Increased Tech Demand Lifts Zones

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Investors in Zones Inc. have seen its value reach a new zone recently as shares of the direct reseller of IT products to businesses surged more than 60 percent from Jan. 27 to Feb. 24.

Much of the jump occurred Jan. 29 when the stock reached $2.80 after closing at $2.16 the previous day, as it announced its results for the three- and 12-month periods ended Dec. 31.

Fourth-quarter net income was $2.2 million compared with a net loss of $1.1 million in the same quarter a year ago. Total net sales reached $130.3 million in the quarter versus $104.7 million in fourth-quarter 2002.

For the year, net earnings improved to $1.6 million. This compares to a net loss of $515,000 for the year ended Dec. 31, 2002. Net sales for the year rose 11.1 percent from $414.6 million in the prior year.

Consolidated outbound sales to the small to midsized business, large customer account and public sector markets ballooned 34.3 percent in the fourth quarter compared with the same period of 2002. Business-to-business sales as a percentage of total net sales for the three- and 12-month periods were 88.4 percent and 89.3 percent, respectively.

Marketing channels include an outbound call center, an Internet presence at and as well as two catalogs, ZONES and macZONE.

ZONES contains desktops and networking products as well as laptops, graphic and Internet software, projectors, printers and scanners. The macZONE catalog features Apple products and peripherals. Both are published monthly.

ZONES targets businesses only while macZONE goes to creative professionals including graphic design operations and small office/home office customers and a general consumer audience.

"My general impression is that the performance in the fourth quarter played a pretty significant role in the stock appreciation because we were participating in the upsurge in IT demand and it was reflected in our results," said Ronald McFadden, senior vice president and chief financial officer at Zones Inc., Auburn, WA. "It's been three long, hard years of basically mediocre results for the company up until the last couple of quarters -- the third and fourth quarters, ending in September and December of 2003."

The stock had been as low as $1.14 as recently as Nov. 20.

"We've been repositioning the company during the three-year period and migrating away from a consumer business to a business-to-business model," he said. "We started going outbound to businesses pretty heavily in 2000, and in 2001 we discontinued our PC Zone catalog, which went to consumers primarily. In that time we've been rebuilding the business and replacing the consumer sales."

The consumer side represents about 10 percent of the business. Three years ago it was 50 percent to 70 percent.

"That has been the strategy," he said. "We did that right in the middle of the recession between 2000 and 2003."

McFadden made it clear that more work lies ahead.

"We have to increase the productivity of our sales reps [and] keep costs low because we're selling in a tight-margin environment," he said. "[Margins] are not expanding. [The business environment] remains competitive, and we have to keep an eye on costs.

"[We've] refined our business model. Now it's time to execute it."

In other news, Jos A. Bank was adjusted for a 3-for-2 split.


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