Current plans call for lsco to open approximately 20 or so new Service Centers in
2007, a decline from 35-40 planned for 2006. Long term, Lesco has indicated it plans to
continue to increase its Service Centers 10-15% annually. Management believes
that the market could absorb 400 more of its service centers. It should be noted
that a major advantage of buying product at Lesco is the knowledgeable staff-
agronomists and lawn care specialists many of who hold 2 or 4 year degrees in turf
management. This expertise enables the company to maintain customer loyalty without
heavy promotional and marketing activity.
Lesco in the first quarter of 2005 closed down its’ third area of sales- the direct
sales representatives- obviously expecting to save on sales commissions. What it didn’t
count on was a significant drop in sales from these customers in its LESCO Service
Centers locations and Store-on-Wheels vehicles. The personal relationship with the
sales representative was obviously affecting business with the stores and vehicles.
The summer of 2006 brought an about face as the company, realizing it shot itself,
began to reestablish it’s direct sales organization. And as of this writing, LESCO has re-
established over 30 sales people that had been either reassigned or left the company.
Plans call to rebuild this sector to its original size.
But the damage was done. Management recently opined that for 2006, while the stores
segment would grow about 2-3%, the direct sales area would be down 33%. Direct sales
are estimated at $50-$55 million for the year down from $76 million or so in 2005. The
company on it’s recent conference call felt that about $60 million dollars of sales was lost
in the all segments because of the termination of the sales agents in 2005. Management
it would seemed belatedly discovered after several devastating quarters that relationships
between the selling rep and the keeper of the golf course or hotel greenery do matter.
The net loss was guided to be $16-20 million. Revenues are tentatively estimated to be
$560, down from a year earlier $ 575 million.
But another problem surfaced during this year. Excessive costs for fertilizer and grass
seed, after they were presold at fixed prices to buyers hurt Lesco. After having played
this speculative game and won in prior years , this year the fertilizer hit the fan. Recent
conversations with management suggest they have learned the lesson. Now speculation
will be left for the future traders and they will only either sell at market prices or
at a fixed price with the costs also locked.
LESCO is in the process of rehiring many of these sales reps, to rehab its
once vibrant direct sales business. Management is hopeful that by year end, many
salesmen will be back on board. Should all go as planned, the subsequent incremental
sales should be quite beneficial to the companies bottom line. Management announced a
1.5 million stock buyback in Oct 2005 with almost 100,000 shares repurchased in the first
half of 2006. LESCO has 9.2 million shares outstanding , $20 million in cash, no
outstanding debt and a net worth of $43 million as of June 30.
Recently Hawkshaw Capital of New York filed a 13-d disclosing a 6.5% ownership
of Lesco.
This is not a complicated story. If management succeeds in rehiring most of its
salesmen, matching costs to selling prices while executing at the store level, Lesco
should see its’ mojo return. Revenues in 2007 should reach over $600 million from the
returning sales people and the new stores. An obviously low retailer net margin of 1%
would result in a $6 million profit or $0.65 per share number. Recent insider purchases
suggest management is a believer.