Retalix: Do the numbers add up?
The stock price of Retalix Ltd. (Nasdaq: RTLX), which supplies software for retailers, fuel stations and foodservice organizations, has been rising like the price of gasoline at the beginning of a warm summer season.
Since the beginning of the year, its stock has risen 37%, from about $16 at the end of December to around $22 today. On May 21, Retalix announced earnings that handily beat analysts’ expectations, and the stock was pushed up nearly 8% in two days, from $20.80 to $22.40.
But don’t get too excited yet. Those numbers reflect a partial recovery from a dismal 2006. And a closer look at its most recent earnings statement suggests that it still isn’t fully back in the express lane.
Retalix started out as a supplier of software for point-of-sale (POS) systems for retailers. Its software is used in POS platforms from companies such as International Business Machines Corp. (NYSE: IBM) and NCR Corp. (NYSE: NCR), although those companies also compete with Retalix with their own software. The Israel-based company sells products in more than 50 countries, and is operating in over 16,000 grocery stores in the United States and 42,000 worldwide. Its customers include The Kroger Co. (NYSE: KR), Costco Wholesale Corp. (Nasdaq: COST), Super-Sol Ltd. (Israel’s largest grocery retailer) and BP plc’s (NYSE: BP) chain of gas-and-convenience stores.
A couple years ago, Retalix started expanding into other software solutions for its niche markets. It made a couple acquisitions to move into back-office software to help manage inventories, customer relationships and supplier relationships, among other things. A warehouse management system, for example, is more efficient if it can easily synch up inventory numbers as POS terminals record a new sale.
The company is also helping to bring grocers into the Internet age. A Retalix subsidiary, StoreNext Retail Technologies, provides hosted electronic payment systems to independent grocers. In early May, StoreNext announced a collaboration with Earthlink, Inc. (Nasdaq: ELNK) subsidiary New Edge Networks, allowing StoreNext to resell New Edge’s broadband networking and internet services to North American grocery stores.
And Retalix is adding to its specialty product offerings, such as Retalix StoreLine QSR, software optimized to run deli-counters and quick service restaurants by integrating order entry systems with Kitchen Management Systems. The order entry system can also be configured to accept orders only, or to take payments as well. Payment systems are integrated to allow grocery stores with deli counters to take payments for groceries at the deli counter, or payments for deli items at the usual checkstand.
It all sounds good on the computer screen. The issue is executing smoothly, especially in the path of giants such as IBM (market cap of $155 billion,) NCR (market cap of $9.3 billion) and Micros Systems Inc. (market cap of $2.3 billion). Retalix, with revenues of $52.7 million for the first quarter, has a market cap of about $421 million.
Its first-quarter finances look good on the surface. Non-GAAP earnings per share of $0.09 beat analysts’ expectations of a loss of $0.01 to $0.04 per share. Revenue was up just 3.9% over a year ago, but was nearly 10% higher than analysts’ estimates.
Still, 2006 was a dismal year, and expectations were low. Early in the year, Retalix announced that it had recognized some 2004 revenues too early. It had to restate its finances and replaced its auditor, Ernst & Young, with Price Waterhouse Coopers. But it must not have been too displeased with E&Y, because it switched back to the firm after all the corrections were made.
Also in 2006, revenues and earnings kept disappointing, which management attributed to delays in implementing systems among some major customers. (The company says these problems are now corrected.) Retalix stock declined all through 2006, from over $26 at the beginning of the year to about $16 by the end.
Has the company worked through its problems? Perhaps, but there are still weaknesses in its balance sheet. The improved bottom line in its recent earnings statement came at the expense of a higher cash burn rate. Retalix went through $1.4 million in cash during the first quarter of 2007, compared with $1.9 million in cash generation from operations a year earlier.
Also, Days Sales Outstanding (DSO) rose sharply last quarter, up 22 days from the previous quarter, to 101 days. DSO is a measure of the average number of days that a company takes to collect revenue after a sale has been made. Accounts receivable increased 31.2% from a year ago, while revenues only increased 3.9%.
Ferris Baker Watts Inc., which makes a market in Retalix, is maintaining its “neutral” rating on the company. Retalix is trading at 1.9x revenues, compared with an average of 2.0 for its peers. The stock is at 23x FBW’s estimated non-GAAP EPS for 2007.
The problems may be starting to sink in for investors. After the stock’s rapid two-day rise at the start of the week, it lost 2.6% on Thursday, closing at $21.55. The 52-week high of $24.19 was established on June 5.
Before betting too sharply on Retalix stock, it’s a good idea to make sure that the company has its own store in order first.
