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Wednesday, Jul 6, 2022

Rewiring the Business

PC Mall is rebooting.

The company started out selling computers, accessories and software via catalog. Then it turned into a chain of stores. Now it’s heading in new directions: most significantly, trying to shift its customer base from consumers to government agencies and corporations.

As a result, PC Mall may be poised for a turnaround when the recovery arrives.

The company has also invested in upgrading its sales force and launching a social networking site.

The Torrance company reported that revenue fell 14 percent through the first nine months of 2009 compared with a year earlier, but it’s now prepared for a growth spurt as businesses, government agencies and consumers are expected to upgrade their computer equipment this year.

Instead of cutting back as revenue shrank, the company opened a telemarketing center in Chicago.

“A recession is not the time to shy away from making strategic investments that we believe are essential for the long-term success of PC Mall,” Chief Executive Frank Khulusi said in a conference call with analysts Nov. 3. “We continue to believe that these investments, when accompanied by an economic rebound, can be leveraged, positioning us for growth in both revenue and profitability.”

Computer catalog

Founded in 1987, PC Mall originally operated as a catalog marketer for computers and accessories, with customers calling an 800 number to place orders. Later, the company expanded to retail stores and the Internet. Today, the company operates sites PCMall.com, MacMall.com and PCMallGov.com.

Five manufacturers – Apple, Hewlett-Packard, Cisco, Microsoft and Sun Microsystems – supply products that represent 53 percent of the company’s sales.

In order to replace its traditional customer – the person who would order via telephone or online – with government and corporate IT buyers, PC Mall has launched aggressive telemarketing operations. In addition to a new Chicago call center, the company has phone operations in Canada and the Philippines.

PC Mall retains three stores from its brick-and-mortar days in Torrance; Santa Monica; and Memphis, Tenn. A distribution facility in Memphis is designed to take advantage of close proximity to the main shipping center of FedEx Corp.

The recession was especially tough on PC Mall because the company runs on thin margins.

Analysts estimate that 2009 earnings per share will drop 38 percent from the year before, when the company reported 68 cents a share. The company does not pay a dividend.

Chris Krueger, an analyst at Northland Securities in Minneapolis, predicted in a recent report that “the worst is past” and PC Mall’s performance will improve in step with the U.S. economy.

“We believe PC Mall has done a strong job at keeping margins up while it fights through the difficult environment,” he said. “After spending a few years aggressively investing in a sales force buildup, which we believe hurt profits while growing market share, PC Mall has shifted gears into leveraging this sales force to grow the bottom line.”

The company has also jumped into the social networking fad. Last summer it launched Small Business Network, a Web site where customers can ask questions of their peers and access a database of articles. Membership in the site also qualifies users for discounts on PC Mall products.

Despite all the company’s efforts, the transition from retail to corporate and government customers may prove a challenge. PC Mall has positioned itself as the low-cost option for computer buyers. That image may not be appealing to chief information officers and government purchasing officers.

Unhappy customer

Tony Greenberg, chairman of RampRate, a consulting firm in San Francisco that buys office technology equipment for Fortune 500 companies, is a longtime PC Mall customer – but not a happy one. Last week he launched a blog, OnlyTimeBuysTrust.com, to point out the poor customer service at MacMall, the company’s site for Apple computers.

“If it’s a question of buying the computer and walking out the door, it’s fine,” he told the Business Journal. “But if you need customer service, forget it.”

PC Mall has an operating margin of 1.8 percent, according to company filings. Greenberg said margins that thin make it almost impossible to support a customer service operation. Just having a support staffer answer a few questions on the phone could make the difference between a profit or losing money on the sale. As a result, customers have to do their own troubleshooting.

“Saving $50 on a $1,200 computer is nice, but what’s your time worth?” Greenberg asked.

The slim profit margins also translate to a low valuation by the stock market. PC Mall has annual revenue of $1.33 billion, but a market capitalization of only $65 million. But Greenberg thinks it’s overvalued given its reputation for poor service.

But Krueger of Northland Securities expects government and large corporate buyers will be the first to return to the market in this recession, and he cites improved numbers in PC Mall’s most recent filings as evidence the strategy of emphasizing sales to those customers will work.

In the third quarter, the company’s sales to government buyers increased 7 percent. Sales to large businesses declined 14 percent, but profits beat expectations because the margins for these large buyers are better than PC Mall’s traditional customers.

“We believe the downside risk to owning this stock is relatively low,” he said.

Krueger gave the company an “outperform” rating with a 12-month price target of $10 per share, nearly double its current trading value.

PC Mall did not respond to multiple requests for an interview. Although the company does not provide future guidance for shareholders, Khulusi said in his conference call that he plans to continue to invest any earnings back into the company’s operations.

“We will not be satisfied with a mere return to growth from low levels,” he said in the November conference call. “We intend to continue to contain costs while making strategic investments. We are committed to invest in our people, systems and processes because we believe the current environment creates opportunities for companies that invest in their business models.”

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