-Retailing again represents more than half of TBC Corp.'s overall sales, accounting for 56 percent of the Memphis-based distributor and private marketer's second quarter revenue.
Sales for the quarter rose 14.7 percent to a record $328.8 million, thanks mostly to the integration of 112-outlet Merchant's Inc., bought in April for $57.5 million. Retail sales from TBC's subsidiaries, Tire Kingdom Inc. and Big O Tires Inc., accounted for about $185 million, and wholesale sales accounted for $143 million, or 44 percent, said Thomas Garvey, executive vice president and CFO.
``We certainly expected it,'' analyst John R. Lawrence of Memphis-based Morgan Keegan Inc. said of the retail sales push. ``That's been the goal for a couple years, ever since they bought Tire Kingdom. We see going forward that retail could be 85 percent of this business at some point. That's clearly the growth pattern, to continue to have retail.''
The growth isn't just in sales figures. TBC's Tire Kingdom, which absorbed Merchant's, operated 346 stores at the end of the quarter, and opened three others since June 30. Larry Day, president and CEO of TBC, said he expects Tire Kingdom to operate 360 to 365 stores by year-end, but that doesn't take into account possible acquisitions, which he said TBC is investigating. Big O counts 560 stores in its ranks, and that could grow to about 575 to 580 by year-end, he said.
With the benefit from Merchant's, TBC reported earnings of $7.86 million, up 15.3 percent from $6.82 million last year. Retail same-store sales in the quarter rose 0.4 percent, and total unit tire sales declined 1.3 percent, compared with a relatively flat market, the company said.
For the first half of the year, TBC's net sales increased 9.1 percent to $585.4 million. Retail same-store sales rose 0.8 percent, and total unit tire sales fell 2.7 percent, compared with an industry decline of 1.6 percent to 2 percent, Mr. Garvey said. Net income in that period grew 14.7 percent to $13.3 million.
For the year, TBC expects earnings of $1.40 to $1.45 per share.
In the second quarter, wholesale sales were down about $11.7 million, but company officials said that was partly a result of an unusually strong 2002 despite the economy as well as lingering economic concerns weighing on the wholesale customers, namely small independent dealers.
``We know they are impacted more heavily with the downturn in the economy,'' Mr. Garvey said, adding in a conference call with analysts that margins had improved in both retail and wholesale segments from cost-savings measures.
In fact, Mr. Day said wholesale sales are improving as small dealers begin to recover their inventories.
``The health signs for the replacement tire industry all appear to be good,'' he told analysts.
But the strong growth appears to be in the retail segment. TBC played a sideline role in the retail market since 1996, when it bought the Big O subsidiary, which were primarily franchised stores. In 2000, TBC made its retail splash with a $45 million buyout of Tire Kingdom in Florida.
About the same time, TBC's competitor, Heafner Tire Group Inc.-now American Tire Distributors Inc. (ATD)-also was buying retail chains, most notably the 1997 purchase of Winston Tire Co. on the West Coast. But in 2001, Heafner announced an abrupt about-face, committing to sell off its retail outlets to improve its balance sheet and stop competing with its wholesale customers, company officials said at the time.
TBC officials could not be reached for comment about their potential for competition.
But Mr. Lawrence, who has covered TBC since 1985, doesn't expect the company necessarily to be in the same predicament. The chief concern would be execution for the retail stores and others added to the fold. He said control of brands as well as management would be crucial.
``Three years ago when they bought Tire Kingdom, nobody thought they could run it, because here's a wholesaler running a retailer,'' Mr. Lawrence said. ``There was a lot of questions and a lot of concern.''
Nevertheless, he added, Tire Kingdom's integration went better than expected, as has Merchant's. Company officials had expected Merchant's to begin contributing to earnings in 12 months, yet it reached that point in only three, he said.
While Mr. Lawrence said he doesn't believe TBC is overextended with its retail locations, other analysts asked during the conference call about TBC's ability to shift resources for acquisitions. Mr. Day acknowledged Tire Kingdom's second-quarter performance was somewhat hampered because key staff and other resources were transferred to Merchant's.
``We are now seeing, now that those folks are back in their regular positions at Tire Kingdom, that Tire Kingdom is solidly back on track,'' Mr. Day said.
He also said the company has resources in place that could run many more company-owned stores, as many as 1,000 locations. If TBC acquired a chain with 50 to 75 stores, Mr. Day guessed it could be absorbed within 50 to 70 days; chains with 150 to 200 stores could take six months.
Following the Merchant's acquisition, Mr. Day said several retail chains have approached TBC about other possible deals, and the company is considering some of them. He said potential acquisitions have to meet certain criteria, including being geographically compatible with TBC's retail strategy and distribution footprint as well as having a good standing in their market. As Mr. Day said, TBC is not interested in ``fixer-upers.''
Still, he said TBC is not growing to the point it will get overextended.
``We worked very hard to reposition TBC as a fully integrated replacement tire marketer,'' he told analysts. ``The transition from exclusive wholesale business to a business today that is more retail than wholesale is right on plan.''