Wednesday, December 10, 1997

Concepts Direct Inc.
(Nasdaq: CDIR)
Phone: 303-772-9171
Price (12/9/97): $19 5/8


HOW DID IT DOUBLE?

Shareholders of Concepts Direct have been walking down the aisle in a giddy state. The mail-order bride has provided an ample dowry as soaring sales have delivered huge stock gains. For the company behind the Colorful Images catalogs, which offer personalized paper goods and gifts, more has been more -- except for the third quarter, where less was still more.

Confused? Sales have been on a tear this past year and earnings have followed. The high growth has caught the eye of large money managers, including the $6 billion Kaufmann Fund, and the reasons are simple. A year ago the company shipped out 11,000 catalogs in the third quarter. This time around? 26,000.

The company outgrew its offices and was forced to relocate in September. The move disrupted operations and created a two-week backlog of orders. So, while investors may have been initially bummed over the surprise earnings deficit this past quarter, the backlog had swelled from just under a million dollars last year to $4.1 million at the end of September.

So, less -- but more to the analysts who quickly raised the fourth quarter earnings estimates in light of the pent-up sales that will be recorded during this current quarter.

BUSINESS DESCRIPTION

While Colorful Images, selling everything from personalized stationary products to low-priced gifts and decorations, continues to be the company's primary mail-order line, accounting for 85% of the catalogs shipped last quarter, the company is expanding its other offerings.

From Linda Anderson Collectibles to Snoopy, Concepts Direct is evolving into a diverse mail-order company.

FINANCIAL FACTS

Income Statement
12-month sales: $66.1 million
12-month income: $2.1 million
12-month EPS: $0.48
Profit Margin: 3.2%
Market Cap: $102.1 million

Balance Sheet
Cash: $7.9 million
Current Assets: $23.4 million
Current Liabilities: $16.9 million
Long-term Debt: N/A

Ratios
Price-to-earnings: 40.9
Price-to-sales: 1.5

HOW COULD YOU HAVE FOUND THIS DOUBLE?

The stock had doubled before the Colorado-based company moved in September. The growth had been evident as steady 50% sales growth trickled down to favorable earnings.

Watching the proprietary customer list grow quarter after quarter was a definite sign that the company was heading in the right direction. As any cold caller knows, the more houses you hit, the better your chances of making a sale.

However, while catalog circulation more than doubled this past quarter, sales were only up 49%. Breaking into new homes often takes more than a glossy mailing. The number of active customers has only grown from 1500 to 2100 patrons over the past year. That is an impressive 40% growth rate, but in relative terms it has not kept pace with the 135% more catalogs that were mailed out last quarter.

While mailing costs are higher and the average sale per catalog mailed has decreased, the bottom line has continued to be attractive. That is, after all, what has brought many like the Kaufmann Fund into the stock -- and no doubt what will keep them there.

WHERE TO FROM HERE?

The expansion into new lines has been both good and bad. The downer is that the personalized paper goods that once made up more than two-thirds of Concepts Direct revenues, and now rings up just half of total sales, is the highest margin segment of the merchandise mix.

The upside is that the other lines are more lucrative. The average sale from the Colorful Images catalog is $27. Meanwhile, the gift-based Linda Anderson mailing has an average sale of $56 per order. However, those numbers have been slipping over the past year (the year before they were $28 and $67, respectively). Just like the falling profit margins and lower sales per catalog, these are not the kinds of thing an investor likes to see.

The bottom-line is that the company is making up for its shortcomings in volume. In late October the company said that sales were running at $500,000 daily. Granted, the fourth quarter is always its seasonally strongest, but if the company were able to keep up that pace for the entire quarter it would generate sales of $45 million -- as much as the company has generated over the first nine months of the year.

The momentum almost assures that fourth quarter sales growth will be well above the 49% rate the company has maintained so far this year. Last year's fourth quarter sales were $20.7 million, so topping $30 million should be a lay-up. And that's why the few analysts following the company consider it a slam-dunk.

Estimates show earnings growing from $0.72 to $1.15 a share next year. One can certainly do worse than pay 17 times year-ahead earnings for a company set to grow them at a 60% clip. This is why the most popular personalized paper product from Concepts Direct, despite the recent rise, may very well continue to be company stock certificates.

-Rick Aristotle Munarriz
(tmfedible@aol.com)


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