Market reacts positively to ACCO results


ACCO’s cost-cutting measures have gone down well with Wall Street with the OP vendor’s share price more than doubling since Friday.


ACCO’s share price opened at $1.70 in New York on Tuesday after hitting all-time lows of under $0.70 last week.


However, ACCO’s share price is still down by around 90 percent in the last 12 months and its market capitalisation of just under $70 million is roughly equal to the annual interest payment it has to make on its significant debt of over $700 million.


The market was buoyed though by the company’s adjusted EPS of $0.37 that came in ahead of estimates and its plans to make savings of $80 million in 2009, including $30 million in additional savings from recently announced measures that include further job cuts, temporary salary decreases and the suspension of company contributions to pension plans.


During the quarterly analyst conference call, CEO Bob Keller said he believed that the savings provided "an adequate cushion" on the company’s bank covenants and ensured sufficient access to liquidity.


But ACCO still looks in a vulnerable position if sales continue to slide as they did in the fourth quarter, when revenues fell by 30 percent in dollar terms, or 22 percent in comparable terms, a heavier drop than the approximate 15 percent decrease in sales in the US power channel sector.


"If the sales decline we suffered in 2008 was to continue or accelerate we may not be able to generate sufficient cash flow to pay our debt service obligations," the company revealed in its regulatory 10-K filing.


Circuit City’s demise at the end of last year hit sales in ACCO’s Kensington computer accessories division and if another major customer was to file for bankruptcy, it could have catastrophic consequences, especially as almost half of ACCO’s sales are with just 10 customers and almost a quarter are with Staples and Office Depot alone.


To try and reduce this exposure to the office superstore channel, ACCO says that it is targeting the mass retail sector and that it has already had some success at Wal-Mart with its computer accessories and OP businesses and that it would "aggressively compete for business in the mass and office products channels and e-channel", notably with its Kensington brand.


Bob Keller also announced – somewhat surprisingly – that providing entry-level products and private label products for customers would now be a focus, a major shift from ACCO’s previous brand positioning.


"If we were to limit ourselves to being the premium provider of product, we are going to cut out an awful lot of the market," he said.


"We believe that we have an opportunity to compete effectively and cost effectively across the entire product spectrum and we also believe that we have the opportunity to create enough efficiencies in our own operations that it is not going to dramatically impact margins."


Keller added that ACCO was already in discussions with clients about these types of products and that he expected progress to be made "during the course of the year".


The idea is that ACCO will act as a "category manager" for customers and that the company’s ability to aggregate volumes in its product categories will provide an attractive proposition.


Customers could also be attracted by the improved working capital requirements such an arrangement would bring, not having to pay for products until after they receive the goods from ACCO, rather than when they take receipt of the products at a Chinese port. Of course, this adds an extra element of risk for ACCO, especially in these credit nervous times, and once again means that cash management is of paramount importance.


A desperate last-ditch attempt to avoid selling off Kensington or closing down other parts of the company, or a sound business strategy in the face of a changing marketplace?

We’ll probably find out sooner rather than later.