Damark's decision to abandon much of its catalog business and focus instead on its membership clubs and on providing fulfillment services for e-commerce companies apparently has been just the news investors were seeking. The stock's rapid rise during the past two months also indicates investors are not concerned that legislation related to bank customer privacy will have a negative impact on the company, which derives a significant portion of its revenues from affinity programs with bank customers.
The Minneapolis direct marketer's stock doubled during January, closing at nearly $32 on Feb. 1. That surge followed a rise of more than 50 percent during December, when the stock started out at about $9 a share. At press time, the stock was up more than $34, approaching its 52-week high of $37.
“I think there was growing anticipation that Damark might close the catalog business and get into e-commerce fulfillment,” said Bob Evans, an analyst at Craig-Hallum Capital Group, Minneapolis. “I think that's a very smart strategy, given that the catalog business has lost a lot of money during the past few years and that the work they would do for e-commerce companies can be very profitable and is a big growth opportunity.”
He also said he expected that Damark would spin off its e-commerce support operations, which it has renamed ClickShip Direct, sometime this year, “assuming that favorable market conditions hold for that type of company.”
Although he said the membership club business could be vulnerable to privacy regulations, he said he did not think that the Gramm-Leach-Bliley Act, which becomes effective in November and includes some restrictions about how banks share customer information with third-party marketing firms, would cause any disruptions in Damark's business.
George Richards, the president and chief operating officer at Damark who was named CEO of the membership club business, which has been renamed Insyte, agreed.
“I don't really see that impacting us dramatically, although servicing bank customers is a major piece of our business and a major factor in the growth we've had over the past couple of years,” he said. “If you get beyond the hype and you actually look at some of the changes that are being implemented, they are pretty much akin to some of the rules that we've followed in the catalog business for some time.”
Richards declined to reveal the percentage of membership club revenues that are derived from bank partnerships. Banks and other groups allow Damark to market membership clubs to their customers in exchange for a portion of the revenues derived from those customers. Customers in most cases pay an annual fee to belong to these clubs.
Stock in Memberworks Inc., another marketer of membership clubs that also partners with banks, also was moving up in January. The company's stock rose almost 42 percent during the past month, to close at $38.69 on Feb. 1. Memberworks, Stamford, CT, saw its stock slide about 25 percent in one day last year after it was associated with marketing programs conducted on behalf of U.S. Bancorp, Minneapolis, which was sued by the Minnesota state attorney general. The suit, in which Memberworks was not charged, alleged that U.S. Bancorp violated its own privacy policies.
Since that time, several states have launched investigations into the privacy practices of their banks. Last month Chase Manhattan Corp., New York, agreed to modify its information-sharing practices in an agreement with the New York attorney general.
Portfolio value: If $1,000 had been invested in each of these companies at the beginning of the year — for newly public companies when the stock first closed — the value would be $100,712, an increase of 0.712 percent.
