Information technology (IT) products distributor, Tech Data Corp. (TECD) recently announced the discontinuation of its Brazilian operations, effective January 31, 2012. Tech Data cited complex tax, legal and the regulatory environment in the country as the primary factors for the discontinuation.
Tech Data will maintain its legal existence in the near term, in order to address its fiscal and legal responsibilities. The move is expected to hurt Tech Data’s profitability in 2012. Tech Data expects to incur operating losses and other charges of approximately $22 million to $25 million in the fourth quarter of fiscal 2012.
Tech Data will also record impairment charges of approximately $8.0 million to $10.0 million relating to its investment in Brazil due to a foreign currency exchange loss. In addition, the company will also incur a non-cash charge to increase its provision for income taxes by approximately $8.0 million to $10.0 million to write off the deferred tax assets in Brazil.
We believe that the winding up of the Brazilian operations will hurt Tech Data’s top-line growth going forward. Latin America has been one of the strongest growth areas for the company over the last few years and Brazil had previously been an important hub for the company’s business.
Brazil has emerged as one of the leading emerging economies over the past few years. Recently, Brazil surpassed Japan as the world’s third largest PC market. This staggering growth has been driven by robust consumer spending stimulated by accessible credit and government efforts to drive higher PC sales. Brazil is also the fifth largest mobile market.
Tech Data derives approximately 15% – 20% of revenues from PC distribution and mobile also forms a significant component of its revenue mix. However, we believe that increasing competition from local distributors had serious implications for Tech Data’s profitability over the years, which compelled the company to leave the country.
Tech Data, which distributes products manufactured by Apple Inc. (AAPL) and Hewlett-Packard Co. (HPQ), expects flat to low single-digit sales growth in local currency in both the U.S. and Europe.
Tech Data faces a number of headwinds in the near term, including a volatile European market and a lack of visibility in government spending in the U.S, which coupled with the discontinuation of the Brazilian operations, adds to our concern.
We believe that the loss of revenue from a major market such as Brazil will affect the growth trajectory of the other regions in Latin America, as the company may be forced to increase the price of its products in order to compensate for the loss. This may result in market share loss for Tech Data, which in turn will put margins under pressure going forward.
We, thus maintain our long-term Neutral recommendation on the stock. Currently, the stock holds a Zacks #3 Rank, implying a short-term Hold rating.
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