Lesco lsco
December 01, 2006 - 11:45am EST by
kiss534
2006 2007
Price: 8.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 73 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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Description

      Despite revenues of over $500 million and the leading position in lawn care

and golf-course markets, Lesco is relatively unknown on wall street. Yet

lsco is the nation’s leader in lawn-care and golf course product for the

professional market. 

 
 

     Selling thru over 300 Lesco service centers (over 5000 sq feet) and over 100 Stores on

Wheels, they stock a wide variety of fertilizer, turf and pest control, grass seed and

associated equipment. A revenue breakdown shows about 40% from fertilizer and

other combo products, chemical control products-25%, turf grass seed-10% with the

balance of sales coming from equipment (mowers and sprayers), parts and service, pest

control etc.

 
 

    Lesco is concentrated in the Northeast and Florida. Customers include golf courses

condos, gardeners and professional landscapers among others. Management believes

that it has 12% of the golf care market and about 16% of the lawn care market. The

direct sales channel  sells to golf courses, Home Depot along with national lawn and

landscape chains. It was in this national accounts group that management cut back on

salesmen which caused Lesco to lose its footing in the recent past.

 
 

     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.

Catalyst

New store, rebuild sales staff and eliminate commodity speculation.
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