How Wholesale Labs Can Mitigate the Economy’s Impact

With Thomas F. Puckett

By
 














Thomas F. Puckett is managing director and CEO of HPC Puckett & Company, a San Diego, Calif. firm specializing in mergers and acquisitions of wholesale optical laboratories. VM asked Puckett to share his observations and insights about how the economic crisis is affecting wholesale laboratories, and what labs can do to minimize its impact on their business in 2009. —Andrew Karp




Vision Monday: What is your short-term (next six months) and medium-term (next 12 to 18 months) outlook on the current economic crisis?

Puckett: Our experience is that 2008, up until October has been a growth year for the optical laboratories we monitor. October was not noticeably different than Oct. 2007. We are however, expecting November, December and the first quarter of 2009 to be down but to what extent we are not certain. After that, nobody can predict what’s going to happen, however, conditions and corresponding sales will be tied to the economic conditions, consumer confidence and government policies such as tax rates.

If I was to project where the industry as a whole is heading, I would say that from Nov. 1 through at least June, 2009 we may be off compared to the prior year.

VM: What should independent wholesale lab executives do to minimize the impact of the crisis?

TP: What I recommend to independents to mitigate the effects of the economy is to really review the expense side of their business to see where they can become more efficient, while at the same time leveraging the business that they have to increase the job average.

At the wholesale level as well as with mass merchandisers we should see greater emphasis on more profitable and add-on sales to each customer. If fewer patients are buying, labs need to help ECPs increase the amount of and profitability of the product mix.

Labs should also look at creating more lens and frame packages. They need to develop relationships with frame vendors if they don’t already have them.

“In the managed care arena, labs need to do more to retain patients. For example, about 30 percent of VSP perscriptions written by VSP doctors walk out the door to retailers and the like. Wholesale labs that are VSP contract labs can help these doctors by offering them economically feasible products, such as frame and lens packages and bundles including quality AR coating and or second pair discounts. The same principle applies to non-VSP labs.

Wholesale labs with vision plan contracts or that have Federal or state contracts, such as with the Veterans Administration, will be less affected by the economic downturn. Those contracts provide a more reliable work flow and can also be a door opener to ECPs that might be more inclined to pass along other work to the contract lab.

VM: What should independent wholesale lab executives do to manage their businesses more effectively in 2009?

TP: Our firm is fundamentally opposed to having a wholesale lab take on too much debt. We are trying to get clients to take a serious look at any capital expenses they undertake. If they’re going to make a capital expenditure and incur more debt, or use their working capital, they want to make certain that the corresponding revenue and profits are fully scrutinized.

However, they can also factor in possible changes in the tax laws. The next administration may implement a 50 percent Federal tax rate. So why not make capital expenditures that are going to build your business if you’re can buy it at 50 cents on the dollar?

With state taxes, the rate might be even better. You might be looking at purchasing equipment after tax for as low as 40 percent to 45 percent when Section 179 deductions are incorporated into the formula. That is not to say that a lab should buy something just for the sake of buying it, but rather consult with their tax specialist to consider the after-tax cost and associated increases to revenue and earnings.

To also preserve cash, labs need to seriously consider continuing to outsource services such as premium AR coating, digital surfacing and the like. If they do put in the technology to produce these services in-house, the lab should start small, then build into larger equipment

We’re looking for clients to try to be as economically savvy as possible. Historically, companies that survive during recessions are ones that have adequate working capital. If you incur too much debt or do not cut your expenses as revenue declines, then you get into a shortfall.

VM: How will the change in administrations in Washington affect lab owners as far as taxes and regulations are concerned?

TP: The consolidation trend in the wholesale lab sector is still going strong. To date, in 2008 HPC Puckett & Company has closed nine transactions, two of which have not yet been announced, with four additional transactions that will close before the end of 2008. We believe that this activity will continue well into next year, despite economic conditions. The one caveat is if the Bush tax cuts are not rolled back, we should see greater volume. If the Bush tax cuts are repealed and nothing else happens, and the capital gains tax increases from 15 percent to 20 percent, we would expect to have the same volume of transactions in 2009.

If the capital gains tax is increased to 28 percent, as mentioned by President-Elect Obama in the campaign, then we think transactions will slow in 2009. The primary factor in determining activity is the connection between valuations that sellers are willing to sell for and purchasers are willing to spend. The market currently has a record number of strategic purchasers and a very favorable tax climate. If the post-tax proceeds to sellers or the underlying enterprise value, which is a direct result of historical earnings are adjusted, then there may be a resulting disconnect between the valuations and a slowing of transaction activity.