The internet is changing the playing field for a lot of companies, and few more so than companies whose main business is selling products by catalog. Printing, publishing, and mailing millions of catalogs is a huge expense for these companies, yet they can put their catalog online, within reach of everyone with a computer, for a fairly modest sum. In addition, an online catalog gives the retailer the option to change prices, offer specials and close-outs, etc., much more flexibly than is possible when it all had to be put on paper and mailed.
On the other hand, the web can be a threat to these sort of companies, because of the ease by which the consumer can compare prices. The companies selling branded computer products, for example, are quite vulnerable. A brand name product is the same regardless of who sells it, so most people will just go with the cheapest. Margins of retailers selling standard brands over the internet will be steadily squeezed by competitive forces.
HELO strikes me as the kind of company that will get most of the benefit and little of the margin squeeze. More than half its line is its own private label telephone related products, so it is in a similar position to LL Bean - you might find a product that looks similar elsewhere, but it won't be a genuine LL Bean or Hello Direct. That should reduce the price competition.
The cost side should be where the action is. According to a recent interview with the CEO in the Wall Street Transcript, HELO last year mailed 29 million catalogs at an estimated cost of $0.40 or $0.50 a piece, or $12-15 million dollars in expense. With not much more than 5 million shares outstanding, that works out to near $3 per share in catalog expense. EPS for this year looks like it is heading toward maybe $0.50 or so. But over the next few years, as the public gets used to shopping online catalogs, HELO can probably reduce substantially its mailing size, or keep it the same, but get much more business from people who haven't even seen a recent printed catalog, because they found the website. (http://www.hello-direct.com).
Either way, the same amount of business with many fewer catalogs mailed, or a whole lot more business with the same number mailed, the result is the same--sharply expanded operating margins, as the $3 per share in expenses ultimately heads toward zero.
To put it another way, the company doesn't even need any top line growth (although it will get it). If it can knock $0.25+ per share off of its catalog expense every year by relying on its website, that will create superb eps growth which will justify a premium multiple.
Virtually no one follows this stock, but it looks cheap, with over $5 in book, no debt, and over $1 in cash per share. I thought I'd set up this thread, even though probably no one will care until it doubles. |
