Huge Third Quarter Shortfall Looms For Ingram Micro

By Richard McCaffery (TMF Gibson)
September 8, 1999

Market leader and computer products distribution giant Ingram Micro (NYSE: IM) announced today it expects to miss analysts' Q3 mean estimates by at least $0.27 per diluted share because of price pressures and a hailstorm of changes in the industry.

The Santa Ana, California company expects net income for the third quarter to range from $15 million to $21 million, or from $0.10 per diluted share to $0.14, compared to net income of $60 million or $0.40 per diluted share last year. Analysts expected earnings of $0.41 per share.

In addition, Jerre Stead, Ingram's chairman and chief executive will step down as CEO as soon as the company's board finds a replacement. Stead will continue to serve as chairman.

Ingram and other computer products distributors are struggling to find new ways of doing business as computer prices drop, competition booms, and Dell Computer (Nasdaq: DELL) continues to redefine the landscape with its direct sales model, which sidesteps distributors like Ingram and goes directly to the customer.

To see what's happening, look no further than the company's warning that gross margins, already razor thin, could fall to 4.8% this quarter, down from 6.3% last year at this time. Not much room to make money there.

Yet Ingram is no slouch. The company established its position as the leading computer products distributor around 1996 and has maintained its leadership ever since. Over that time the company has grown its top line from $12 billion to $25 through acquisitions and internal growth.

But the company's stock fell back to Earth late last year when the company -- and virtually every distributor in the industry -- issued earnings warnings for the fourth quarter because of year 2000 issues and price wars. Ingram's stock dropped from a 52-week high of $54 5/8 to $16 1/8 last winter.

When the skies didn't brighten in the first quarter, Ingram initiated a restructuring plan that included closing its consolidation center in California, realigning its sales force and cutting 1,400 jobs. The company said this restructuring is partly to blame for the expected Q3 shortfall, as management had trouble responding to industry changes.

Other reasons include continued pricing pressures, which led customers to seek new distributors when Ingram tried raising prices, and reductions in vendor rebates (which means manufacturers won't refund distributors for unsold inventory at a rate anywhere near historical levels).

Investors, however, should not believe the distributors are finished. Not every company can execute a direct sales strategy as smoothly as Dell, and even Dell uses distributors to stock items it doesn't want to carry on warehouse shelves. In addition, most companies can't get their products to market in quantity without leveraging the sales channel.

But the computer products distribution industry is in major upheaval and probably won't look anything like it looks now in two years. One promising area the major distributors are pushing is outsourcing -- getting manufacturers and resellers to turn over procurement, configuration and logistics operations to distributors that have the size and pricing leverage to handle such services efficiently. In July, for example, Ingram landed an outsourcing deal with CompUSA. The five-year agreement could be worth $10 billion.

However, until new business models are clearly defined and distributors emerge with the kind of efficiency and asset management skills needed to make money in a low margin business, investors should stand back.

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