For Growth Stocks, Investor Patience Is in Short Supply

Four months ago, Irwin Helford’s company, Viking Office Products, was worth $2.5 billion on Wall Street, and his personal shares in the firm were worth $114 million.

Today, not much has changed as far as the basic business is concerned: It is still delivering office products to 2 million small and mid-sized businesses in the United States, Europe and Australia, and is still doing so with a pledge of “fanatical” customer service--the Viking hallmark for the last decade.

Yet investors now value Viking at $1.2 billion, half what it was worth in December. Helford’s shares are worth $56 million.

And so it goes in a bear market, which is already the brutal reality for many individual stocks, even if Wall Street officially isn’t enduring anything more than a “correction” in share prices so far.

Viking’s stock price peaked last June at $34. By mid-February it was trading at about $25. Then last Tuesday, the bottom fell out: The Los Angeles-based company warned investors that earnings growth in the first quarter ended March 31 would be about 15%--half what had been expected--and that earnings will be up only modestly this quarter.

Viking’s shares plummeted $5.50 to close at $14.50 on Tuesday in Nasdaq trading, as more than one-fifth of its 83 million shares changed hands. By Friday the stock had inched up only slightly, to $14.625.

In a market where investors haven’t needed much of an excuse to sell once-high-flying stocks, Helford dropped the equivalent of a bomb. Viking’s annual sales had rocketed from $320 million in 1992 to $1.06 billion last year, and its stock had surged fourfold in that period. When investors get used to those kinds of numbers, they aren’t psychologically prepared for any disappointment.

In the big picture, that is perhaps the greatest challenge facing the 6 1/2-year-old bull market today: Investors’ expectations may far exceed companies’ ability to deliver, given rising interest rates, a strong dollar, higher labor costs and ever-intensifying competition.

And nowhere are the stakes higher than in the growth-stock sector of the market. Companies like Viking have high-potential businesses that ought to represent the best reason to own shares. If investors can’t count on these firms to deliver consistently strong earnings, they may start thinking that their money might do just as well in a bank account.

The silver-haired, 62-year-old Helford, who has built up Viking from a mere $15 million in annual sales in the mid-1980s, says he is all too aware of the anguish he caused his investors.

“We’ve disappointed an awful lot of people,” he says. And he knows the key question that Wall Street is asking: Has Viking just stumbled, or is there a much bigger problem with its catalog-based office products business--one that could mean the end of the stellar earnings growth the company produced between 1991 and 1996, as annual profits zoomed from $8 million to $61 million?

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In a conference call with analysts last week, Helford explained the reasons for the earnings shortfall in the first half of this year. Viking’s European business, he said, is being hurt by the weakness in the strike-riddled French economy and the strength of the dollar (which reduces the value of foreign sales when translated back into dollars).

Lower paper prices worldwide also have crimped the company’s sales, as customers pay less while Viking’s cost of distributing paper products hasn’t declined.

And in Britain, which accounted for 29% of Viking’s total sales last year, the company has run into capacity problems: Its two current shipping facilities in Britain are at full capacity, Helford said, so he made the decision to pull back from an aggressive marketing campaign rather than risk being unable to fill customers’ orders.

“I would always sacrifice [additional] sales to keep our word” to current customers, Helford said.

Analysts who follow Viking say Helford isn’t just blowing smoke.

“He isn’t going to ruin the business just to appease” investors who never want the stock to go down, said Jim Stoeffel, analyst at Smith Barney Inc. in New York.

While “momentum” stock players won’t take any comfort from that, Viking’s long-term investors should--because devoted customer service is what has made Viking.

Helford’s strategy has been to offer small and mid-sized businesses everything they need in office supplies--10,000 items in all--via mail order.

From the outset, Helford decided he would not try to compete on price. Rather, he would offer a level of service that competitors would find difficult to duplicate, and which his customers would find impossible to live without once they got used to it.

Critical to that strategy is the company’s overnight delivery service and, in a growing number of markets, including Europe, its same-day delivery pledge.

Moreover, Helford has pursued database marketing with a vengeance. Viking’s computers not only keep track of everything individual customers buy, but try to anticipate their needs, depending on their line of business.

“We know everything about our customers,” Helford says proudly.

Most exciting to Helford is that advances in technology and printing now allow Viking to print what are essentially “personalized” catalogs of office products, furniture and computer supplies. “Eventually we’ll have a customized catalog for each customer--that’s the future,” he said.

But even the most individualized catalogs won’t be worth much if Viking’s employees don’t back them up with “fanatical” service, Helford insists. So he demands that his workers care deeply about customers, period.

“People can tell over the phone if you give a damn or not,” he said.

That has cost him more in labor expenses, he concedes, because “I want to pay more to get the best.” The company maintains a companywide pay-for-performance plan that rewards each employee with a fifth check each month “if their performance measures up to standards they agree to” in advance, Helford said.

In addition, 70% of employees own Viking stock, Helford said. They can purchase it twice a year at 15% below the market price.

That Helford’s corporate strategy has worked so far isn’t a question on Wall Street. Even more remarkable, he has built Viking solely by internal expansion--without acquisitions and without debt.

The issue now, however, is whether that strategy can continue to deliver.

Helford concedes that at $1 billion in sales, the “law of large numbers” is catching up with Viking: It’s much more difficult for a business of this size to grow 50% a year than it is for a much smaller business.

And the company’s rising dependence on foreign sales, which were 60% of total sales last year, presents both new opportunities and new risks, as last week’s announcement demonstrated.

But Helford sees Viking’s problems in Europe as short-term. In Britain, he said, the capacity issue will be solved with a new facility set to open this fall.

And while the dollar’s strength is a challenge now, Helford believes that the fast success the company has had with each market it has entered in Europe bodes well for long-term sales volume as it penetrates new regions. The office supply needs of small businesses, he said, are universal, but Viking’s level of service is not.

Moreover, Helford expects to move into Japan and the rest of Asia sometime in the next few years, and perhaps Latin America.

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As for the U.S. market, Helford concedes that competition is tougher--especially from the office superstore chains like Staples Inc., which has been increasingly emphasizing its delivery business.

But Helford notes that Viking’s same-day delivery accounts for just 20% of total U.S. sales--not because customers don’t want it, but because it isn’t yet offered in most regions. As Viking expands that service with new facilities, Helford believes he will snare significant market share. “Our most loyal customers are in the same-day zones,” he said.

Helford is telling Wall Street that Viking is still capable of 20% to 25% annual earnings growth over the next several years. Analysts expect Viking to earn about 80 cents a share this fiscal year (which ends June 30) and about $1 a share in fiscal 1998.

If Helford delivers that 1998 estimate, Viking stock now is trading at 15 times 1998 earnings. It may take time, but Helford believes investors will one day look back on this price as a great buy. For now, however, he’s clearly in need of patient investors--and in this market, they may be the ones in shortest supply.

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Vikings Voyage

Spectacular sales and earnings growth since 1990 has fueled a dramatic rise in shares of Viking Office Products. But this year the stock as plummeted on fears that the company’s future growth will be much slower. The stock’s quarterly closes and latest on Nasdaq:

1997, Friday: $14.63

Prices adjusted for stock split.

* Source: Bloomberg News