Retalix ( RTLX), an Israel-based maker of checkout software for grocery stores and gas stations, is pushing into the U.S. After several stateside acquisitions, Retalix says it sells so-called point-of-sale applications to two-thirds of the top 50 U.S. grocery chains and to 74% of the top 50 grocery wholesalers. That means that Retalix is in more than 16,000 grocery stores across the U.S. and 42,000 worldwide. Yet Wall Street has yet to notice the company. Just 23,000 shares trade daily, and the company's market capitalization is just $380 million at recent prices. On Tuesday, the company is due to post fourth-quarter earnings. Analysts expect a 19-cent-a-share profit on sales of $55 million, though only two firms cover the stock. CEO Barry Shaked recently spoke with TheStreet.com about his company's plans and the markets it sells into. TSC: What is Retalix's niche and how big is this market? Shaked: We operate in the retail and distribution market with a specific focus on grocery stores, convenience stores and fuel stations. We sell point-of-sale solutions as an alternative to aging legacy systems currently used by most of America's food retailers. We also provide end-to-end enterprise solutions that cover the operational, business intelligence, supply chain management and customer loyalty aspects for retailers and distributors. We have a broad customer base that ranges from large retail chains such as Kroger ( KR) and Costco ( COST) to local independent stores.
We estimate that annual spending on software by U.S. retailers and wholesalers in the food and fuel segment is roughly $1.5 billion, and 7% to 10% of that goes to Retalix. So what is your focus now -- point-of-sale or enterprise solutions? We started as a point-of-sale company and grew it into an enterprise solution provider. As the company grew, we needed to make a strategic decision: Are we going to keep making store solutions for other retail verticals, such as general merchandise or apparel, or are we going to take the grocery, convenience and fuel vertical and develop an end to end solution? We decided to master the enterprise solution. Who are the main players in retail software? We find different competitors in the different areas of activity. In store solutions, we still find IBM ( IBM) and NCR ( NCR). They partner with us on the hardware side but compete with us on the software. On the enterprise side, we find JDA ( JDAS), SAP ( SAP) and Oracle ( ORCL), while in the warehouse section we compete with Manhattan Associates ( MANH). What are you doing in order to beat competition? SAP and Oracle have recently gone on acquisition sprees, each buying enterprise software companies that target general merchandise retail because of the great potential in this market. But both companies are "bleeding" these acquisitions. It is very difficult to take a vertical enterprise solution and make it work in groceries and general merchandise, namely because it's the most complex supply chain. They will get to it in two to three years, but in the meantime they are giving us a window of opportunity to improve our position.
How are you going to increase your market share? When we decided to go into the enterprise and warehouse management we made a series of acquisitions. In 2004 we bought OMI, which has its legacy systems installed among a majority of the U.S.' largest grocery chains, which means that they are our customers now and our task is to move them into the next generation. Then we acquired another company called IDS on the distributors' side. But the significant change will happen once our enterprise solutions take off. We currently have this solution installed at seven sites in the U.S., and the grocery market is waiting to see how we perform with these pilots. If we succeed, there is no question many others will follow. How is your enterprise solution better than others'? Our strength is that we have got one solution that goes end to end for retailers and distributors, completely synchronized. A good warehouse system needs to know what it sold in real time at the point of sale, it needs to know if there is a campaign or promotion starting on a certain product, and it has to also know when the Super Bowl is, when a lot more beers are bought. Inefficiencies that occur between a retailer and a distributor are the biggest problem. The need for greater efficiency in many ways was boosted by Wal-Mart ( WMT), who has a proprietary IT system that improved operation efficiency, cut costs and brought down their prices. Now most other retailers are forced to improve their own supply chain efficiencies in order to compete with Wal-Mart. What we offer is an entire solution from warehouse to checkout that reduces costs and improves the bottom line. I don't believe there is any other solution that is equal to our solution.
Where would you like to see the company in three to five years from now? I would like to see Retalix being the "de facto" end-to end solution provider in the grocery, food and fuel markets. Something like SAP did in manufacturing. Because it's so complex to come up with a real competing solution, I believe that once our solution becomes known we will automatically win 50% of all new bids. With hard selling maybe even win 75%. What's your strategy? We are investing a lot in R&D to fulfill our vision, probably twice as much as other companies do, about 25% of our revenue. We are acquiring domain knowledge and market share, hiring good people. We know we have to grow our company to half a billion dollars in revenue quickly because to be a significant player you have to have these revenues. All of this is part of our three-year plan to execute the change that will create value for our shareholders What about the rumors regarding various acquisition offers targeting Retalix? As a public company, you are obliged to respond to any offer which is better than your ability to bring value to shareholders. As the chairman and shareholder, I always look at what we can achieve on our own and compare it to other offers. Your 2006 financial results -- what should investors expect? 2006 was a difficult year for Retalix because it was the first year we didn't meet our own expectations. After two soft quarters, the fourth quarter was very important to get back investors' confidence and to prove that we are on track in terms of revenue and profitability. We will be back on track, and the numbers will be in line with expectations. There will be no surprises. Although 2006 was a weak year in terms of expectations in the market place, it was strong in that we completed the integration of three companies and created one management team, one professional services team, and grew from 200 people to 600 people in the U.S. in one year. That was not an easy thing, but we are still smiling at the end of the year. We are well-positioned to make 2007 our best year ever, and the indications for that will be the Q4 2006 results.