LESCO Announces Q4 Financials, Will Focus on People in 2006

Industry supplier LESCO hosted its fourth-quarter investor conference call this morning, during which CEO Jeff Rutherford focused the discussion not only on the company’s financials for the last three months of 2005, but also on its positive outlook for 2006.

“The most significant accomplishment of the year is the culmination of our strategic and financial realignment,” Rutherford told investors and media. “Over the past four years, we have been engaged in an ongoing restructuring effort to streamline our business model and focus on the more profitable side of our business.”

The fourth quarter of 2005 saw the completion of LESCO’s sale of substantially all of its supply chain assets to Turf Care Supply Corp. (TCS). At the closing of the deal in October 2005, LESCO received $15 million in cash and $19 million in accounts receivable from TCS, noting that it expected to reap about $25 million in cash after settling all requirements associated with the transaction. While Rutherford and LESCO Chief Financial Officer Michael Weisbarth would not comment on the final amount of the cash settlement, LESCO’s management team is looking forward to moving the company forward in 2006.

“With the sale to Turf Care Supply, we have excited the low-margin, high-working and fixed capital manufacturing business in order to invest further focus on our more profitable store segment,” Rutherford said. “It will allow us to harvest working capital and realize tax benefits so we can devote resources to an area where we hold a clear and differentiated competitive advantage.”

Financially, LESCO is currently operating in a transition period due to the TCS sale and management changes that were made late in 2005. The company reports that total segment sales were up 18.5 percent and Service Center same-store sales increased 10.4 percent. Since 2003, when the company made the decision to focus more on its store segment, Service Centers have been a success for LESCO. The company added 79 Service Centers since 2003, winding up 2005 with 305 units in operation. However, because of slower-than-anticiapted store openings in 2005, about half of the Service Centers that opened last year will operate as first-year stores during 2006.

This year, LESCO intends to continue its Service Center expansion, opening up to 40 stores by the end of 2006.

Meanwhile, LESCO’s Stores on Wheels segment also experienced fleet expansion, jumping from 73 Stores on Wheels to 111 in 2005. However, this fast expansion had a slightly negative financial impact on the company. “There were significant challenges with the fast ramp-up of Stores on Wheels and we endured some employee turnover with the changes we implemented,” Rutherford said. Moreover, the company downsized the vehicles in its fleet from tractor-trailers to box trucks – an important fuel-saving measure down the line, but one that cost about 3.6 million to implement.

Though beneficial to the company in the long term, expansion in LESCO’s store segment “comes at a price,” Rutherford said. “We’ve experienced operating profit contraction during this period. We’ve increased field management in order to create infrastructure to support future growth, and we extended merchant discounts and market conditions necessitated by aggressive promotional offerings to gain marketshare and maintain customer loyalty.”

Speaking on merchant discounts, Weisbarth said this expense increased 80 basis points for the quarter compared to Q4 2004. “We offer customers three ways to pay: cash or check, bank credit and private label credit applied through GE,” he explained. “To better serve our customers, we’ve increased our acceptance of bank credit cards and more customers are paying us that way. However, for us, bank credit is the most expensive option. Because the use of this type of credit has shifted, the merchant discount expense has increased.”

Overall, LESCO reported a net loss of 15.6 million in 2005 compared to 13 million in 2004. Components of the loss included a cost of $4.7 million related to the TCS transaction, $2.5 million for markdown charges to restructure the company’s parts sourcing model and rationalize its product offering, and $2.6 million associated with stock option buyouts and severance of prior executives.

LESCO’s Store segment increased 18.4 percent in the fourth quarter to $116 million compared to $98 million last year, and gross profit in this segment increased 140 basis points to 25.8 percent due to improved margins in many product categories, including seed, control products and fertilizer. “The improvement here is based upon the fact that we put in a new pricing model, we’ve refined our product mix and we concentrated on higher return,” noted Chief Operating Officer Bruce Thorn. “The key metric for us is gross margin return on inventory, and we’ll continue to refine our product offering and ability to raise margins through our pricing matrix.”

In its Direct segment, LESCO says net sales were $13 million for the quarter vs. $27 million in 2004. The change is attributable to the company’s decision to restructure and redeploy its direct sales associates. Gross profit as a percentage of sales increased to 19.4 percent from 15.8 percent year-over-year.

“We’re optimistic about the upcoming year,” Rutehrford said in closing. “We’ve spent a significant amount of time interacting with our team members in the field, who are the heart of this business, and many customers. We’re more convinced now that this is a strong model and we will expand our marketshare over time.”

Rutherford called communication among the company’s corporate staff, associates and other field employees “the difference-maker” for LESCO in 2006. “Historically, over the last couple of years, we’ve had some cultural issues here,” he said. “I wouldn’t do differently anything that we’ve done strategically or financially, but we would have paid more attention to our people and our customers during that transition period and during the management change. Now, we’re going to spend a lot more time with our people so, culturally, they know what’s going on and their motivated to be more successful. In my travels with our people and our customers, the good news is that the people in this industry are hardworking, loyal people who love what they do and love the industry – and LESCO is full of those people. If we get out of our own way and do the right things form a leadership perspective, this model will do even better than we anticipated.”