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Analysts expect more bad news for earnings in 2010, but believe OptionsXpress Holdings Inc. will pick up a larger piece of the retail stock and options industry in the following two years.

The retail brokerage industry’s new 'insurgent' marketers

by Jason Shough
May 21, 2010


Jason Shough/MEDILL

OptionsXpress has taken out ads at a wide range of popular finance sites on the web.

Ads for OptionsXpress Holdings Inc. are popping up more often and in more places these days.

The company recently began posting ads on popular financial websites like Investor’s Business Daily and Barron’s. This month the Chicago-based online stock and options brokerage placed one on CNBC, marking the company’s first foray into television.

Instead of lying back and riding out whatever is left of the large storm hovering over the retail options industry, OptionsXpress has gone on the offensive. Over the next year the company intends to capture a larger share of its market by building brand recognition and more aggressively marketing its current products and trading platforms, analysts say.

But more aggressively does not necessarily mean more expensively. The company brought aboard a new marketing boss, Kirk Chartier, in January to ramp up its marketing efforts after a particularly weak 2009. Following two years of stunning double-digit growth, earnings fell 7.5 percent in 2008 and then plummeted last year by almost 33 percent, to $60.7 million from $90.3 million in 2008. Revenues decreased 5 percent. Better marketing became essential.

Analysts surveyed by Bloomberg LP expect the downward trend to continue through this year and then forecast healthy growth for the next two years. This year, they estimate, the company’s earnings will fall by 7 percent to $56.6 million, or 97 cents per diluted share. But they expect earnings to surge 21 percent in 2011 and then 34 percent in 2012.

OptionsXpress stock closed at $16.49 on May 20, with a 52-week high of $19.38 last June and a low of $13.85 at the end of 2009. The analysts’ target price for 2010 is $17.63, not much above the current price, with a high target of $20 and a low of $15, according to

Chartier has taken the reins at a time when online brokerages across the board have been struggling to see profits, analysts say. The industry was bruised by the recession in 2008-2009, which scared many investors away from stocks and more complex derivative products like options.

Customers made fewer options trades in 2009 than in prior years. From 2005 to 2008, optionsXpress customers averaged 38 trades per account. But in 2009 that number dropped 13 percent to 33 trades, another indication of slack in the demand for options investments.

“It’s a later-cycle business in that retail investors’ willingness to invest is driven primarily by confidence,” said Mark Lane, an analyst with William Blair & Co. “So you need the markets to be more stable, employment to improve and people to feel better about things. It’s taken longer to heal than most.”

To combat the economic weather, Chartier is utilizing a strategy called “insurgency” marketing, which attempts to build momentum by utilizing the company’s current relationships and advertising spaces more effectively. The beauty of the insurgency is that it is the strategy of not having a broad concrete strategy. Instead, Chartier said he will look at everything and figure out what works.

“We’re doing new things but not raising net costs,” Chartier said, in an interview. “We think like insurgents. What we’re going to do will be unexpected mixed with the traditional.”

The good news for optionsXpress is that it may not require doubling expenses to deliver results.

Getting something for nothing is always welcomed in rough economic conditions. OptionsXpress cut its advertising expenses by 15 percent in 2009, to $17.6 million, and management expects that number to remain flat in 2010, excluding money set aside for new product launches.

OptionsXpress “is still working through very difficult market conditions,” Lane said. “Retail investors remain pretty cautious, impacting [the company’s] ability to attract new clients and also impacting trading activity of current clients, putting pressure on their revenue.”

Putting more pressure on optionsXpress is the competitiveness of the retail options market, 90 percent of which is dominated by five well-recognized companies: Fidelity, Charles Schwab, TD Ameritrade, Etrade and Scott Trade.

Not only does optionsXpress have to worry about the bigger fish, but several new companies have entered the niche retail options market in the past few years, including Trade King, Trade Monster and Think or Swim. These companies are competing mostly with their pricing structures, which for higher-volume trades are slightly lower than optionsXpress, analysts say.

For instance, on trades of 10 contracts the industry average commission is $16.89 per contract, slightly above optionsXpress's $15. But on trades of 20 or more contracts, the industry average is $26.48 while optionsXpress charges $30, or 13 percent higher.

But Chartier is confident that focusing on products and customer service, rather than exclusively on price, is the way to compete in this market. The industry-wide decline in revenues and earnings over the past two years was due more to the recession than some broader downward trend in the retail stock and options market, analysts say. This could mean that when market conditions improve, retail options customers may not be entirely motivated by price.

“Cyclically they’re facing challenges,” Lane said. “But we think those pressures will slowly dissipate.”

While average investors and traders remain wary of throwing their weight into the risky options market, there is some indication that this trend is reversing. Volume of revenue-generating trades for optionsXpress went up almost 6 percent in April from the same period last year.

 “The population that trades options has grown over the years,” Chartier said. “Options have become more mainstream to traders, which has helped us.”

Helping to keep options mainstream are education services aimed at new investors. OptionsXpress purchased one such company last year called Optionetics Inc. The service offers training seminars to prospective investors on general investing and options trading strategies.

Analysts believe the Optionetics venture has the potential to bring in new accounts, but that it was launched at a difficult time for the industry overall. Managers initially hoped it would bring in roughly 600 customers per month, but since it was purchased it has only delivered roughly half that number.

The affect of the insurgent strategies and new products on company earnings remains to be seen. Analysts are careful not to be too bullish about the retail options market, but most agree the market will eventually rebound.

 “I really think [growth] is going to be driven by market conditions and the retail investors,” said Richard Repetto, an analyst at Sandler + O’Neil. “Marketing should help. They’re making a lot of effort to improve.”