[Leica] Re: Leica Newsletter and financial report.

[drodgers@nextlink.net]

Eric:

You wrote:
>>If anything, this P&S market might just
bolster up the sagging sales at the high end long enough to get their
marketing act together and really start selling the good stuff.<<

You make a very good point. I just looked at the 3rd Quarter report. It's pretty
high level, as one would expect in a consolidated financial report. But it's
dangerous to make too bold a prediction of a particular product line.

Sales figures alone can be misleading. Yes, R sales were down. Yes, M sales were
up. I know for a fact that there was heavy promotion and discounting on the
Classic M6s after release of the M6TTL. So it doesn't surprise me that M sales
were up. I don't know the whole story on the R line. Were there R promotions in
3Q 1997/98? It's dangerous to put too much into a two year comparison. Five-year
trending would be better, and still not perfect.

The bullet point "First successes in inventory reduction" in the shareholder
letter is interesting. Overall it looks like inventory is about 50 percent of
sales. INV=109K and SALES=105K. That's less that two inventory turns per year. I
don't know if that's good or bad in the optics industry. For many industries,
that would be way too low. Some industries want to turn inventory 12 times a
year. Interest rates are low now. If they creep up (and they will eventually)
the cost of capital, and inventory, goes up. That makes higher turns more
important. Overstock usually means discounting.

Turns is very industry specific. Overstock is especially bad in high tech, where
obsolesence is an issue. For example,  how would you like to have an abundance
of items with 5-year-old AF technology sitting in a warehouse, or floored
somewhere?

It's not wise to make product line predictions based on a consolidated financial
statement. It's a wide angle shot. We don't have the macro shot. These
statements don't show detailed COGS (cost of goods sold) information. They don't
show how fixed and variable costs are allocated. They don't show margin
information. Sales may be down because there was less discounting. Margins,
therefore, may have been higher in the R line. We just don't know.

The consolidated statements don't show net income by product line. I don't mean
to speculate. I'm just saying there are many facts we don't know. If you drop
the R line, for example, sales costs probably won't drop propotionally. You have
to allocate more fixed costs to the other lines and margins shrink. The fact
that compact camera sales are increasing is good news for the other lines, as
you implied.

It's easy to focus on sales, but it's not the only barometer of success. It
would be unrealistic to expect Leica, a company with a long history, to increase
sales on every line every year. It's short sighted to put too much emphasis on a
two-year comparison. I'm not saying that it isn't important, especially if
continues. I'm just saying there's a lot more to it. For example, imagine the
value of the Leica trademark on an SLR.  For the same reason we still have
Contax cameras, instead of Kyocera?

Dave