(PDC.L) Printing.com Buy/Sell

Feb, March & April ought to be some of the better months in the year. May to August are slower months. The election will cause orders to slow as businesses are holding back due to uncertainty. PDC is very sensitive to the business cycle. If the economy does not start to improve very soon, the downward spiral will cause closures. A move to RPC will not really help, as the lack of orders will still apply.

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The first quarter of 2010 quite simply has been shocking, the weather badly affected what was already going be a very difficult trading period.

Of the franchises I have spoken with January was a right off, February was the same and March has had one good week of trading.

The turnover is mostly driven by a small percentage of the estate and these territory franchises have now also seen a substantial contraction in sales. Of the territory operators I have spoke with they have seen a few of their "bolt-on" outlets close and expect more to fail.

Conventional thinking that with the Chief exect being such a substantial shareholder he will work to ensure a dividend has to be reconsidered. Unfortunately with a yes man culture, the Chief exec on a pedestal dominating boardroom to production floor the dynamic will make for an interesting boardroom will he can push through a dividend even with poor results or will the board win through with a more prudent decision.

I think we will find sales down to as low as £13.8M, I think Mr Rafferty even if he wanted to willl struggle to pay a substantial dividend and with the outlook for the rest of the year in the sector not looking good the share will continue to slide. Anyone who has been holding on based upon previous solid dividends should be seriously worried by the two last trading statements. The downward trend in price and poor outlook should be enough for considering cutting the loss before this ends up sub 20p as previously suggested.

If the individual franchises have all but cut their postal/ printed marketing which is very low cost to them, how can they expect other small business to pay full price and continue to spend in this area!

The market place is very competitive and with a morning telephone calls it is clear whilst printing.com competes well against the other high street retailers such as Kallkwik, Prontaprint, Minuteman etc. they are now losing ground to the local printers who are fighting for survival.

I think the renewal for many franchises will be very difficult with franchise renewal fees averaging between £4000 and £8000, money they simply will not have or find difficult to finance. It may be the case head offfice finances the better performing (better from a head office perspective) outlets allowing payments by installments having consequences for cashflows and therefore also affecting any possible dividend.

When a franchise can move to Printing.com's main competitor RCS Plc who for a similar franchise fee offer a wider range of products on average 15%-20% less, within their model offer free promotional monthly mailers and more importantly 2 free deliveries per week it is a relatively simple decision to move. Many franchises already have made that choice. TNT are the courier of choice of printing.com and with no real space to hold orders at Trafford Park they are despatched when they are ready. These carraige costs eat substantially into the franchisees margins example £49 business card with a profit say at 40% £20 take of the TNT delivery of £8.00.

There is a multitude of online offerings now with free pluggin/ franchise options and whilst these may not have the infrasture of RCS and Printing.com are substantially undercutting price. With an average customer spend of £150 and increased internet pruchasing more and more customers will take the risk in using these online printers as its a small order price and quantity, with a view the print will at the least be usable or just as good as Printing.com. Franchisees may chose these outlets over the likes of RCS and Printing.com as they have well designed websites and great prices.

It will be interesting to see how things unfolf here but by any simple reasoning there are far more negatives than positives.

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I was talking with a friend still in the franchise network, but making plans to move to RCS later in the year when his renewal comes up.

He like i took some shares on as initially we loved the whole model. Then we seen from the inside margins for franchises, losing good print jobs to local competition, the slow down of new and regurdgitating of existing outlets, promotional items and short run digital being added all of which we knew we would leave the network and chose best time to dump the shares. I got out at 39.5 taking the hit. he his hoping the share creeps up to that again before he bails.

Only problem is February has been a right off following from bad January!

So he may rethink that plan.

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A lot of the franchises are no more than booking offices for print orders - they are not actually trained printers. Installation of a small digital press - say a Xerox at £16,000 - needs financing and an operator trained in computer generated artwork, plus a few items of finishing kit, plus the space to house them to offer a complete package. Lets say £5 plus lease costs plus an extra member of staff - say £15k. So in year one, to cover costs, at 30% profit they will need to turn over an extra £75k in a competitive and shrinking market. Add to that, the problem of the new digital service cannibalising their existing sales. Plus their competitors have two/three years start on them.
As the average franchise probably turns overs about £150k at best, the chances of a franchisee making the head office plan
work are rather slim. The smaller franchises are doomed, the larger ones may struggle through but with reduced profits.
Please excuse the "back of an envelope" calculations but I think you will see where this is going. It does not look good.

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