Worse Than Expected Q2 Results
Prompt Swift Actions From Essendant CEO Bob Aiken.
Essendant responds to market dynamics
By Andy Braithwaite.
Essendant CEO Bob Aiken spent several days touching base with the wholesaler’s investors following disappointing second quarter results and a lower outlook that have sent its shares tumbling by more than 40% on the NASDAQ exchange since 21 July.
Aiken told OPI that the calls “went well” and that he had assured investors the management and board of Essendant still believed in the long-term strategy to be able to grow shareholder value.
See opi.net for a closer look at the quarterly results themselves, but one of the key issues was a year-on-year gross profit decline of more than $15 million. Aiken said this was caused by two main drivers: a shift in sales towards larger – and therefore lower margin – customers, and a higher mix of lower-margin products such as imaging supplies and paper after categories including traditional office products, jan/san and, to some extent, furniture underperformed.
With these margin pressure trends set to continue, Aiken wasted no time in announcing a series of strategic measures around three main areas:
Focusing resources on customer channels that have the best long-term profitable growth prospects. These include e-tailers, vertical markets such as enterprise accounts, and large jan/san distributors (segments that grew respectively by 10.8%, 18.6% and 4.6% in the second quarter).
Improving gross margin dollars by “more effective” pricing and merchandising. This entails more closely aligning with key suppliers.
Reducing Essendant’s cost structure, mainly through further simplification of the organisational structure and a reduction of the distribution footprint.
Impact on relationships
The first two of these points will certainly impact the relationships that Essendant has with both its suppliers and resellers. “A majority of the profits in the value chain today are captured by manufacturers, not wholesalers or resellers,” Aiken told OPI. “So the question becomes: How do we align with resellers in a way to help key manufacturers grow and capture part of that value?”
An example of the kind of alignment Aiken is referring to is the recent strategic partnership with TriMega which, among other things, will see the wholesaler play a key role in the dealer group’s marketing production.
On the manufacturer side, Essendant is reducing inventory purchases by $100 million by the end of this year. It’s something that Aiken said won’t affect all suppliers equally. “We’ll look at where our strongest partnerships are. Where there are less strong partnerships, the impact will be felt more greatly,” he commented.
Market forces such as the growth of the online channel and the decline in traditional office supplies are continuing to hurt Essendant, so it is not a surprise that Aiken has announced what is effectively the acceleration of an existing strategy.