Tech Data Corporation (TECD - Free Report) is reeling under a few problems, soft margins being one. Evidently, shares of the company have lost 15.9% in the past three months compared with the industry’s 7.3% decline. Also, this Zacks Rank #4 (Sell) stock has lagged the broader Retail - Wholesale sector's growth of 3.9% in the said time period.
Tech Data is reeling from lower gross margins for the past few quarters. In fact, gross margin contracted 44 basis points (bps) and 39 bps during the second and first quarters of fiscal 2019, respectively. Apart from competitive conditions, gross margin in the second quarter declined due to unfavorable product mix. Further adjusted operating margin contracted 6 bps and 30 bps during the second and the first quarters, respectively.
Further, Tech Data faces intense competition from several distributors in the Americas as well as several regional and local distributors. The company also faces risks from foreign currency fluctuations, as a considerable chunk of its revenues come from international operations. These factors along with risk of changes in supplier polices as well as data security breach are threats to the company’s operations and profitability.
Efforts to Counter Hurdles
The company is adopting several initiatives to put itself on the growth trajectory. Tech Data launched a Global Business Optimization Program (GBO Program) to become a more flexible and cost-effective organization in the reported quarter. The components of the program include improving the company's regional go-to-market models to deliver higher value to channel partners; developing digital processes to create a more responsive, empowered and agile work environment; and improving productivity with the help of increased centralization and standardization throughout the organization. Going ahead, the company anticipates annual cost savings of $70-$80 million from this program, out of which half the savings will be invested to speed up the company’s strategic priorities.
All said, we hope that the aforementioned initiatives help Tech Data stock return to growth trajectory.
Stocks to Consider
Mantech International Corporation (MANT - Free Report) has a long-term earnings growth rate of 8% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
PC Connection, Inc. (CNXN - Free Report) has a long-term earnings growth rate of 8% and a Zacks Rank #2 (Buy).
Syntel, Inc. has a long-term earnings growth rate of 10% and a Zacks Rank #2.
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