Systemax Inc. (NYSE:SYX)
Q3 2009 Earnings Call
November 10, 2009 10:00 am ET
Denise Roche - Brainerd Communicators
Richard Leeds - Chairman & Chief Executive Officer
Gilbert Fiorentino - Chief Executive of Technology Products Group
Larry Reinhold - Chief Financial Officer
Bruce Leeds - Vice Chairman
Ali Motamed - Boston Partners
Ross Licero - Wisco Research
Good afternoon, ladies and gentlemen, and welcome to the Systemax Inc. third quarter 2009 earnings teleconference call. (Operator Instructions)
At this time I would like to turn the call over to Denise Roche of Brainerd Communicators. Please go ahead, Ms. Roche.
Thank you, Operator. Welcome to the Systemax third quarter 2009 earnings conference call.
I'm here today with Richard Leeds, Chairman and Chief Executive Officer of Systemax, Gilbert Fiorentino, Chief Executive of Systemax Technology Products segment, which includes TigerDirect, CompUSA, CircuitCity.com, MISCO, WStore, and Larry Reinhold, Executive Vice President and Chief Financial Officer.
This discussion may include certain forward-looking statements. It should be understood that actual results could differ materially from those projected due to a number of factors, including those described under the caption Forward-Looking Statements in the company's annual report on Form 10-K.
This call is the property of and is copyrighted by Systemax Inc.
I will now turn the call over to Richard Leeds.
Good afternoon, and thank you for joining us on today's call.
Despite the continued economic challenges, Systemax posted solid third quarter results, growing consolidated sales both on a U.S. dollar basis and on a constant currency basis. Our results were primarily driven by a strong performance in our consumer channel businesses, where sales grew over 10% in U.S. dollars and 12% on a constant currency basis.
During the quarter we experienced some erosion in our overall gross margin resulting from the continuing impact of shipping promotions coupled with changes to the product mix; however, on a sequential quarter basis our gross margin improved 20 basis points.
We continue to carefully control operating costs, which resulted in double-digit bottom line earnings growth.
In our earnings press release issued earlier today we provided a review breakdown from consumer which includes retail stores, consumer websites, inbound catalog and television shopping, and our business-to-business channels, which include managed relationships conducted through outbound call centers and extranets with business customers. I'd like to discuss how the current environment has impacted each of these channels.
On the consumer front, our operations performed well relative to the current economic environment, with same-store channel sales up 6%. This growth has been aided by our Retail 2.0 initiative, which is now live in 23 CompUSA stores.
Since our last call, CompUSA has opened two new retail locations in South Florida, and there is one additional store scheduled to open in that market later this month. This will bring CompUSA's total number of retail locations to 27. In addition, TigerDirect continues to operate five retail stores in Canada.
The retail storefront expansion remains a key focus for CompUSA, and leases have been signed for stores in several new U.S. markets. Our strategy is to expand in the large metropolitan areas where we already maintain a presence and in new markets that can support stand-alone destination stores - either stores located in areas that are within driving distance from several large metropolitan areas and where we believe CompUSA can generate significant volume and deliver a profitable and growing store.
Systemax's three large retail ecommerce sites - TigerDirect.com, CompUSA.com and CircuitCity.com - continue to place well on industry ranking for site traffic according to Hitwise. Combined, they rank in the top five in terms of traffic and market share in the United States in the consumer electronics segment. This is a strong indication that Systemax has positioned itself as a leader in online retailing of value-priced branded computers and consumer electronics to consumers.
CircuitCity.com is our newest ecommerce site, and while the brand has a long history in retail, it's still in its early stages as a Systemax company and as an online ecommerce site only. CircuitCity had taken a deliberate strategy to efficiently re-launch the site and reintroduce the brand to the public. In the short time that the site has been live it has expanded product categories and selection, adding more consumer electronics and house wares products, reactivated the customer base with targeted e-mail campaigns, and initiated a robust marketing campaign.
While results will be measured near term, the strategy is progressing smoothly, and we're excited about the potential as sales from CircuitCity.com already contribute to overall sales growth in the third quarter. In addition, CircuitCity is a prized asset that has significant value outside of ecommerce, and we're currently exploring opportunities to extract that value.
Now I'd like to turn to the B2B channels, which include MISCO in Western Europe and Global Industrial in the U.S. In general B2B operations have continued to be the most affected by the economic slowdown, and businesses of all sizes have not yet returned to normalized spending; however, we are cautiously optimistic that we've reached the bottom of the decline. Our businesses are continuing to make prudent investments to improve marketing position while carefully controlling costs.
As I said in the past, where there are challenges there are also opportunities. In mid-September Systemax closed on the acquisition of WStore Europe, a supplier of business IT products with operations in France and the United Kingdom. The European IT market is large and fragmented, which presents tremendous opportunities for long-term growth. Adding WStore to Systemax's portfolio of companies significantly strengthens our presence in France and adds to our U.K. operations, where MISCO already has substantial operations.
Global Industrial sales for the third quarter and nine months periods were down; however, on a sequential quarterly basis sales improved and there are other positive indicators that a downward trend may be bottoming.
While customer acquisition is at a slower rate than last year, Global Industrial is modestly gaining market share. The entire industry waits for spending to resume, but to mitigate the impact, continued cost reduction initiatives are being implemented to better rationalize expenses with sales without sacrificing strategic investments in areas that can help grow this part of the business in the long term. Global Industrial continues to invest in its sales force, improve its ecommerce sites, increase product selection and expand into complementary product categories.
One major initiative of Global Industrial was the deployment of an entirely new ecommerce website that went live last month. The new site features over 100,000 industrial products in a vast number of categories. We are rapidly expanding an array of new features designed to make the online shopping experience as efficient as possible for customers. Global Industrial's customers have expressed the desire for a convenient and fast way to purchase products and manage accounts for their industrial needs. The enhanced site combines our strength in web functionality and outbound sales, enabling an increased partnership with these customers. We believe the new site is more advanced than the sites of any other company in the sector.
With the recent acquisition of CircuitCity.com and WStore and the acquisition of CompUSA last year, coupled with the consistency of our established TigerDirect and MISCO brands, Systemax has strengthened its position as a leader in the global consumer electronics retail market. We remain diligent in our objectives to achieve strategic expansion and brand awareness.
We achieved solid results in the third quarter and remain optimistic about the rest of the year and heading into 2010, believing we are well positioned to grow faster as the economic environment improves.
I will now turn the call over to Gilbert.
Thank you, Richard, and good afternoon, everybody.
We are pleased with the solid performance of the Technology Products Group during the third quarter. Net sales increased by 4% in U.S. dollars and 8% on a constant currency basis. Revenue growth in the quarter was driven by our North American operations, where sales grew about 11% over the prior year. North America represented 71% of Systemax's Technology Products total revenue in the third quarter.
In North America, consumer business CompUSA continues to lead the retail storefront strategy in the United States. CompUSA has recently opened two new stores with a third one set to open later this month. Taking advantage of attractive rents, there are already several leases for new CompUSA stores signed, and we continue to explore opportunities to open additional locations in target metro areas in the U.S.
Our Retail 2.0 initiative is successfully progressing as we look to continue our leading position as an innovator in our industry. By the end of the quarter 23 CompUSA stores had been re-launched with the Retail 2.0 strategy. Currently, four CompUSA stores and five Canadian TigerDirect stores are in the conversion process, and we remain on track to convert all retail stores to Retail 2.0 layout by the end of the year.
Customer response to Retail 2.0 remains positive, with customers appreciating the added value Retail 2.0 offers. The stores are a one-stop shop for product information, comparisons and reviews as well as price match comparisons without leaving the store.
Last quarter we noted the addition of intelligent Retail 2.0 waterfall displays for cameras, GPS devices, mp3 players and cell phones. We're always looking for new ways to innovate and keep Retail 2.0 as unique and current as possible, and we spend time in our stores talking to associates, talking to customers and looking for vender and partner feedback as we continue to make modifications and add features based on those discussions.
Microsoft's long-awaited Windows 7 operating system launched a few weeks ago. To commemorate the launch, CompUSA held midnight events at many stores featuring contests and giveaways of Windows 7 products and others. Initial reviews and customer reactions to the software are extremely positive, and we expect it will provide significant marketing opportunities not only for Microsoft but also related venders. Marketing campaigns featuring the software and components campaign to upgrade the necessary hardware for Windows 7 will be undertaken throughout the duration of the fourth quarter.
TigerDirect.com, our largest direct sales website in terms of activity, continues to be the market leader in the online retailing of computers and electronics. Web traffic increased 14% over the prior year period, with approximately 1.9 million average weekly unique visitors to the site. TigerDirect received recognition for excellence in customer service from American Express and the National Retail Federation, Computer Shopper magazine, Biz Rate, PriceGrabber.com, and reseller ratings, among others. TigerDirect.com and now CircuitCity.com encompass the majority of our direct web business.
CircuitCity.com website traffic is averaging over 1 million visitors per week. Site traffic continues to improve as the site is further enhanced and the customer base for CircuitCity is reactivated. As Richard mentioned, this was the first full quarter with CircuitCity.com and the integration of this brand into our portfolio, and it is going well. CircuitCity continues to offer great deals in a wide selection of products, fast shipping and world class customer service while working to expand the product categories and advertising campaigns.
Our North American B2B technology business was down compared to the prior year for all the reasons that Richard mentioned earlier; however, B2B technology still offers significant growth opportunities for Systemax. As we start to see signs of a possible economic turnaround on the horizon, we continue to strategically invest in this part of our business and position it for growth once the economy improves. The call centers we opened during Q2 in Idaho and South Dakota are ramping up, and we have selectively increased sales representatives with specific product expertise.
In the European B2B business, where sales are primarily generated by MISCO, the financial performance has differed by country. The most challenging countries, much like last quarter, were Spain, Germany and Italy. Those countries have economies that are still in deep recession. MISCO continues to focus on cutting expenses, especially in markets that have experienced the most softness, through headcount reduction and other cost-cutting initiatives.
The bright side in Europe remains the U.K., MISCO's largest European operation, where sales modestly increased. The U.K. operations continue to benefit from MISCO's strength in the public sector, with much of the business coming from government and education sources. While France experienced lower sales, this was offset by a growth in margins. After the U.K., France has been the strongest market in Europe this year.
As Richard mentioned, in September Systemax closed on the acquisition of WStore Europe. The acquisition has minimal overlap with MISCO's existing operations in these countries, increasing Systemax's penetration of these markets. We are excited by this growth opportunity, which essentially doubles the size of the Technology Group's business in France and further adds to the existing operations in the U.K.
In summary, although we are certainly not immune to the macro environment, we believe that the overall consumer business is performing well, and we feel optimistic heading into the end of the year. In the segments most impacted, like B2B technology, we are managing our expenses but also feel encouraged by new customer additions and the progress of internal initiatives to support additional growth.
We are focused on executing on strategic growth opportunities and implementing innovative initiatives with the intent of changing the retail landscaping for the good of the customer, all key ingredients to Systemax's long-term growth and prosperity.
So with that, I'll pass the call to Larry.
Thank you, Gilbert, and good afternoon, everyone.
Systemax posted third quarter consolidated sales of $753.9 million, up 2% compared to the third quarter of 2008. When you look at revenue on a constant currency basis, sales grew 6%. Third quarter consumer channel sales increased by over 10% in U.S. dollars and 12% on a constant currency basis compared to last year, while business-to-business channel sales were down 7% in U.S. dollars and 1% on a constant currency basis. Our performance was again highlighted by growth in our North American Technology Products Group, which I will discuss in further detail shortly.
Gross margin for the quarter was 15.0% versus 15.6% in 2008, down mostly from a change in product mix and the continued use of discounted freight charges. Sequentially, gross margin was up in the third quarter over the second quarter by 20 basis points.
Net income for the quarter was $12.6 million or $0.34 per diluted share, up from $11.3 million or $0.30 in the same period last year.
Income tax expense in the quarter was about $8 million.
Our third quarter results included pre-tax charges of $1.0 million for costs related to the WStore acquisition and the previously announced plan to exit the PCS hosted software business. Charges impacted our third quarter net earnings by approximately $0.02 per diluted share after tax.
Our effective tax rate for the first nine months was 36.3%, down from 37.3% last year. Included in the 2009 rate is a reversal of tax reserves of approximately $1 million as a result of statute expirations. If we exclude this reserve reversal, the company's effective tax rate would have been 38.7%. This higher effective tax rate this year is primarily the result of a higher percentage of taxable income in the United States, where corporate tax rates are the highest.
Technology Products' net sales were $701.8 million, an increase of 4% in U.S. dollars versus the third quarter of last year and represented 93% of the company's overall sales revenue. On a constant currency basis, Technology Products' sales would have increased 8% compared to last year. Technology Products operating income in the third quarter was $21.7 million compared with $22.1 million in the third quarter of last year.
Industrial Products is profitable and it generates strong cash flow and therefore continues to be an important part of our overall business. The third quarter total revenue from Industrial Products was $52.0 million, a decrease of nearly 18% over the third quarter of last year. Operating income was $3.6 million.
Turning to our geographical breakdown, our total North American sales were $552.1 million for all segments in U.S. dollars, an increase of 8% from the third quarter last year, and represented 73% of our total sales for the quarter. European sales for the third quarter were primarily generated by MISCO as WStore was included in consolidated results for only a few business days during the quarter. Total European sales were $201.8 million in U.S. dollars, down 11% over the year ago quarter, and represented 22% of our total consolidated sales. Again, excluding exchange rate changes, our European sales would have been flat with the third quarter of last year.
Looking at our revenue mix by customer channel, our total consumer channel sales, which include sales from retail stores, consumer websites, catalogs and television shopping, were $426.2 million, an increase of 10% from the third quarter of last year, due in large part to the acquisitions of CompUSA and of CircuitCity.com. Consumer sales represented 57% of our total sales for the quarter. Business-to-business sales, which include sales generated from outbound call centers and business extranets and the entire Industrial Products segment, were $327.7 million in U.S. dollars, down 7% over the year ago quarter, and represented 43% of our total validated sales.
I'd like to highlight our revenue mix by product categories in the third quarter. The computer and the consumer electronics categories were our largest growth categories, with 29% and 7% growth, respectively. Additional information on our revenue mix has been made available in the earnings press release.
During the quarter, total SG&A expense decreased about 40 basis points to 12.4% of revenue versus last year. Excluding the charges incurred in this quarter's SG&A expense [inaudible] would have been 12.3% of revenue, a 50 basis point decline versus last year. Although we hired during the quarter for new retail stores, we were able to control overall SG&A spending as a result of various cost reduction initiatives implemented over the past year.
Systemax continues to maintain a strong financial position. As of September 30, 2009, our balance sheet reflected $256.8 million of working capital and over $102 million in cash and cash equivalents. The current ratio at the end of September was 1.6 to 1. We ended the quarter with about $316 million of inventory. Short-term debt totaled $18.8 million at September 30th and included about $17.1 million in revolving debt assumed as part of the WStore acquisition. The remainder is capitalized lease obligations. Additionally, our $120 million credit facility remains undrawn, and we have approximately $199 million of cash and available liquidity as of the end of the quarter.
With that we'd like to open the call up for questions. Operator?
Thank you, sir. (Operator Instructions) Your first question comes from Ali Motamed - Boston Partners.
Ali Motamed - Boston Partners
First of all, can you talk a little about the CapEx outlook, let's say, for the next quarter and maybe the next year, sort of what we should be looking at?
Our CapEx has been relatively modest in the company, typically under $10 million a year, for normal kinds of activities. I think that we're spending, as we know we've commented on, our Retail 2.0 initiative and also some other IT system upgrades. I think you could probably look to the future of normal CapEx in about the same range. Possibly we're going to be looking at some additional distribution center capability as our volume of business grows.
Ali Motamed - Boston Partners
Okay. And then Newegg's meant to be coming public any day soon. I see the valuations that are put out in their prospectus, and you guys are pretty much the best comp. They're looking at 20 times earnings and 30% of sales. Obviously, it's a little bit of a different business, but are you going to use this as an opportunity to maybe get out and discuss the company a little more and meet investors? You don't even really have much analyst coverage, you know? So make yourselves more available to the investment community?
We obviously look at all of our competitors, and they're one of them and they're a good competitor. We certainly want to have the best stock price that we could possibly have, and we always look at things like that.
Ali Motamed - Boston Partners
So will you be going out you think and doing that more? Do you have any plans?
I hope so. I mean, that's our intent, to get out more as we can.
Ali Motamed - Boston Partners
And what about supporting analyst coverage perhaps?
We're always trying to get more analyst coverage. If you could help us with that, we'd appreciate it.
Your next question comes from Ross Licero - Wisco Research.
Ross Licero - Wisco Research
I wanted to know how many new leases are signed for the new CompUSA stores?
There are two right now. There's one new store opening in Aventura, Florida imminently in the next few weeks. Other than the ones that are imminent to open, for competitive reasons we just don't like to talk about where we're putting stores or the markets we're looking at.
Ross Licero - Wisco Research
And for the other category that you guys listed in your press release, can you explain what that is exactly and why it's going from - I guess it's consistent year-over-year, but it drops from about 100 to 15.5 from the second to third quarter.
On the product category mix?
Ross Licero - Wisco Research
That's the catchall net of everything that doesn't make the specifically identified list, so it's really too voluminous to go into there.
With no additional questions in queue, I'd like to turn it over to Richard Leeds for any additional comments and closing remarks.
I'd like to thank everybody for listening to our call, and we look forward to speaking to you next quarter. Thank you.
That does conclude today's conference call. Thank you for joining us.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!