For a time it looked like
was on his way to becoming a junior
Media Arts Group
, which sells canvas paintings, lithographs and other home decorating items based on the artist's
Licensing deals had placed Kinkade images on everything from
chairs. The company was opening galleries at a breakneck pace, and sales at galleries operating at least one year were booming.
But now, after last week reporting a quarter that was riddled with ugly surprises, the road to brand ubiquity for the San Jose, Calif.-based company looks less certain. Even Shelly Hale, a
NationsBanc Montgomery Securities
analyst who was one of the company's more ardent bulls, downgraded the stock to a hold from a buy. Her firm has performed underwriting services for Media Arts. And the shares, which 12 months ago changed hands in the 20s, dropped 7/16 to close Monday at 7, its 52-week low.
Bud Peterson, Media Arts' president and chief executive, says the company is only going through a transition that should last about six months as it changes its strategy from a retailer to a wholesaler and licensing company.
And by some measures Kinkade's work is still popular with folks who favor covered bridges and red brick houses with smoke wafting from the chimney. "Tom is the best-selling artist in America right now," says Terri Peters, an art dealer in Pawhuska, Okla., who says 80% of her sales are Kinkade paintings.
But as the most-recent quarter attests, that demand appears to be eroding, or at least growing more slowly than the company had expected. (Some short-sellers alluded to some of these issues in a Dec. 16
story.) And the slowdown comes at a time when Media Arts is increasing supply. In the past year, it's tripled the size of editions -- the number of prints of a particular image.
Although Media Arts hit the
consensus estimate of 32 cents per share for the fiscal fourth quarter ended March 31, the company's total sales -- $31.4 million, up 23% from $25.4 million a year earlier -- fell short of estimates. Additionally, same-store sales, an indicator of a retailer's strength, were flat. More alarming: Inventories at the fiscal year's end swelled some 83%, compared with a 53% sales gain.
Now, the company has decided to get out of the brick-and-mortar retail business altogether and concentrate on wholesale and e-commerce. It's selling its 32 company-owned stores to privately held
, which offer Kinkade's products exclusively. Betting that the Net will be a more efficient distribution system, Media Arts plans to invest up to $6 million this fiscal year to develop an e-commerce site that should launch in September.
"These issues lead us to believe the stock has little room for appreciation in the short term as investors take a wait-and-see approach for tangible results of the company's new business model," Hale wrote in a note to clients. She trimmed her fiscal 2000 earnings-per-share estimates to $1.50 from $1.64.
One investor, who is short the stock and says it will go lower, puts it another way: "The comparable store sales are flat, gross margin is declining and spending is going up. The business model doesn't work. That's when you become an Internet company."
Not so, says Peterson, who adds that he's taking advantage of an opportunity to grow the business more efficiently over the Net, without accruing all the fixed costs associated with opening and operating galleries.
"Some of our dealers are already selling images over the Net," he says. "That's an area where we need to exercise control over our brand name."
But with Media Arts' inventory climbing faster than sales, Kinkade's supply is outpacing demand.
Peterson says part of the inventory buildup is due to a program that allows galleries to exchange paintings that aren't selling for new ones. Last year, it seems, there were quite a few Kinkade clunkers -- to the tune of $1 million, which Hale estimates Media Arts took back from galleries.
Most of the inventory bulge, however, is because Media Arts tripled its edition size. To ensure all pieces in a certain edition have the same color quality, they must be printed at the same time, Peterson says, causing the company to carry more inventory than it had in the past.
The larger edition size is a sore point with Kinkade collectors, who began buying his artwork not just because they liked the images but because they deemed them good investments. Skeptics have long said that by increasing edition sizes and placing Kinkade scenes on everything from coffee mugs to greeting cards, his name would lose value. And there seems to be anecdotal evidence to that effect.
Although Media Arts says it discourages people from buying Kinkade as an investment, several gallery owners were quick to point out how easy it would be to resell a Kinkade at a profit.
"It's not uncommon for the value of these paintings to increase by 50% in the secondary market," says Rich Bedayn, who operates six Signature Galleries in Lafayette, Calif. "I can't think of any living artist whose paintings have appreciated as much."
But the reality, as Lou Livingston, a landscape contractor living in Portland, Ore., discovered can be starkly different. Since 1994, he'd accumulated 15 pieces. But when he tried to resell some of these paintings on the secondary market, he found few buyers. He eventually sold six pieces for 25% of their original price.
"Gallery owners never pushed the investment angle," Livingston says. "But it was implied that you could cut a big fat hog by buying these paintings."
Taken together, the slowing sales, rising inventory and price depreciation in the secondary market point to some cracks in Media Arts' picture.