They warned you. I warned you. Now it's come to pass.
A couple weeks ago, I criticized Cisco's (Nasdaq: CSCO ) timing in introducing some new high-price-tag gizmos for the home in the middle of a consumer-driven recession. As evidence of the dire straits consumers are in, I pointed to a string of earnings warnings emanating from such leading lights as Motorola (NYSE: MOT ) and Sony (NYSE: SNE ) , Philips and ... Logitech (Nasdaq: LOGI ) .
Suffice it to say that yesterday, while America was busy honoring Dr. King's memory, Swiss-based Logitech got busy reminding us just how bad things can get in a recession:
- Fiscal Q3 gross margins tumbled 700 basis points year over year, falling to 29.9%, their lowest level since the disastrous June 2003 quarter.
- Profits plummeted 69% to just $0.22 per share.
- Sales declined 16% to $627 million.
- Management did a good job collecting on its bills, as accounts receivable dropped in tandem with sales.
- However, Logitech totally dropped the ball on inventory control, as piles of unsold mice, keyboards, and webcams teetered 34% higher than at this time last year -- meaning that yes, the situation looks even bleaker now than it did in Q2.
Management: Asleep at the wireless keyboard?
Explaining the fiasco, new Logitech CEO Gerald Quindlen lamented that "customers continued to reduce inventory levels in the face of weaker consumer demand." So kudos to Amazon.com (Nasdaq: AMZN ) , Best Buy (NYSE: BBY ) , Office Depot (NYSE: ODP ) , and Logitech's other retail partners, which had the foresight to tap the brakes on inventory growth while there was still time.
Pity Logitech wasn't so prudent. With inventories swelling and sales sagging, Logitech seems not to have figured out that it must bite the bullet and follow its retailers' lead. Quindlen uses the "significantly stronger dollar and a retail environment that was highly promotional, particularly in the Americas" as explanations for Logitech's poor performance. Yet he shows no understanding that "promotions" (retail-speak for sale pricing) may be necessary to move inventory out the door before it becomes stale.
Do promotions hurt margins? Sure they do, and Logitech's are already feeling the pinch. But judging from the still-rising inventories, the company didn't cut deeply, or fast enough.
Foolish takeaway
So here's the problem, Fools. Failing to wield the axe today will only postpone the bleeding till tomorrow. The longer Logitech waits, the more stale its inventories will become, and the deeper the discounts necessary to move them tomorrow.
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