Parting From DAC Technologies

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DAC Technologies' margins are under pressure because it's difficult to pass its increased costs on to Wal-Mart, its biggest customer.

DAC Technologies (DAAT – $0.42) announced third quarter results this week for the period ending September 30, 2010. Sales were $2.64 million, down almost 15% compared with the same period last year and net income was $7,242, down 90% compared with the third quarter of 2009.

Frankly, these numbers came as a big surprise. Especially since Mr. Collins, the Company’s CEO, in the middle of the third quarter stated that he expected sales during the second half of 2010 to meet or exceed sales of the second half of 2009.

 
Three Months Ended September 30
Nine Months Ended September 30
Amounts in $000’s
2010
2009
2010
2009
Net Sales
2,643
3,098
6,687
9,775
Cost of Goods Sold
1,927
2,222
4,963
6,879
S, G & A Expenses
684
714
1,972
2,136
Income From Operations
32
162
(248)
760
Other Income (Expense)
(17)
(42)
(58)
(130)
Pre-Tax Income
15
121
(307)
630
Income Tax Expense
8
47
(114)
244
Net Income
7
73
(192)
386
Earnings Per Share
0.00
0.01
(0.03)
0.07
Shares Out. – Diluted
5,772
5,794
5,783
5,815
Most important income statement data for the quarters and nine months ending September 30, 2010 and September 30, 2009. Source: Company Filings

When we initiated coverage of DAC, a little over a year ago, the stock was trading at 85 cents. The Company had shown significant sales and earnings growth in the previous quarters, it had just received its largest purchase order in its 16 year history from Wal-Mart and management had raised its net income guidance for fiscal year 2009 to 14 to 16 cents per share (P/E of 6).

Margins Under Pressure

One of DAC Technologies’ biggest problems is that about half of its business is with Wal-Mart. When one customer becomes so important, he practically owns you. For instance, to meet Wal-Mart’s demands, the Company lowered its gross margins, had to start selling all of its products under the Winchester brand name for which it has to pay royalty, opened a Bentonville, Arkansas office and a California distribution center.

On top of that, its gross margins continue to be impacted by increased transportation costs, increased commodity prices and the devaluation of the Chinese currency (RMB) against the U.S. dollar.

Needless to say that all these increased costs are a heavy burden on the Company’s margins. And again, because Wal-Mart is such an important customer, it’s very difficult for DAC to pass these costs on to the mass market retailer as otherwise it may risk loosing half of its revenues.

Conclusion

We’re going to part here from DAC Technologies as we don’t immediately see a solution for its decreasing margins. Maybe it would be a good idea for Mr. Collins to take his Company private and reward his loyal shareholders with a nice premium. That would save him a lot of money to comply with being public.

For important disclosures, please read our disclaimer.
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