There's a story of a town whose citizens wants to construct a toll bridge to collect money. So they build the bridge and hire a toll collector. But the toll collector needs a supervisor, and the supervisor needs someone to watch over him, and it all gets very expensive. To save money, they end up firing the toll collector, and they can't understand why there's still no money coming in.
It sort of reminds me of the way lawn-care product supplier LESCO (NASDAQ:LSCO) approached its sales problems last year. LESCO is the leading supplier to golf courses and the professional lawn-care industry, but it has been engaged in a turnaround for the past several years and has not been profitable since 2000. Early last year, the company identified that its business was divided between high-margin service centers and a low-margin sales rep force. To maximize profits, it disbanded its sales force and beefed up its service centers and Stores-on-Wheels.
And sales promptly fell off a cliff. Like the town that fired the one person who brought money in from the toll bridge, LESCO forgot that although they were a low-margin segment, the sales reps generated a lot of business. Not only did the company lose sales from the reps, but their stores and mobile centers lost money, too -- not at all what LESCO had anticipated.
While the first quarter is generally a money-losing one for the company, profits in 2005 fell 24% and continued to mount throughout the year. Earnings went from a loss of $0.69 per share for 2004 to a loss of $3.07 per share in 2005. And the company announced last week that it planned to report a loss of $4 million for 2006 because of lower sales, whereas analysts had been expecting a profit of $0.69 per share.
Management, to its credit, realized from the outset that the transition to the new model was not going as smoothly as anticipated. As losses mounted, members of management went out and talked to the customers they were losing to find out what the problem was, discovering that the sales rep was actually an integral part of the business relationship. Hmm! Imagine that!
Like a properly tended lawn, the care and feeding of a customer by a sales team can generate benefits far beyond the initial sale. When LESCO disbanded its sales force, the customers themselves essentially felt abandoned. When a golf course had a problem on a particular green, the folks at the course previously called up the sales rep to come look at it. The Stores-on-Wheels were often too busy to provide the same level of service. As a result, the customers took their business elsewhere, to competitors such as Andersons (NASDAQ:ANDE), Deere (NYSE:DE), and privately held J.R. Simplot.
LESCO now expects sales at its stores to grow only 5% to 6% for the year, half the rate it had previously forecast, and that sales from its direct segment will be off by as much as 35%, rather than the 15% it had thought. The stock plunged 36% last week to less than $10 a share when the company announced its revised forecast.
To counteract the declines, management has essentially eaten crow; it's reinstituting its sales-rep program. Though I would not expect any fast turnaround because of the move, it does appear that the company finally realizes it has paid a heavy toll by eliminating an essential component of its business.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.
