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Friday, January 15, 1999

Day Runner Inc.
(Nasdaq: DAYR)
Website: www.dayrunner.com
Phone: 714-680-3500
Price (1/14/98): $11 5/8


Oh, if only one could flip back through a Day Runner personal organizer and go back in time. The luxury of having scribbled "Sell Day Runner Stock" in a To-Do list back in the summer would have fetched a nice price in the mid-twenty dollar range.

Then again, those were merrier times for the company. Showing solid sales growth and knee-deep in international acquisitions, everything was going to plan. But as anyone who has ever taken Liquid Paper to a Day Runner knows -- nothing ever goes as planned.

Margins were about to get crunched from both ends due to weak sales and higher operating costs. Day Runner cramped up. Another former Daily Double was about to get tripped up in light of missing expectations.


In 1982 the Day Runner System organizer was introduced. For the next dozen years company sales consisted of planner and organizer sales along with annual refills. However, since 1995 the company has diversified into other lines of related office products.


Income Statement
12-month sales: $177.4 million
12-month income: $16.6 million
12-month EPS: $1.32
Profit Margin: 9.4%
Market Cap: $147.6 million

Balance Sheet
Cash: $1.4 million
Current Assets: $88.1 million
Current Liabilities: $33.0 million
Long-term Debt: None

Price-to-earnings: 8.8
Price-to-sales: 0.9


Day Runner has lapped itself. Two years ago the stock suffered under seemingly similar circumstances. The office supply superstores were trimming purchases to incur just-in-time inventory management. Wal-Mart (NYSE: WMT) had its own "logistical" inventory problem as well. That stymied sales, but only in the short run. Day Runner eventually shook it off and regained the form of its sprinter logo. Will this inventory dilemma clear up the same way?

In 1998 there were a few signs that the company was sensing a domestic slowdown. The company only derived 9% of its total revenues abroad, but in February the company bought out Timeposters, a small personal organizer supplier in Canada. In September the company announced a $85.8 million deal to buy Filofax, England's leading maker of loose-leaf organizers.

The lesson here is not that an investor should shy away from a company looking to expand overseas. The Filofax purchase should serve Day Runner well, as 86% of the acquired company's take is from outside of the U.S.

However, since stateside office supply superstores account for 45% of Day Runner revenues, and sales to the mass market retailers like Wal-Mart account for another 41%, the move to snap up Timeposters and Filofax should have been taken as a sign as a company looking to diversify its egg baskets.

In addition, a review of recent financial reports showed an unsettling trend. For fiscal 1998, which ended this past June, the company had revenue growth of 32% while sales of organizers and planners were up a mere 13%. This was the company's flagship bread and butter. Things got even worse in September when overall top line growth of 25% ran against the 19% decline in organizers and planners. If the organizers falter, the lucrative refill business might not be all that far away.


The December 21 pre-announcement was not what investors wanted to hear. While quarterly sales were set to grow from $49.4 million to $62 to $65 million, that figure was less than both the company and analysts had initially projected. The margin contraction would then find earnings coming in between $0.30 and $0.35 a share. That was less than the $0.45 a share showing in 1997's December quarter and well below Wall Street expectations of $0.55 a share.

So, bleakness noted, let's turn the page. Filofax, and to a lesser degree Timeposters, couldn't have come at a better time. As Day Runner begins to lose share of the organizer and planner market, and compensates for that by rolling out new lines in competitive segments, the international diversity may prove to be a breath of fresh air. This should help even beyond the potential of new domestic product lines. (Filofax, for example, produces high-end pens for the United Kingdom). It gives the company some new baskets, just as the flagship weave was beginning to crack.

-Rick Aristotle Munarriz

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