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Friday, March 13,
1998
Hirsch International Corp.
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Phone: 516-436-7100
Website: http://www.hirschintl.com
Price (3/12/98): $9 19/32
HOW DID IT FIND TROUBLE?
For years, Hirsch International reaped what it sewed, as fast-rising sales
of its embroidery machinery allowed it to stitch up seemly profits. But the
seams have frayed on what looked like a solid growth story, and the reaping
has turned grim.
Hirsch has long been the major U.S. distributor of high-tech sewing equipment
made by Japan's Tajima, a leading manufacturer. That's why the company enjoyed
annual sales growth of 29% between FY93 and FY97. Annualized average growth
in net income was 48% over the same period. The story seemed to get even
better when the firm acquired two competitors in 1996 and extended its U.S.
distribution rights to Tajima products.
The stock began to unravel, though, in September, falling from near its all-time
high around $26 to the high teens on word that the firm would miss third
quarter estimates by 8 to 10 cents per share due to "a supply/demand imbalance."
Third quarter results came in at $0.24 a share versus $0.28 a share in the
third quarter of FY97, despite a 12% jump in sales.
Then on February 19, Hirsch said fourth quarter revenues would come in between
$32 and $33 million, a drop from last year's $35 million. Worse, earnings
would badly miss the $0.34 per share estimates, coming in at breakeven or
better.
The company blamed slow sales of its multi-head machines on some of its larger
customers moving to Mexico. Investors didn't wait around on pins and needles
-- they ripped the stock in half in just one session.
BUSINESS DESCRIPTION
Hirsch International is a leading single-source provider to the embroidery
industry, selling electronic single-head (44.5% of sales) and multi-head
(56.5% of sales) embroidery machines to apparel makers such as Fruit of the
Loom, OshKosh B'Gosh, and Russell. It also sells related software, supplies,
and accessories, and leases machinery through its HAPL Financing subsidiary.
Prior to the 1996 acquisitions of Sewing Machine Exchange and Sedeco, Hirsch
was the exclusive distributor of Tajima equipment in 26 states. These deals
increased its territory to cover 39 states. A January 1997 agreement with
Tajima also granted the company rights to distribute small Tajima embroidery
machines in nine western states and Hawaii.
Tajima is a technological innovator that Hirsch has worked with for 20 years.
Through its Tajima USA subsidiary and with technical assistance from Tajima,
Hirsch last year opened a new facility in Bohemia, New York to manufacture
embroidery machines with up to six heads. Hirsch announced on Wednesday of
this week that Tokai Industries (Tajima's manufacturing arm) has purchased
a 45% interest in Tajima USA.
Insiders (mainly CEO Henry Arnberg and COO Paul Levine) own 8% of the Class
A shares and nearly all of the Class B shares, which control the board of
directors.
FINANCIAL FACTS
Income Statement
12-month sales: $147 million
12-month income: $8.2 million
12-month EPS: $0.89
Profit Margin: 5.6%
Market Cap: $93.6 million
Balance Sheet
Cash: $3 million
Current Assets: $77 million
Current Liabilities: $36.8 million
Long-term Debt: $1.4 million
Ratios
Price-to-earnings: 10.8
Price-to-sales: 0.64
HOW COULD YOU HAVE SEEN IT COMING?
Hirsch's market-beating performance since going public in February 1994 owed
a lot to the strong demand for technologically advanced labor-saving embroidery
machines. In turn, this machinery expanded the range and complexity of possible
designs and fed the boom for sports-related products with embroidered logos.
This positive trend allowed the company to raise $24 million in a secondary
offering in June that helped pay down long-term debt. Plus, a strong dollar
made Tajima's products cheaper for Hirsch to buy. So in theory, Japan's new
troubles due to the Asian financial flu should have been at worst neutral
for Hirsch.
Amid these positives, the third quarter shortfall should have been a wake-up
call. How could the company have expanded its sales territory so much and
yet managed to increase sales so little? Why had inventories and receivables
skyrocketed? An investor re-examining the financials would have seen net
margins declining from 7.3% in FY96 to 7% in FY97 to 5.6% in FY98.
The fourth quarter pre-announcement was a surprise, but the third quarter
problems were bad enough to spur a shareholder to have a serious tete-a-tete
with Investor Relations.
WHERE TO FROM HERE?
Any embroidery to the First Call estimates has now been ripped out, as FY99
numbers have been shredded to $1.02 per share from 1.57 per share. This former
fast-grower is now contracting from last year's $1.10 per share, as the sales
slowdown is exacerbated by the recent share dilution. Hirsch is now priced
at about 9.4 times forward earnings, in-line with the industry's growth rate.
CEO Arnberg sounded the optimistic tone in recent press releases. He suggested
that the apparel industry is shifting toward greater use of small embroidery
machines and that's where Hirsch has strengthened its position with its new
manufacturing facility and broader distribution rights.
He also noted that higher margin sales of software and supplies have been
rising. They accounted for 18% of revenues for the first nine months of FY98.
They should continue to increase since they represent a higher percent of
small machine sales. Hirsh has proven to have a nicely profitable business
in the past.
On the other hand, inventories are more than double where they were a year
ago and accounts receivable have skyrocketed 65% versus last year. The
back-to-back earnings shortfalls have destroyed the company's credibility.
The market has now factored in sufficient pessimism. Still, it's likely to
take a couple of quarters for Hirsch to manage its product transition and
convince investors that it has stitched up its wounded business.
-- Louis Corrigan
([email protected])
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