US stock market plunge hits distribution shares

Wholesale Slide comes as MicroAge holds on to Pinacor and CHS kicks off internal audit of vendor incentives.

Wall Street saw shares tumbling last week with distributor stocksks off internal audit of vendor incentives. experiencing the biggest fall.

The Dow Jones industrial average dropped 144.75 points to 9,399.67, while Nasdaq fell 37 points to 2,339.38, a 1.6 per cent drop.

On 26 February, Tech Data sank $1.63 to $18.63, while MicroAge dropped $2.75 to $9.56, a 22 per cent decrease. Ingram Micro fell $2.19 to $22.44.

The slide comes at the same time as MicroAge revealed that it was unlikely to offload Pinacor in the short term, despite projecting dwindling profit for the distribution operation, according to Jeffrey McKeever, chairman and chief executive of MicroAge.

Last week, MicroAge reported year-on-year consolidated revenue growth of 23 per cent to $1.4 billion for the first quarter ended 31 January.

Consolidated net income for the quarter was $2.1 million, compared with a loss of $6.1 million in 1998. Of that, Pinacor's revenue reached $1.3 billion, a rise of 24 per cent on the previous year, while pre-tax profit nearly tripled to $16.9 million from 1998.

By comparison, MicroAge's IT Services unit's product and services revenue increased three per cent over the previous year to $459 million. However, of the unit's total services revenue grew 62 per cent year on year and McKeever predicted it would improve again in the second quarter, although he does not expect to reach profitability until the third quarter.

But he stressed the prospects for Pinacor were not good and MicroAge was still looking to restructure or offload it. 'We anticipate lower profits in the second quarter for Pinacor due to competitive pressures and other industry factors,' McKeever stated. 'We are continuing to explore various financial options for it, including an IPO, spin-off, merger, or sale.'

But MicroAge has not found any of these options suitable: 'We had narrowed our focus to a specific sale, but it seems less likely that this transaction will be completed,' McKeever admitted.

'We also believe an IPO is not a viable alternative because of market conditions and a perceived weakness in the distribution channel. A spin-off would leave Pinacor under-funded as a result of the less favourable payment terms recently announced by leading suppliers.'

Meanwhile, CHS Electronics also posted disappointing fourth-quarter results last week, causing its stock price to plummet 25 per cent.

For the quarter ended 31 December 1998, the distributor recorded earnings of just 47 cents per diluted share, 19 cents short of First Call analysts' predictions.

On sales of $2.9 billion, CHS reported preliminary gross profit of $193.4 million, an increase of 50 per cent on the fourth quarter of 1997, while preliminary net income of $26.2 million grew just two cents per share over the previous year's fourth quarter.

Overall, annual net sales rose by 80 per cent to $8.5 billion for the year ended 31 December 1998. Preliminary net earnings also increased 86 per cent to $90.2 million.

However, CHS' figures are subject to an auditors' investigation into vendor incentives. The distributor promised to release its audited results by the week beginning 15 March.

C2000 PUTS FORWARD SPENDING PLAN

Computer 2000's supervisory board will ask shareholders to approve using the distributor's fiscal 1998 profit of $35 million to strengthen its capital base and pay minority shareholders a dividend of $6.76 per share.

Majority shareholder Tech Data Germany has already declared that it will approve the board's request.

C2000 has also announced that Tech Data France is to be folded into Computer 2000 France, while C2000's Latin American units in Argentina, Chile, Peru and Uruguay will be sold to Tech Data.