Furniture Firm Finds School Market Offsets Office Falloff

Corporate Focus
by Anthony Palazzo

Virco Manufacturing Corp., the Torrance-based manufacturer of institutional furniture for schools and public buildings, saw some uncharacteristic excitement recently, as its stock price jumped 18.7 percent over two days.

Company officials don't know who the buyers were that pushed its price temporarily above $15 on May 31. (It has recently backed off to $14.43.)

But Virco has been generating excitement on its own in the past year, taking strides to improve its position in a down market.

In a dismal environment for furniture sales, Virco "has been making all the right moves," said Michael Gardner, managing director of capital markets at Wedbush Morgan Securities in downtown L.A.

The company has cut expenses and inventory, and it recently made a rare acquisition to help jump-start sales to schools. While the institutional furniture market, hampered by tight public-sector budgets, hasn't shown any signs of recovery, Virco has positioned itself well to ride out and eventually capitalize on a recovery. "It's a very good company overall," Gardner said.

Gardner, the only analyst covering Virco, looked for an explanation of the recent stock-market activity but couldn't fully solve the mystery. "It looked like there was a buyer who was getting very aggressive" and didn't choose to space out the purchases, Gardner said.

(A large order can whipsaw the price of a thinly traded stock like Virco. In this case, volume totaling 90,000 shares on May 30 and 31 outstripped normal daily volume of between several hundred and several thousand shares.)

Virco has been working through an industry downturn that accelerated dramatically in the second half of last year. Competitors are reporting order rates as much as 30 percent below prior-year levels; layoffs have reduced the number of furniture manufacturing jobs by 16,000 nationwide; and 20 percent of the industry's production capacity has been eliminated, Chief Executive Robert Virtue said.

Virco wasn't as affected by the downturn as competitors who rely more on sales of office furniture, which nosedived with the dot-com bust. But the K-12 school market, into which Virco makes 60 percent of its sales, isn't looking rosy either.

"A limit to immediate sales (increases) is the very tight budgets that school districts and states have right now," Virtue said. "All of us have suffered somewhat from a shortage of money."

Indeed, Gardner rates Virco a "hold" because of the uncertain industry outlook.

Nevertheless, Virco managed to avoid reporting an operating loss in the fiscal year ended Jan. 31, despite a 10 percent decline in revenues. Virco also posted record-breaking cash flows from operations of $36.4 million, due to increased efficiencies.

A big part of the improvements is a Conway, Ark., plant Virco opened in 1999. The state-of-the-art facility, still operating at 70 percent of its capacity, allowed Virco to vastly reduce inventory costs last year and further still this year, Virtue said. Instead of warehousing finished chairs and desks of various colors, the company stores the bases separate from the colored seats, backs and tops.

The company designed its own system to stack the bases efficiently in large bins, reducing the amount of storage area needed per piece. The new system's flexibility allows it to cut back overall inventory levels, further reducing warehouse space requirements.

In the year ended Jan. 31, Virco cut its inventories by $19.4 million, to $38 million. Accounts receivable fell by $5.3 million, to $19.5 million.

With the savings, along with the sale of another warehouse, Virco was able to nearly eliminate the debt incurred in building the Conway plant. With extended holiday vacations and temporary 10 percent pay cuts across its entire staff, it avoided layoffs during the downturn. (Full pay was re-instituted at the end of January.)

Also last year, Virco purchased an Ohio-based reseller of school equipment, including furniture and other items such as cots and cafeteria trays. The company, Furniture Focus, could help increase Virco's penetration in the K-12 market, where it already has about a 50 percent market share nationwide, Virtue said.

Furniture Focus specializes in outfitting new schools with a package of such school equipment, and anywhere between 25 percent and 50 percent of a typical order is products made by Virco.

Virtue said he looks at Furniture Focus, a former Virco customer, as an added distribution channel into school districts that may find this kind of packaged solution attractive in an era of tight budgets and reduced staffing levels.

"School districts are really trying to save money. This gives us additional coverage of that market," he said.



Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at tpalazzo@labusinessjournal.com.

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