Shares of housewares company Salton (NYSE:SFP) rose sharply in morning trading on news that first-quarter international revenues helped the company offset a decline in domestic sales, leading to a slim net profit. Mixed signals abound at the company, which is nevertheless optimistic about its ability to grow profits in the near term.
Overseas sales were a very bright spot, especially with domestic sales falling 10% year over year. This isn't particularly surprising -- the company's key George Foreman grill line couldn't possibly maintain the incredible pace of recent years. Now the pressure is on to juice sales, and finding strong products, new markets, and overseas partners are all good ways to do that.
Meanwhile, Salton likes its chances of boosting gross margins, which have fallen as the company has lowered prices in anticipation of lower costs of obtaining its goods. (The lower prices, meanwhile, have helped boost market share.)
And the impact gross margins can have on Salton's income statement is clear: Cost of goods sold has risen in each of the last four full years, even as sales have fluctuated. This, combined with higher selling, general and administrative expenses, has hurt operating income -- an effect reflected in today's earnings release.
Interest expense, meanwhile, continues to take big chunks out of net profit. In Q3, for example, the company recorded $12.4 million of operating income, but $9.7 million of that was eaten up by debt service. In fiscal 2002 it was worse: Salton managed just $1.23 of operating income for every dollar of interest expense, compared with $1.29 in Q3 of this year.
Supporters today are standing firmly behind Salton, optimistic that it can continue improving sales and profit margins while generating free cash flow. But with the stock trading at nearly 30 times trailing 12-month net income, a value argument is difficult to make.
Dave Marino-Nachison can be reached at [email protected].
