It's not easy making a buck in the low-margin world of retail. Witness online and by-phone contact-lens hawker 1-800 CONTACTS (NASDAQ:CTAC), which released its Q2 and H1 2005 earnings report yesterday.
The company managed to earn just $269,000 in the second quarter of this year, a pittance on its $61.8 million worth of sales, yielding a net margin of just 0.43%. And that's the good news.
The bad news? Over the course of H1 2005, the company had even worse net margins, just 0.37% on $122.1 million in sales. On the other hand, "bad news" is relative, and when compared to its performance last year, 1-800 CONTACTS actually looks pretty good. In both Q1 and Q2 of fiscal 2004, the company booked sizeable losses. In fact, it hasn't posted a single profitable year since 2001.
The complications don't end there. As novel a concept as selling prescription eyewear "sight unseen" might seem, the company faces stiff competition from other discount vision retailers. Established chain competitors such as LensCrafters and National Vision (AMEX:NVI) loom on one side, wholesaling behemoths such as Wal-Mart (NYSE:WMT), Motley Fool Stock Advisor pick Costco (NASDAQ:COST), and BJ's (NYSE:BJ) advance on the other, and out in the ether, 1-800 CONTACTS has drugstore.com (NASDAQ:DSCM) trying to horn in on its game.
But according to 1-800 CONTACTS, all of the above pale in comparison to what it considers its greatest threat: an alliance between the nation's eye doctors and "one large manufacturer" that only sells lenses to those doctors and their affiliated retail stores. This, according to 1-800 CONTACTS, prevents consumers from buying contacts at a discount and denies 1-800 CONTACTS "millions in sales and income."
However, the company seems to feel that a solution to this dilemma is imminent. If its statement that millions in actual income (as opposed to low-margin revenues) are at stake proves true, the company might be poised to multiply its recently revived profits.
Personally, I think this presents us with a real "buy what you know" moment. I'm not sure how significant it would be if this nameless manufacturer let 1-800 CONTACTS distribute its products. Having worn contacts for nearly two decades, I have yet to get a prescription for a brand of contacts that I couldn't buy cheaply online from 1-800 CONTACTS, which suggests that it may be exaggerating the source of its troubles. Unless your situation is different, consider taking the company's hopeful "forward-looking statement" with a grain or two of salt.
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Fool contributor Rich Smith does not own shares in any company named above.
