Analysts -- what would we do without them?
Computer equipment salesman CDW
By delivering greater than expected profits, despite selling fewer goods than expected, CDW confounded the Street, and catalyzed an 8% run-up in its share price yesterday. So what was the secret to its success?
It actually consisted of three factors.
- First, gross margins improved 80 basis points to 16.2%, continuing the long-term trend we saw in yesterday's Foolish Forecast.
- Second, the net margin increased roughly 100 basis points year over year, to 4.4%, dropping an extra tenth of a penny's worth of profit from each dollar of sales to the bottom line. This too looks to be part of a longer-term trend.
- Third and finally, CDW juiced its per-share profits by buying back about 4% of its diluted share count over the last year. That left fewer shares, among which the profits had to be divided.
Drilling down toward what's happening at the business itself, I see a lot of reports focused on CDW's hottest sellers: notebook CPUs, video and memory cards, input devices, and so on. That may be of interest to investors in chipmakers like Intel
On the first point, CEO John Edwardson mentioned that his company continued to expand its market share during the quarter -- and profitably. On the second point, he noted that sales made directly over the Web accounted for more than 30% of all revenue and increased nearly three times as fast as overall sales, at 16.8% year over year.
As we've all learned since the first shots of the Internet revolution were fired, sales made over the Internet usually generate significantly better margins than do sales over the phone or in person. In this humble Fool's opinion, CDW's expansion of Internet-based sales likely explains much of the increase in gross margins this quarter. In future quarters, I'll be looking to see it expand this sales channel even more.
More CDW Foolishness:
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Dell is also a Motley Fool Stock Advisor recommendation.
Fool contributor Rich Smith owns shares of Dell, but no shares af any other company mentioned in this story.