Write-off of bestroute.com affects Hughes fourth quarter
Hughes Supply (Orlando, Fla.) reported an 11% sales increase but a decline in net income for the fiscal year ended Jan. 26, which it attributed partly to restructuring activities, including the write-off of its Internet venture, bestroute.com.
"We, like so many others in industry and the investment community, succumbed to the lure of dot-com fever," Chairman and CEO David Hughes said in a March 8 teleconference call. "We were concerned that the e-commerce revolution could, through disintermediation, threaten the traditional role of distributors such as ourselves. We viewed e-commerce as both a threat and an opportunity to develop sales tools for our customers. If we did nothing, we were at risk in having other players be the winners, but if we could combine Internet technology with new internal systems already developed, we could be a major beneficiary of the e-commerce revolution."
While Hughes' customers have found the content of bestroute.com to be of value, they have not used the Web site to order or buy material at the adoption rate the wholesaler had anticipated, he said.
"We believe we are probably several years early with this concept," Hughes said. "We found on our own Web site that customers appreciate the information and flexibility of access, but when it comes to placing orders, they still prefer to deal with their trusted sales and service people by phone, fax or in person. Very few orders are actually placed on our Web site, although the site is used a lot to obtain information about order status and account references. The same is true of bestroute.com."
The logic of bestroute.com and other e-commerce models will gradually take hold, Hughes said, but the company cannot sustain a high level of losses for an extended period of time waiting for that to happen.
"In the new fiscal year alone, this was going to have an $8 million negative impact on earnings," he explained. "So we, along with the bestroute.com management team, decided it was in our shareholders' best interest to cut our losses now and shut down the operation."
Hughes committed to an initial investment of $8 million in the site in 1999 and had invested $15 million by the end of summer 2000. The Web site went live and began receiving orders in May 2000.
"An important part of our experience with bestroute.com has been the upgrading of our own technology," Hughes said. "As the owner of the bestroute.com technology, we intend to incorporate parts of it into our own systems."
The wholesaler's general concern regarding e-commerce and the experience with the site led Hughes Supply to write off its $2 million minority investment in supplyFORCE.com also, in spite of recent changes there which may result in its "ultimate viability," Hughes said in the teleconference call.
Hughes Supply reported net income for the year of $46.5 million, 29% below $65.9 million last year. Earnings per share were $1.97 vs. $2.80. Net sales for the year increased by 11% to $3.3 billion.
During the fourth quarter, Hughes Supply recorded after-tax charges totaling $16.6 million for the write-offs of bestroute.com and certain other nonperforming assets and higher than anticipated provision for doubtful accounts. These charges were partially offset by the sale of the company's pool business, which resulted in an after-tax gain of $6.7 million. The wholesaler had a loss per share of 39 cents and a net loss of $9.1 million for the fourth quarter, including the after-tax charges and gain on the sale of the pool business.
"Due to the uncertainty surrounding the current economic outlook, we are entering fiscal 2002 cautiously," Hughes said. "For the first half of fiscal 2002, our focus will be on improving working capital and enhancing profitability through several key initiatives."
Fourth-quarter performance by group
- Electrical group: Same-store sales for the electrical group were up 10% for the quarter, said Steve Zepf, chief financial officer and treasurer at Hughes Supply, in the March 8 teleconference call. The increase was primarily due to a big order late in the quarter involving a new product group.
- Plumbing group: Competitive and weather-related issues resulted in about a 2% decline for the plumbing group in the fourth quarter, Zepf said.
- Industrial Pipe, Valve and Fitting group: Sales of industrial PVF were up 5% for the fourth quarter. This was attributed largely to some plant construction on which Hughes had successfully bid, he said.
- Building Material/Apartment Supply group: This group was down about 7% for the fourth quarter. "The apartment supply business is seasonal, so its sales drop off in the quarter anyway," Zepf said.
- Water/Sewer group: For the quarter, the Water and Sewer same-store sales were down 6%. This was attributed mostly to the weather in the Midwest and the Carolinas.