Although some apparel catalogers are finally commanding more respect when it comes to stock value, such is not the case in the business-to-business sector. While sales and earnings for most publicly traded b-to-b marketers have been steady, stock performance has not.

The few bright spots in the business-to-business category belong to the computer mailers, led by Los Angeles-based Creative Computers, Vernon Hills, IL-based CDW, and Tempe, AZ-based Insight Enterprises. Over the past 12 months, Creative Computers’ stock performance improved 229.1% against the S&P 500; CDW beat the S&P by 75.4%, and Insight outperformed the S&P by 56.6%. This likely reflects investors’ view of computers as a commodity that can be sold via direct marketing as easily as through other channels, Silverman says. “Both the buyer and the seller know the product, so there’s no need to go to a store to touch, smell, or feel it.”

The performance of these computer mailers was not enough to pull the entire b-to-b market out of its doldrums, however. As of May 28, the business segment’s year-to-date stock performance against the S&P 500 was down 6.9%. Then again, year-to-date results weren’t so rosy for the three leaders, considering that CDW’s stock performance was down 14.4% vs. the S&P, Creative Computers’ was 10% lower, and Insight trailed the S&P by 29.4%.

Even for b-to-bers that rely on consolidation to fuel growth, such as office supplies marketer U.S. Office Products and promotional gifts mailer Corporate Express, the market has soured somewhat. While many of these stocks had been doing well, Wall Street is punishing consolidators that have overpaid for acquisitions or that buy companies that don’t boost earnings or help achieve economies of scale

“The decrease in share price is creating headaches for some consolidators, as they can no longer use their stock as currency to pay for acquisitions, or cannot structure a transaction that would help boost the share price,” Silverman says. A shrinking price-to-earnings multiple puts a limit on a company’s ability to pay for a transaction. If a company pays too large a multiple for a company, the price will begin to negatively affect earnings.

Others argue that the b-to-b catalogs aren’t in the forefront for investors, regardless of healthy balance sheets. Small-cap (companies worth $50 million-$500 million) and mid-cap ($500 million-$2 billion) stocks have stayed down against large-cap stocks (over $2 billion), largely because investing baby boomers concerned about their retirement prefer to invest in companies they know, such as Microsoft and IBM. Except for a select few, the b-to-b mailers have not been favorites among investors.

“The first quarter of 1999 was our ninth consecutive quarter of sales and earnings increases,” says Dennis Waldera, vice president of direct marketing for San Jose, CA-based telephony products cataloger Hello Direct. But the $69 million company’s stock price has not necessarily reflected this growth. “The first six months of the year has been a pretty challenging time for small-cap stocks,” Waldera says.

And most catalogers would qualify as small-cap stocks. For instance, $34.7 million Canton, MA-based wine direct marketer Geerlings & Wade improved profits 23%, but saw its stock fall almost 42% since January.

What of the Internet?

As for whether the growth of Internet commerce will help or hurt catalog stock, it may still be too soon to tell. During the first half of 1999, investors have been cautiously evaluating the role of Internet in direct marketing. True, stock prices for a few traditional catalogers have received a boost from their Web presence. But investors don’t know how catalogers will be affected by the Internet, Gassman says, and some believe direct marketers, rather than retailers, risk losing market share. “Wall Street has decided that the Internet will not have an effect on the brick-and-mortar business but believes catalogers are a bit more susceptible. It’s all a question of how much market share catalogers retain as they shift their customers from print to the Web,” he says. (For more on the effect of the Web on catalog valuations, see “Cashing in on the e-commerce frenzy,” p. 95.)

The inflation wild card

Public catalogers also have to keep an eye on interest rates. Despite a strong economy and low inflation, many market observers anticipate that the Federal Reserve will raise interest rates by late summer or early fall. (In fact, at press time, speculators believed that interest rates would increase a quarter of a point in late June.) This could spell trouble for stocks, especially Internet stocks, because if the central bank decides to raise rates, investors may decide to pull back on these speculative plays.

Indeed, says ABN-AMRO’s Silverman, “inflation is bad for high-growth companies,” particularly for those companies that promise earnings in the future. “If a company’s earnings are years away, the present value is going to evaporate very quickly,” he says.

Does stock performance follow earnings? Sometimes yes, sometimes no. We’ve highlighted some of the catalog industry’s best and worst stock performers since the beginning of the year through May 28 and looked at their annual net income over the past two fiscal years.

Super stock performers

Lands’ End For the year ended Jan. 29, 1999, net income was $31.2 million, down 51% from the previous year. But the apparel cataloger’s stock has risen nearly 59% since Jan. 1, in part because of gains made during the first quarter of ’99.

Coldwater Creek Following years of double-digit growth, the apparel and gifts catalog suffered an 8.5% drop in net income, to $10.7 million for the year ended Feb. 27, 1999. But since the beginning of 1999, its stock price has soared 45.5%, as the company moves to bolster its Web offerings.

Spiegel The general merchant turned around last year’s $33 million net loss to end 1998 with a $3.2 million profit. And since investors love a comeback kid, it’s no surprise that the company’s stock has risen 28.3% since January.

Corporate Express The promotional gifts marketer’s stock price has risen 26.5% since Jan. 1, yet for the 12 months ended Jan. 30, the company posted a net loss of $73.2 million, compared to net income of $50.6 million the previous year.

Not-so-hot stock performers

Geerlings & Wade The wine cataloger was probably the victim of a bias against small- and mid-cap stocks over the past year. Its annual net income rose 23%, to $1 million for the year ended Dec. 31, 1998, but its stock price has plummeted more than 41% since January.

New England Business Service (NEBS) The good news: The business forms and packaging supplies cataloger improved its bottom line 33%, posting net income of $24.9 million for the year ended June 27, 1998. The bad news: Its stock price fell nearly 31% since the beginning of ’99.

Systemax (formerly Global DirectMail Corp.) The name change, which reflects the success of its PC product line and its Web initiatives, wasn’t enough to lift the b-to-b supplier’s stock price. Since January, its stock has plunged 42%. This is despite a 27.6% jump in net income, to $41.2 million for ’98.