Systemax has finally shuttered the majority of its consumer tech stores in North America after once again enduring weak holiday season sales and reporting yet another year of losses.
The New York-listed reseller grew consolidated sales 4.4 per cent to $912.9m but it was the B2B side of the house and not retail that contributed to the expansion, growing seven per cent to $652.5m.
Broken down by unit ‘as reported’, Technology Products in EMEA grew 5.5 per cent to $310.6m and was up 4.4 per cent to $198.3m in North America. Industrial Products sales were up 14.7 per cent to $142.1m but consumer fell 1.6 per cent to $260.4m.
CEO Richard Leeds confirmed it is “substantially exiting our brick and mortar retail stores” with some 31 outlets to be closed by the end of calendar Q2 - these outlets turned over $400m in sales in 2014.
Customers will be served online by the Tiger Direct sub, management claimed on a conference call last night.
This leaves Systemax with just a distribution centre for Tech Products, a retail store in Puerto Rico where demand for old-style retailing remains relatively hot, and the flagship Miami branch.
Systemax is cutting costs in the B2B operations too, Leeds revealed it is “consolidating and restructuring” operations in the Miami HQ which will involve a general headcount reduction across the board.
“These are difficult decisions to make, but the dynamics of the consumer market make them necessary,” he said.
One-time exit and severance costs of this activity is forecast to be between $50m to $55m, incurred in the first half of calendar 2015. The cost-cutting actions are expected to save the firm up to $22m a year. Cash reserves have reduced to $160m so working capital is going to get low if the losses continue.
The truth is that drastic action in the consumer sideshow, previously run by disgraced former exec Gilbert Fiorentino until 2011, should have been taken years earlier during the recession. It wasn’t and the corporation suffered as a result.
This is not to suggest trade in the B2B divisions is all plain sailing, either; organic growth in Technology Products in Q4 was 0.5 per cent. The reported 5.5 per cent rise included the acquired SCC Netherlands biz - rebranded as Misco Solutions - but excluded the negative impact of for-ex translations.
“Reported revenues were significantly impacted by the year-over-year strengthening of the dollar against European currencies,” said chief beancounter Larry Reinhold.
The “solid” showing from Sweden and Spain was highlighted by management but the core UK market “remains disappointing”. The UK management team were swapped out last year with the MD and commercial sales director leaving.
Work is still underway to restructure UK operations with one in five sales peeps given notice earlier this year, as we revealed, and this resulted in a hefty exceptional cost in the quarter.
Gross profit crossed the Q4 finishing line at $124.5m, down from $128.2m, equating to a gross margin of 13.6 per cent versus 14.7 per cent a year earlier.
“The key driver of this decline was reduced selling margins in Europe, particularly in the UK, which more than offset the positive impact on consolidated gross margins from a higher proportion of sales represented by the Industrial Products group,” said Reinhold.
Selling, general and admin expenses jumped by nearly $3m to $126.7m, and special charges of $14.3m - restructuring European ops, exiting retail store leases, litigation - left Systemax nursing an operating loss of $16.5m, as compared to an operating loss of $1.3m in Q4 2013.
After finance costs and a provision for taxes was made, net losses soared to $25.5m, up from the year-ago quarter's net losses of $19.8m.
The 2014 financials do not include $120,000 worth of gold bullion, which is part of the initial restitution that was seized by the US government from Gilbert Fiorentino.
In December, Fiorentino and his brother Carl pleaded guilty to fraud and tax evasion during their time working for Systemax and were last week given prison sentences of five and six years respectively for the crimes.
Reinhold confirmed a restitution hearing in early April will “start the process to determine the amount of final restitution that the Fiorentinos will owe Systemax”.
Court records show the pair took kickbacks in return for steering hundreds of millions of dollars worth of business to PC component makers, who then inflated their prices to Systemax, costing it $27m.
For the whole of calendar 2014, Systemax sales edged up to $3.44bn from $3.35bn, but overheads and special charges saw operating losses widen to $25.9m.
Despite interest soaring to $6.7m from $1.2m, a tax bill that was $4.9m – or a quarter of the size of the prior year's bill – helped reduce net losses to $37.5m from $43.8m.
Investors are clearly showing less appetite to buy Systemax stock; there was only one financial analyst on the conference call with management last night.
The business currently has a market cap of $385m, making it a potential target for anyone that wants to buy a business that is in the middle of a transformation, and where the outcome is anything but certain. ®