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Many large distributors are pursuing their expansion strategies, despite the economic downturn

NEWTON, MASS.--The slowing economy has made its effect on the industrial distribution sector, as reflected in the reduced earnings reported by many of the publicly traded distributors for the last quarter of 2000. It has also caused forecasted earnings numbers to be reduced for the first half of 2001.

"My sense is clearly that we have seen a slowdown," said Holden Lewis, senior equity analyst, CIBC World Markets, "but the industrial distribution companies were more spectators than involved in the softening of the marketplace. It has only really started to be felt in November."

He said he expects this to be more of an issue during the first half of 2001 rather than the fourth quarter of 2000. He noted, however, that nearly all of the companies cite the effects of the slowing economy in their reports.

Among the companies that reported fourth quarter 2000 sales below expectations was Fastenal, which saw a drop in daily sales growth during December. Fastenal cited the slowing economy and weakening manufacturing sector. This was compounded with bad weather and the weakening Canadian dollar. However, the company intends to continue its planned growth.

"Fastenal plans to increase their sales force and their target is to open at least 10 percent more store locations in the coming year," said Michael Connelly, an associate with Robert W. Baird & Co. Inc.

Parker Hannifin blamed disappointing results on higher interest expenses as well as $30 million in delayed shipments, especially in their heavy-truck customers.

W.W. Grainger and Applied Industrial Technologies fell short of their projected sales volume, but were able to make or exceed their projected earnings through increased operating margins.

"While things are slowing, some of our key programs are paying off," said Rick Shaw, Applied Industrial Technologies vice president of communications and learning. "We feel that the economy will hit the manufacturing sector harder than the distributors. We are doing what is necessary to weather this storm."

Shaw said Applied is reducing some expenditures but will continue with its planned acquisitions. He expects the first half of 2001 to be a difficult time, but he cites a strong balance sheet, which he said will leave the company well positioned for more consolidation of market share.

MSC Industrial Direct vice president of finance Shelly Boxer said that MSC will be accelerating its rate of growth.

"We hope to expand our sales force from 362 people in November 2000 to nearly 500 in 2001," said Boxer. "We plan to grow through this slowdown and we are investing in what historically has increased our revenue."

He said that they have increased their direct mail marketing by 50 percent and plan to prospect for sales in new geographic areas.

Stephen Jacobs, an analyst with US Bancorp Piper Jaffray, said that for companies like W.W. Grainger the current slowdown doesn't warrant any changes in their strategy, which is to continue to penetrate current accounts and add new ones.

Jacobs said that as plant managers try to reduce inventory levels, they are purchasing from distributors as spot buys and this is resulting in more market share.

"Bad debt and bankruptcy, however, are running rampant," said Shaw, "and this will have a considerable effect on lesser capitalized companies."

Patrick O'Keefe of IDG said that the fourth quarter of 2000 was a declining environment, with manufacturers scaling back on purchases. The beginning of 2001 is showing no improvement.

"There is no doubt that this is a difficult environment'" said 0'Keefe. "We have had to reconsider some of our planned expansions. I think that the reduction in the interest rates will help but that we will not see the impact of that until the latter half of 2001."

Lewis said that many analysts are optimistic about the effect that reduced interest rates will have later this year, but he cautioned that this may not necessarily bring about the hoped for relief.

"The assumption is that after a weak first half of the year, the Fed's cuts in the interest rate will kick in and things will be better in the second half of 2001," said Lewis. "That is not necessarily so. Many other factors drive the economy and with other indicators still plunging, I see no reason for optimism."

COPYRIGHT 2001 Cahners Business Information in association with The Gale Group and LookSmart.