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Tech Data: Closures to Improve Profitability

Record sales were not enough to lift Tech Data Corp.’s profitability high enough to meet Wall Street’s expectations for the IT distributor’s first quarter, but CEO Bob Dutkowsky pointed out that the company’s recent moves have been designed for long-term profitability. “Underneath these earnings it is important to note that Tech Data continues to invest […]

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Jessica Davis

May 23, 2007

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Record sales were not enough to lift Tech Data Corp.’s profitability high enough to meet Wall Street’s expectations for the IT distributor’s first quarter, but CEO Bob Dutkowsky pointed out that the company’s recent moves have been designed for long-term profitability.

“Underneath these earnings it is important to note that Tech Data continues to invest in the long-term health of our business,” Dutkowsky told eWEEK’s Channel Insider in an interview following the company’s earnings call with analysts.

For example, as part of its first quarter earnings release, Tech Data announced it will close down its United Arab Emirates operations and that it took charges of $8.8 million to do so in the first quarter.

“We decided to close UAE operations in the first fiscal quarter of 2008 as part of our ongoing initiatives to optimize profitability worldwide,” said Chief Financial Officer Jeffery Howells in the conference call with analysts. Tech Data expects the closure to be completed in the second quarter and the company expects to take smaller charges due to the closure during the second quarter.

“The money we will realize from exiting UAE is money we will invest in other parts of the business,” Dutkowsky said, such as Eastern Europe and Latin America.

In addition, Tech Data announced plans to close a warehouse in Germany, consolidating those operations to a facility in the Czech Republic. Howells said Tech Data expects to see a reduction in ongoing costs through the warehouse consolidation move, primarily due to the long-term cost of leasing the facility in Germany.

For the fiscal first quarter, Tech Data reported net sales of $5.4 billion, a 9.3 percent increase in revenue year-over-year from fiscal 2007 first quarter’s $4.9 billion. European sales increased even more dramatically by 12 percent. The region represents 54 percent of the Clearwater, Fla., company’s total sales, Dutkowsky said.

“That strong European performance is a strong component of Tech Data’s success,” he said. “But in the last few years, Europe has not performed that well in terms of profitability.”

To fix that, Tech Data has made several moves, including the consolidation of the German warehouse to the Czech Republic as well as improvements in internal IT infrastructure with a SAP implementation designed to improve the efficiency of its logistics systems.

“The improvements to our European logistics operations are complete,” Dutkowsky told eWEEK. “The Czech warehouse transition is in process. It’s still too early to see the benefits of these changes.”

In the earnings call with analysts, Dutkowsky said the company should begin reaping the rewards of the changes in the second half of the fiscal year.

For the second quarter, Dutkowsky said Tech Data remains optimistic about its outlook, even though it tends to be the slowest seasonal quarter of the year. The company said it expects net sales in the range of $5.2 billion to $5.35 billion.

Closures will continue to affect profitability, according to GAAP (generally accepted accounting principals) during the quarter, Dutkowsky said, “But we expect Tech Data to be in a solid position to leverage and improve performance in the second half of the year.”

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Tech Data: Closures to Improve Profitability

Jessica Davis

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