Bad Holiday Season Forces Brookstone Stock Down 21%

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It took only a few hours for the stock market to react to bad sales figures from Brookstone Inc. last month. The company's stock price dropped 16 percent after Brookstone said its same-store sales were below holiday expectations.

The multichannel marketer's stock closed Jan. 5 at $18.68. But after reporting that same-store sales were flat for the holidays, the stock fell to $15.72 a day later. On Feb. 1, Brookstone's stock price stood at $14.83, down 21 percent for the month. The result prompted Southwest Securities, Dallas, to downgrade its rating on the company to neutral from long-term buy Jan. 6.

However, not all of Brookstone's holiday news reported Jan. 5 was negative. Sales in its direct marketing segment increased 25.5 percent, as total sales were up 8.2 percent. Also, year-to-date same-store sales rose 6.6 percent. Sales in the DM segment climbed 21 percent compared with last year. And year-to-date total sales were up 15.1 percent.

Last week, the Merrimack, NH, company said that total sales rose 8.5 percent for the fourth quarter and 14.9 percent for the year. Direct marketing sales jumped 24.5 percent for the quarter on a 46.7 percent increase in catalog circulation. For the year, DM sales climbed 20.8 percent on a 41.5 percent rise in circulation.

The company's research note last month cited very weak iJoy massage chair sales and soft sales in the acoustic category.

"Management indicated that poor iJoy sales may have resulted from different features in a new iJoy version this season and has been working to identify potential improvements," the note said. "The company is also accelerating new versions of its AcoustiClear products that would allow users to play CDs recorded in compressed MP3 formats."

Though the note acknowledged that increased catalog circulation helped drive top-line revenue, it said that the company was "disappointed that additional circulation did not drive more traffic into the stores."

Still, Brookstone said it plans to boost catalog circulation this year and now views catalogs "as more of an advertising vehicle and evaluates catalog performance based on sales and profits across all channels." The note also said the company expects to open 20 new stores in 2005.

Despite the disappointing news, Ozarslan Tangun, director of research at Southwest Securities, said he remains optimistic about Brookstone's long-term outlook.

"The niche itself is dependable, and you're not competing with discounters," he said. "It is very attractive over the long term. These companies develop their own product [and] have good gross margins."

According to Southwest, the percentage of Brookstone-branded products in Brookstone stores for fiscal year 2003 (the most recently reported year) was 65 percent, up from 14 percent in fiscal year 1996.

"It enables [them] to offer a differentiated product mix, and many are innovative products that are hard to find at discount or department stores," Tangun said. "It positions them better from a competition point of view, unlike other retailers that must compete with Wal-Mart."

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