Lakeland Industries: Competing With the Hand That Feeds

Includes: DWDP, LAKE
by: Dime Trader

Competition is usually a scary thing for managers, causing excess earnings to revert to the mean and often relegating home run innovation to mere transitory gains. Consider then the fear of management that must also rely on the company’s competitors for key inputs. Such is the case for Lakeland Industries, Inc (NASDAQ:LAKE), which both competes with and relies upon E.I. du Pont de Nemours & Company (DD), A.K.A. DuPont. LAKE, a company with a market cap around $50 million that manufacturers and sells to distributors a range of safety garments and accessories, relies upon DD, a $45 billion company to supply it with Kevlar and Tyvek products. From the company’s last 10-k:

We do not have long-term supply contracts with DuPont or any of our other fabric suppliers. In addition, DuPont also uses Tyvek® and TyChem® in its own products which compete directly with our products. As a result, there can be no assurance that we will be able to acquire Tyvek®, TyChem® and other raw materials and components at competitive prices or on competitive terms in the future. …

In fiscal 2010, we purchased approximately 5% of the dollar value of our raw materials from DuPont, and Tyvek® constituted approximately 26% of our cost of goods sold. Between 2006-2008 there were shortages in DuPont Nomex fabrics due to substantial military demand for the fabric in Iraq and Afghanistan. This reduced allocation limited our ability to meet demand for our products during those years. Also, there can be no assurance that an adequate supply of Tyvek® or TyChem® will be available in the future. Any shortage could adversely affect our ability to manufacture our products, and thus reduce our net sales.

LAKE acknowledges the reliance, and we even have recent historical precedent for a shortage from DuPont leading to operational problems for the company. Dumbfounded, I asked the company for clarification as to the situation with DuPont, and received this response from the CEO:

Mr. Voisin,

Lakeland is no longer a direct competitor of du Pont’s. We are no customer of du Pont as a designated wholesale distributor. We buy all our finished products from them directly and resell to distributors. DuPont wants only to serve as truck loader container load customers. So anybody big enough to buy by the container load, they will service directly. So they service, WW Grainger, Fisher Scientific, Hagemeyer, Airgas, etc directly, and they are leaving it to Lakeland as a wholesale distributor to serve the 600 small mom and pops that cannot buy into his huge quantities of 250,000 $1 million and paying 30 days

Christopher J. Ryan, CEO

Although this differs from the company’s 10-K, specifically the second sentence “which compete directly with our products,” we’ll take him at his word. Thus, it appears that Lakeland serves the small end of the market (mom and pop stores) directly and DuPont takes the high quantity purchasers (I would assume these would be distributors in competition with LAKE). Though this goes some way to relieve concern over competing with a supplier for specific customers, the problem still remains that the company’s revenues are overly reliant on a single distributor, with which it has no long-term contracts. The result of having no long-term contracts, as we see from the 2006-2008 shortages, is that the company won’t be a high priority when better opportunities come along.

While LAKE looks attractive on several measurements, in my opinion it isn’t enough to overcome reliance on products which have uncertain supply. It turns out an overreliance on a competitor/supplier isn’t scary just for managers – it is also terrifying for value investors.

Author Disclosure: No Position.