It’s No Bull: Catalog stock performance continues to lag

DESPITE STRONG FINANCIAL growth enjoyed by the catalog segment, the performance of most catalog stocks has yet to surpass that of retail and industrial stocks. But growth in catalogers’ earnings and profitability should pave the way for gains in stock performance.

“The catalog segment has higher returns on capital, and its growth rate is higher due to rapid growth in the business-to-business area,” says Kevin E. Silverman, managing director of the Equity Research Group at Chicago-based Everen Securities. “But the catalog stock performance has yet to reflect its strong underlying fundamentals.”

These fundamentals-earnings, profitability, and growth-typically persuade investors to buy or sell a particular stock, thereby going a long way in determining stock value.

But the stock performance of catalog companies is anything but typical. According to the Everen Direct Marketing Index (EDI), which tracks the stock performance of 39 direct marketers, catalog stock prices for the three months ending May 29 was up 1.4%-but the stock performance for the 40 companies that make up Everen’s Retail Composite Index (RCI) had risen 10.8%, and the stocks that make up the S&P 400 had gone up 3.8% during the same three-month period.

Given the poor showing of catalog stocks, you’d expect that the companies had suffered flat or falling sales or earnings. But in the three months ended May 29, the revenue of the companies that EDI tracks had increased 23.5% from one year prior, surpassing the 11.3% sales increase of the RCI and the 0.3% of the S&P 400 index.

As for earnings, the EDI companies’ pretax income for the three months ended May 29 increased a whopping 45.3%, substantially beating the RCI pretax increase of 12.7% and the S&P 400’s 11.5%.

Lack of understanding Why hasn’t the strong financial performance of catalogers translated into strong stock performance?

For one thing, while catalogs are gaining market share, that growth is relatively slow. In 1997, catalog sales were only 3.7 % of overall U.S. retail sales of $2.35 trillion, up from 2% of retail market sales in 1995.

For another, until recently, few catalog companies were public, so few potential investors understood the industry. “Ten years ago, you didn’t have many publicly traded direct marketing companies,” Everen’s Silverman notes.

But Nick Holland, of Boston-based investment firm Ulin & Holland, says that the investment community’s ignorance of the industry is becoming a thing of the past. “More catalog companies are going public, and more analysts are following the catalog industry’s economics and dynamics,” he explains.

Analysts and investors certainly took note of women’s apparel cataloger DM Management. The Hingham, MA-based cataloger’s stock price rose 254.3% in 12 months, following a 74.3% rise in revenue and a 123.8% rise in earnings for the fiscal year ended March 31.

“DM Management has done a great job, led by its CEO Gordon Cooke,” Holland says. “That stock has attracted some rather interesting institutional investors.” For instance, Jeff Vinik, the former fund manager of Fidelity Investments’ Magellan Fund, bought a 7% stake in DM Management during the first quarter of 1998-a move that didn’t go unnoticed from those in the Wall Street community. “He’s a savvy investor who bought a big piece of a relatively small company,” says Holland.

“Catalogers are just coming into their own as a viable segment for institutional investors,” Everen Securities’ Silverman adds. “Catalogs are now approaching the size that warrants attention from institutional investors.”

Unique assets Investors are also beginning to appreciate assets unique to catalogers, such as their house files and use of data mining, which will enable catalogers to continue taking market share from traditional retailers.

The Internet will also help catalogers steal market share and, hopefully, will drive up their stock prices, “especially in the business-to-business arena,” says Derek Leckow, investment analyst for Chicago-based Barrington Research Associates. “The standardization of product inherent in b-to-b speeds the ordering process” and encourages customers to shop online, he says

For certain, many observers in the investment industry are bullish about the future of catalog stock performance. “There’s a lot of room to grow, catalogers are growing faster than traditional retailers, and consumer spending levels bode well for the rest of the year,” Leckow says. “This is a good indicator that the industry will continue to grow.”

Among the catalog categories, the apparel segment showed the strongest stock performance. Over 12 months, apparel stock prices rose an average of 75.6%, ahead of b-to-b’s 28.6% and general merchandise’s 25%.

A closer look reveals, however, that the apparel numbers were inflated by the performance of two companies: DM Management (whose stock rose 254.3%) and Hanover Direct (posting a 250% improvement). Discounting these two companies, the performance of apparel stock is roughly on par with the b-to-b and general merchandise.

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