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Thursday, October 23, 1997
Multiple Zones International, Inc.
(Nasdaq: MZON)
Phone: 425-430-3000
Website: http://www.zones.com
Price (10/22/97): $5 7/8
HOW DID IT FIND TROUBLE?
With most of its revenue tied to the Apple Macintosh, computer catalog retailer Multiple Zones has felt APPLE COMPUTER's (Nasdaq: AAPL) pain and then some. Who would have thought something as tasty as Apple could lead to such shame? But Multiple Zones' shareholders are finding there are many circles in investor purgatory.
After going public in late June 1996 at $12 a share, Multiple Zone's stock multiplied to $28 3/4 by mid-October on the strength of a fourfold increase in second quarter profits and favorable media coverage. But the seeds of the firm's destruction were already sprinkled in the marketplace. Competitor MICRO WAREHOUSE (Nasdaq: MWHS) had dropped 34% back on June 6 after the company said it would miss estimates due to weak Mac sales.
Multiple Zones' ensuing collapse came in multiple steps as the Mac market continued to disappear. The stock dropped from $19 1/2 to $9 on a late December earnings warning and soon found itself in lock-step with others in the industry, as the Fool Evening News reported more than once.
The final whammy came June 12 when the firm said it would take a substantial charge on its Mac inventory and restructure its operations. The second quarter earnings released two weeks later showed a loss of $0.44 per share, as both Mac and PC sales measured in dollars declined sequentially, the latter due to rapidly falling prices throughout the PC industry.
BUSINESS DESCRIPTION
Based in Renton, Washington, Multiple Zones is a catalog retailer of computer hardware, software, accessories, and peripherals. The company has sent out 26 million catalogs in the first half of this year, targeting Mac users, PC users, the education market, and application developers. Some 18,000 products are featured.
The company has a database of 2.5 million potential customers, about 23% of which have made purchases in the last 12 months. In FY96, 70% of sales came from Mac-related products. Last year, the generally lower-margin hardware sales rose to nearly 82% of revenue from 71% in FY96.
With subsidiaries or licensees in 27 foreign countries, the company has seen international sales rise 400% in the past two years, to $59.2 million in FY97. Its new website generated $1.4 million in sales during the second quarter. To grow its PC/Wintel business, Multiple Zones is increasing its outbound telemarketing sales push, focusing on small-to-medium-sized businesses, and the government and education markets.
Other direct mail computer retailers include Micro Warehouse, CDW COMPUTER CENTERS (Nasdaq: CDWC), INSIGHT ENTERPRISES (Nasdaq: NSIT), CREATIVE COMPUTERS (Nasdaq: MALL), and GLOBAL DIRECTMAIL (NYSE: GML).
Insiders own 71% of Multiple Zones' shares.
FINANCIAL FACTS
Income Statement
12-month sales: $475.5 million
12-month income: $8.5 million*
12-month EPS: $0.64*
Profit Margin: 1.8%
Market Cap: $76 million
(*Excludes after-tax charge of $5.8 million or $0.45 per share)
Balance Sheet
Cash: $1 million
Current Assets: $78.1 million
Current Liabilities: $41.2 million
Long-term Debt: $1.3 million
Ratios
Price-to-earnings: 9.2
Price-to-sales: 0.16
HOW COULD YOU HAVE SEEN IT COMING?
Stunning growth over the last three years might have suggested that Multiple Zones was a good bet on the expanding direct-sales channel. Our own Jeff Fischer (TMF Jeff) thought so last Thanksgiving when he made the bullish case.
On the other hand, Randy Befumo's analysis of CDW Computer and Global Directmail last Halloween suggested that other industry players were overvalued and in trouble. Since the Mac troubles at Micro Warehouse were already well known when Multiple Zones went public, it's tempting to say this should have been an easy Trouble to fear if not predict.
WHERE TO FROM HERE?
Former U.S. West executive John DeFeo took over as CEO in January and has been working to cauterize the bleeding. DeFeo has said the inventory write-down and restructuring plus some management additions are "first steps" and that it "will take several quarters to fully realize the benefits resulting from these initiatives."
The second quarter results point to a rapidly deteriorating Mac market, with those sales off 30% versus the year-ago period and 20% sequentially, to $49.7 million. The number of actual Mac computers sold dropped 50% from last year. PC/Wintel sales rose 53% from the year-ago period, to $40.8 million, but that was still a 9% sequential decline.
Gross margins fell from 13.9% last year to 12.5% (before the charge), as the previously improving Selling, General & Administrative (SG&A) expenses jumped to 12% of sales versus 9.9% last year. International sales were up 14% sequentially, but they still comprise just 16% of total revenue.
The company's revenues are now nearly evenly balanced between Mac and PC products. That's good for the firm's long-term stability but very bad for profitability because PC margins are comparatively low and coming down due to lower box prices.
The two analysts surveyed by First Call see $0.29 per share this year and $0.42 per share next year. Both numbers are a long way from the $0.92 per share reported in FY96. The estimated industry growth rate of 15% and the company's projected rate of 40% suggest a YPEG fair value somewhere between $6 and $17. Direct sales should continue to grow faster than the overall PC market, and even smaller players such as Multiple Zones should benefit. But declining margins suggest it is probably still too early to bet on a turnaround in this inherently low-margin business.
- Louis Corrigan, TMFSeymor@aol.com
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