November 25, 2006

Business Review: PC Connection

PC Connection significantly improved the profitability of its business during the past year. Let's take a look at some of the key findings from their most recent 10-Q statement.

Through nine months, net sales increased by fifteen percent to just over $1.2 billion dollars. Earnings before taxes dramatically improved, from $7.8 million last year to $14.7 million this year.
  • Small Businesses and Consumers = $655.6 million dollars sales and $4.3 million dollars profit. Sales improved seven percent, profit improved by $1.4 million dollars. Gross Margin was 13.5% in 2006 verses 12.5% in 2005.
  • Large Accounts = $350.0 million dollars sales and $17.6 million dollars profit. Sales improved by a whopping forty-nine percent, profit improved by $5.2 million dollars. Gross Margin was 10.9% in 2006 verses 10.3% in 2005.
  • Public Sector = $197.8 million dollars sales and a loss of $7.2 million dollars. Sales were essentially flat, while profit improved by $0.3 million dollars. Gross Margin was 12.3% in 2006 verses 11.5% in 2006.
By product offering, sales improved nicely across all merchandise divisions.
  • Notebooks and PDAs = +7% (the largest merchandise division, $210,000,000 YTD).
  • Desktops and Servers = +12%
  • Storage Devices = +14%
  • Software = +20%
  • Net/Com Products = +19%
  • Printers and Supplies = +11%
  • Video, Imaging & Sound = +25%
  • Memory & System Enhancements = +8%
  • Accessories & Other = +23%
Management makes several interesting observations in this report.
  • Small business sales increased among businesses, but decreased among consumers.
  • Increases in online sales were offset by decreases in telephone sales.
  • The number of catalogs mailed were decreased verses 2006, focusing instead on more diverse strategies to drive sales among businesses.
  • Large accounts benefited from inclusion of sales from Amherst sales representatives, and a twelve percent growth in organic sales.
  • Gross margins were improved by vendor considerations.
I enjoy reading about businesses that I am not familiar with. Specifically, I have generally worked for businesses with gross margins in the forty to sixty percent range, businesses that largely developed their own products.

In this case, PC Connection largely sources merchandise from vendors who can and do sell their own merchandise through their own distribution channels, or through other channels. For instance, HP computers can be sold via HP's website, or through businesses like Best Buy. Competitively, PC Connection would have to differentiate itself in some manner, so that customers choose their business. In my case, I buy from PC Connection because merchandise is shipped in a rapid and inexpensive manner.

As you can see, PC Connection faces challenges managing a business with gross margins in the twelve percent range. Downturns in business can cause the business to not leverage fixed expenses. Large accounts appear highly profitable, as sales and margin leverage a minimal expense structure. The majority of the profit generated by PC Connection is generated by only 87 employees. More than four hundred employees manage the small business segment.

It will be interesting to see if PC Connection can continue to drive sales and profit increases at a time when margin pressure increases in the computing industry. What do you think about the prospects for PC Connection?

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