Low Margins, Retail Closures Drag On Systemax Q2 Sales

Margin pressure and massive retail store closures took a toll on Systemax's North American technology business as sales continued to fall in the second quarter, the company reported Tuesday.

Revenue for the Port Washington, N.Y.-based company, No. 17 on the CRN Solution Provider 500, declined 4.5 percent, from $769.1 million a year ago to $734.7 million today, excluding the impact of currency fluctuations, acquisitions and the closed retail stores. That outcome handily beat Seeking Alpha's projection of $716.1 million.

Non-GAAP net income improved from $300,000 last year to $2.2 million this year, or 6 cents per share, walloping Seeking Alpha estimates of a 34-cent-per-share loss.

[Related: Systemax Restructure Closes Retail Business, Ignites Companywide Layoffs And Cutbacks]

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Still, Systemax stock fell 2.4 percent in after-hours trading, to $6.44 per share. The company reported earnings after the market closed Tuesday.

"The transition will take time, add substantial disruption to our business … and may negatively impact our results," Richard Leeds, Systemax chairman and CEO, said during the earnings call.

Systemax announced in March that the company planned to close a distribution center and 31 of the company's 34 retail stores, with the cuts affecting 1,500 of the company's 4,000 employees in North America.

Those closures occurred in May, according to Larry Reinhold, Systemax executive vice president and chief financial officer, and resulted in a $28.8 million charge in the second quarter. That charge included $24.2 million for the leasing of closed facilities, $2 million in forgone profits because of liquidation pricing in the retail operations, and $800,000 for employee severance packages, Reinhold said.

The majority of the restructuring work has been completed, Reinhold said, and costs are expected to come in lower than the March estimate of $50 million to $55 million. Systemax has spent $36.8 million on restructuring so far in 2015.

But even after the sales of closed retail stores are excluded, Systemax's North America Technology Group revenue fell 11.5 percent, to $305.1 million, while non-GAAP operating losses worsened from $4.5 million last year to $5.1 million this year. The operating loss was because of margin pressure and restructuring costs, Reinhold said, with Leeds warning that the challenges in North America will persist.

Technology sales in Europe, the Middle East and Africa (EMEA) grew by 0.6 percent, to $252.6 million, after factoring out acquisitions and changes in foreign currency exchange rates. Sales and earnings growth in continental Europe was offset by a continued performance decline in the United Kingdom.

Systemax last month brought Simon Taylor over from Insight Enterprises to right the ship in the U.K., Leeds said. Taylor is serving as president of Systemax's European Technology Products Group, replacing Pim Dale.

Non-GAAP operating losses in Europe also improved, from a $2.3 million loss last year to an $800,000 loss this year.

The bright spot in Systemax's operations is its industrial product group, which saw sales grow 10 percent, to $180.9 million, excluding acquisitions and currency fluctuations. Non-GAAP operating income, meanwhile, improved from $12.9 million to $13.3 million.

The division has benefited from growth in higher-margin sales and the maximization of inbound and outbound marketing operations, according to Leeds and Reinhold. Systemax is slated to open a 465,000-square-foot distribution center in Las Vegas, which executives said should bolster the company's West Coast operations and result in efficiencies at other distribution centers.

Systemax did not provide an outlook for its third quarter.