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Steve,
I met with Michael Koss earlier this week and I'll try to answer your questions as best as I can. BTW, on an overall basis, I was favorably impressed with Michael and the company. There are a lot of positive things happening there and I believe they have a solid foundation for future growth.
(1) The Koss branded products built by Jiangsu are products (other than headphones and speakers) that Koss has chosen NOT to be in the business of selling. These would include things like boom boxes, car stereos, antennas, etc.
Koss maintains quality control on all products with their name on it. They view this as a way of "getting paid not to be in a certain business" that they'd just as soon not be in anyway. So the royalty income drops to gross profit and is a nice income stream.
(2) The new products are doing very well. Koss has been working on adding products in all price ranges so that they can compete with Sony at the retail level for shoppers in Wal-Mart and Target. Radio Shack (Tandy) currently accounts for 18% of sales and is their single largest account. At the top end, they have studio headphones at $750 and at the lower end, they sell under $20. And they have everything inbetween.
One new product that is in product this week is "Cheese Headphones". These will appeal to the local sports fans who call themselves "Cheeseheads". The ear pieces have yellow cheese icons on them and will be an ideal product for sports fans who bring their radios to the game for the play by play.
If it goes well, they will find other affinity groups to sell similar products to. This is a product that will be under $20 and has a lot of mass appeal. And yes, they are sending sets to the ABC announcers who are covering the Monday Night Football game with the Packers. If they wear them on TV, it would be a great promo for the company.
(3) The reason that Koss thinks that they can sustain earnings growth is based on several factors:
(a) Increase overall revenues from $40m to $50 over the next 2-3 years with new products at various price levels. They have good distribution setup and continue to work on new relationships that could add to their sales.
(b) Increase gross profit margin from 34% in FY '97 to 38% in the next 2-3 years through better inventory management, more efficient manufacturing methods, and sub-contracting out some of the non-essential pieces of the process.
(c) Increase EPS through additional royalty income and continue buying back shares of stock as long as it is undervalued in their estimation.
Hopefully that provides some feedback for your questions. If you have any others, please let me know and I'll try to answer them. But the overall perception I have is that this is a solid company with good prospects for future growth.
Koss doesn't issue earnings projections for competitive reasons. But, based on my own research and knowledge of the company, I'll go out on a limb and issue an earnings forecase of $1.35/share for FY '98. That would represent slightly more than a 25% increase over '97. FWIW.
Rick |
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