Business Context and Reporting Period
Company: REX Stores Corporation (REX American Resources Corp)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2007
Business Overview: REX operates as a specialty retailer of consumer electronics and appliances, with 142 stores as of July 31, 2007 (down from 210 a year prior). The company has diversified into the alternative energy sector, investing in ethanol production facilities and synthetic fuel partnerships. The company is an accelerated filer and is not a shell company.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended July 31, 2007 |
Six Months Ended July 31, 2007 |
Six Months Ended July 31, 2006 |
|---|---|---|---|
| Net Sales and Revenue | $56,264 | $113,955 | $129,572 |
| Gross Profit | $17,598 | $35,378 | $36,608 |
| Gross Margin % | 31.3% | 31.0% | 28.3% |
| Net Income | $5,810 | $13,344 | $2,986 |
| Diluted EPS | $0.48 | $1.12 | $0.26 |
| Cash and Cash Equivalents | $90,293 | $90,293 (End of Period) | $5,481 (End of Period) |
| Total Debt (Current + Long-Term) | $21,305 | $21,305 (End of Period) | $22,593 (End of Period) |
| Working Capital | $119,382 | $119,382 (End of Period) | $92,494 (End of Period) |
Note: Debt figures include current portion of long-term debt and long-term mortgage debt. Working capital is calculated as Total Current Assets minus Total Current Liabilities.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 11.5% in the quarter and 12.0% for the six-month period compared to the prior year. This was driven by a 12.0% decrease in comparable store sales and a reduction in the store count (142 stores vs. 210 last year).
- Televisions and appliances were the primary revenue drivers, but sales of plasma, light engine, and traditional tube TVs declined.
- Profitability Surge: Despite lower sales, Net Income increased significantly (288% for the quarter, 347% for six months). This was primarily due to:
- Synthetic Fuel Income: $3.4 million (quarter) and $10.1 million (six months) from tax credits related to prior sales of synthetic fuel interests (Colona and Somerset).
- Real Estate Gains: Significant gains from the sale and leaseback of 86 store locations to KLAC REX, LLC ($74.5 million proceeds), resulting in recognized gains and deferred gain amortization.
- Discontinued Operations: A gain of $2.6 million (quarter) and $5.0 million (six months) from the disposal of discontinued operations.
- Liquidity Improvement: Cash and cash equivalents increased from $5.5 million to $90.3 million, largely due to proceeds from real estate sales and synthetic fuel investments.
- Inventory: Merchandise inventory decreased to $84.3 million from $123.3 million a year ago, reflecting the reduced store footprint.
Guidance, Outlook, and Risks
- Store Strategy: The company continues to close underperforming stores. In the first six months of fiscal 2007, 51 stores were closed with no new openings.
- Alternative Energy Investments:
- Levelland/Hockley: Construction of a 40 million gallon ethanol plant is underway ($17.4 million spent of $58.4 million contract). The company increased its ownership to 56% in July 2007.
- One Earth Energy: Committed to subscribe for $35.1 million to $62.4 million of membership units for a 100 million gallon facility in Illinois.
- Millennium Ethanol: Subsequent to the period end (August 2007), the company's $14 million note was converted into stock and cash upon acquisition by US BioEnergy Corporation.
- Key Risks:
- Tax Credit Phase-out: Synthetic fuel income relies on Section 29/45K tax credits, which are subject to phase-out if crude oil prices exceed certain thresholds. The company estimates a 25% phase-out for 2007 based on current oil prices.
- Lease Terminations: In August 2007, the lessor (KLAC) notified REX of the termination of nine leases, requiring vacating of those properties by October 30, 2007.
- Competition: High competition in consumer electronics, particularly in audio and video categories where products are becoming commodities with lower price points.
Investor Verification Checklist
- Synthetic Fuel Sustainability: Verify the likelihood of Section 29/45K tax credit phase-outs in 2007 and the impact on future income from Colona and Somerset interests.
- Real Estate Obligations: Confirm the financial impact of the nine lease terminations notified in August 2007 and the status of the remaining sale-leaseback properties.
- Ethanol Project Costs: Monitor construction progress and budget adherence for the Levelland/Hockley and One Earth Energy ethanol plants, as cost overruns could require additional capital.
- Comparable Store Sales: Assess whether the decline in comparable store sales (12.0% in Q2) is a temporary trend or indicative of a structural shift in the retail market.
- Discontinued Operations: Review the timeline for the sale of remaining assets held for sale and the finalization of gains/losses from store closures.