LESCO Announces Q2 Results, Sale of Supply Chain Assets

CLEVELAND, Ohio – LESCO has announced its second-quarter results for the period ending June 30, 2005 and the signing of a definitive agreement to sell its supply chain assets and enter into a long-term supply agreement with Turf Care Supply Corp., an affiliate of Platinum Equity, a global acquisition firm based in Los Angeles.

Q2 RESULTS. Net sales for the second quarter ended June 30, 2005 increased 4.4 percent to $190.2 million from $182.2 million in the comparable period a year ago. Lawn care gross sales grew 9.7 percent to $154.9 million from $141.2 million in the second quarter of 2004, while golf gross sales were off, ending at $37.3 million versus $42 million in the same quarter last year. Total Service Center gross sales increased 12.1 percent to $142 million from $126.7 million, while same-store Service Center sales grew 8.3 percent.

Gross profit on sales (defined as product margin less distribution costs) increased to 26.8 percent of net sales, or $50.9 million, compared to $47 million, in the second quarter of 2004. Product margin was $68 million, or 35.8 percent of net sales, versus $62.3 million, or 34.2 percent of net sales, in the same quarter last year, and was driven by better sell-through on seed and combination products. Distribution expense rose to $17.1 million, or 9 percent of net sales, from $15.3 million in the comparable period in 2004, as higher fuel costs, along with the company's larger store base and wider network of distribution end points, negatively impacted year-over-year results.

“I am pleased by the solid effort of the entire LESCO team to drive such strong results in our Service Center and lawn care business,” said Michael Dimino, president and CEO of LESCO. “Additionally, after fully evaluating our business model, we believe our greatest opportunity for growth and the highest level of return to our stakeholders will be achieved through our commitment of capital resources to our Service Centers and Stores- on-Wheels businesses."

SERVICE CENTERS & SUPPLY CHAIN ASSETS. LESCO opened 10 new Service Centers during the second quarter of 2005 in areas where the Company already had a market presence. On June 30, 2005, there were 285 Service Centers in operation, versus 272 at the end of the second quarter of 2004. The 59 Service Centers opened from 2003 through the second quarter of 2005 generated net sales of $17 million for the quarter and net sales of $24 million for the first six months of 2005.

On July 26, 2005, the company signed a definitive agreement, subject to the satisfaction of customary closing conditions, to sell substantially all of its supply chain assets along with its consumable products inventory stored at those locations including fertilizer, seed, control products, combination products, pest control and related products. The supply chain assets to be sold are composed of all four of LESCO's blending facilities and the majority of the company's warehouse and distribution centers.

Turf Care Supply Corp. will pay LESCO a cash purchase price equal to the value of the inventory at closing. LESCO expects to harvest approximately $25 million in cash after settling all requirements associated with the transaction including the outstanding accounts payable due to vendors for the inventory. The company anticipates the proceeds to be returned to shareholders in the form of a stock repurchase plan, tender offer, or special one-time dividend to be determined by LESCO's Board of Directors. The transaction is expected to close by the end of October 2005 and the company expects a pre-tax charge associated with the proposed transaction of $27 million to $30 million.
Concurrent with and subject to the execution of the sale agreement, the company will enter into a long-term supply contract that includes negotiated pricing terms and built-in cost incentives.

"We have selected an elite business partner that we believe has the capital and the resources to leverage the production and distribution capacity of our supply chain network over the long-term,” Dimino says. “We continue to believe in our long-term strategic direction and expect that the continued expansion of our Stores-on-Wheels and Service Centers, along with other margin enhancing initiatives, including the right-sizing of our cost structure, will provide increased earnings in 2006."

FULL YEAR GUIDANCE. LESCO has adjusted guidance for 2005 full-year revenue growth to range from 1 to 2.5 percent, with an 8- to 9-percent increase in Service Center sales. The sales of other selling locations are expected to decline approximately $22 to $25 million related to the acceleration of the company's strategy to reduce its sales representative model and to concentrate on the higher profit Service Center and Stores-on-Wheels models. For the full year, the company estimates a diluted EPS range of 74 to 82 cents before the $27 million to $30 million expected charge associated with the supply chain transaction. Assuming a 39-percent tax rate, the company estimates a diluted EPS range of 45 to 50 cents, which includes a 3-cent effect from the settlement of our dispute with KPAC.

"Our historical direct golf business can be bifurcated between a high margin Stores-on-Wheels model and a low margin sales representative model,” Dimino says. “Consistent with our commitment to invest capital in our high growth, high return store model, we made the decision during the first quarter to convert the resources of our sales representative model to our Stores-on-Wheels model. The disbanding of our sales representative model included the conversion of these individuals to regional manager or Stores-on- Wheels positions. Unfortunately, the execution of this program was less than we desired, resulting in a golf sales decline greater than we had expected. We continue to manage this company and make the changes necessary to create long-term value for our shareholders."

As part of the Company's refined strategy of opening new Service Centers throughout the entire year, the Company expects to open approximately 30 to 35 in 2005, with 9 to 10 openings in the third quarter 2005.