Business Context and Reporting Period
Company: REX Stores Corporation (REX American Resources Corp)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended October 31, 2006
Business Overview: REX is a specialty retailer of consumer electronics and appliances operating 207 stores as of October 31, 2006. The company has significantly diversified into synthetic fuel and ethanol investments, including the recent acquisition of a 47% interest in Levelland/Hockley County Ethanol, LLC.
Key Financial Metrics
| Metric | 9 Months Ended Oct 31, 2006 | 9 Months Ended Oct 31, 2005 | 3 Months Ended Oct 31, 2006 | 3 Months Ended Oct 31, 2005 |
|---|---|---|---|---|
| Net Sales and Revenue | $251.5 million | $259.6 million | $85.2 million | $91.8 million |
| Gross Profit | $68.8 million (27.3%) | $73.4 million (28.3%) | $22.5 million (26.4%) | $25.4 million (27.7%) |
| Operating Income (Loss) | $0.3 million | $3.8 million | ($0.8 million) | $1.3 million |
| Net Income | $7.8 million | $21.7 million | $4.8 million | $6.9 million |
| Diluted EPS | $0.67 | $1.76 | $0.42 | $0.58 |
| Cash and Equivalents | $15.9 million | $1.3 million (Oct 31, 2005) | $15.9 million | $1.3 million |
| Working Capital | $105.7 million | $88.0 million (Jan 31, 2006) | $105.7 million | $88.0 million |
| Long-Term Debt | $21.5 million | $27.8 million (Oct 31, 2005) | $21.5 million | $27.8 million |
Cash Flow (9 Months): Net cash used in operating activities was $15.4 million, primarily due to an $18.7 million increase in inventory. Net cash provided by investing activities was $8.2 million, driven by real estate sales and the Levelland/Hockley acquisition. Net cash provided by financing activities was $1.8 million.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 3.1% year-over-year for the nine-month period, driven by a net reduction of 19 stores and a 0.7% decline in comparable store sales. Comparable store sales were negatively impacted by lower price points in audio and video categories, partially offset by growth in appliances.
- Profitability Drop: Net income fell 64.1% to $7.8 million for the nine-month period. This sharp decline is largely attributed to a significant reduction in income from synthetic fuel investments ($8.7 million in 2006 vs. $24.8 million in 2005).
- Operating Loss: The company reported an operating loss of $0.8 million for the quarter, compared to operating income of $1.3 million in the prior year quarter, due to lower gross margins and increased stock-based compensation expenses following the adoption of SFAS 123(R).
- Store Count: The company operated 207 stores at period end, down from 226 stores one year earlier, with 11 stores closed in the first nine months of fiscal 2006.
Outlook, Risks, and Management Commentary
- Synthetic Fuel Risks: A primary risk factor is the potential phase-out of Section 29/45K federal tax credits for synthetic fuel if crude oil prices exceed specific thresholds. Management estimates a 40% phase-out as of October 31, 2006. Future income from these investments is uncertain and dependent on oil prices and production levels.
- Ethanol Expansion: The company is actively investing in ethanol production. It acquired a 47% stake in Levelland/Hockley County Ethanol, LLC ($11.5 million funded) and has contingent agreements to invest up to $70.4 million in additional ethanol entities (Millennium, One Earth, Patriot, Big River). Funding for these is subject to conditions and external financing.
- Tax Rate: Management expects the effective tax rate for fiscal 2006 to range between 32% and 40%, higher than prior periods, as the company no longer earns federal income tax credits from synthetic fuel production.
- Liquidity: The company maintains a strong liquidity position with a current ratio of 3.2 to 1. However, future ethanol investments may require increased borrowings or alternative financing sources.
Investor Verification Checklist
- Synthetic Fuel Income Sustainability: Verify the impact of current oil prices on the Section 29/45K tax credit phase-out and the resulting reduction in non-operating income.
- Ethanol Investment Commitments: Confirm the status and funding requirements of contingent agreements with Millennium, One Earth, Patriot, and Big River, totaling potential additional investments of over $70 million.
- Retail Margin Pressure: Assess the trend in comparable store sales and gross margins, particularly in the television, audio, and video categories facing commoditization.
- Discontinued Operations: Review the timeline and proceeds from the sale of assets related to the 11 closed stores classified as discontinued operations.
- Debt Covenants: Monitor the company's ability to service debt while funding new ethanol projects, noting the recent $10 million mortgage borrowing in November 2006.