REX

Business Context and Reporting Period

Company: REX Stores Corporation (REX American Resources Corp)

Filing Type: Form 10-K (Annual Report)

Reporting Period: Fiscal year ended January 31, 2003

Business Overview: REX is a leading specialty retailer of consumer electronics and major household appliances, operating 252 stores in 37 states. The company focuses on small to medium-sized markets, offering brand-name products at guaranteed lowest prices. The company operates in a single segment and did not open any new stores in fiscal 2002, closing 10 locations instead.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 7.7% to $428.6 million, driven primarily by a 5.1% decline in comparable store sales and the closure of 10 stores with no new openings.
• Margin Expansion: Despite lower sales, gross profit margin improved to 29.7% from 28.9% due to a favorable shift in sales mix toward higher-margin categories (e.g., large-screen TVs) and better vendor pricing.
• Cash Flow Reversal: Operating cash flow swung from a $42.3 million inflow in 2002 to a $37.2 million outflow in 2003. This was primarily due to a $41.0 million increase in inventory to rebuild stock levels following shortages in the prior year.
• Debt Reduction: Long-term mortgage debt decreased by approximately $12.8 million as the company paid off $12.1 million in debt and refinanced portions at lower rates. Interest expense dropped to $5.4 million from $8.2 million.
• Share Repurchases: The company repurchased 1.55 million shares of common stock for approximately $16.8 million.

Outlook, Risks, and Unusual Items

• Synthetic Fuel Tax Credits: A significant portion of income ($15.1 million in 2003) is derived from sales of interests in synthetic fuel limited partnerships. Approximately $6.3 million of proceeds from these sales are held in escrow pending an IRS audit. If the audit denies the tax credits, the company could face significant tax liabilities.
• Inventory Strategy: Management expects inventory and cash levels to remain consistent with year-end 2003 levels, subject to seasonal fluctuations. The company is rebuilding inventory after prior shortages.
• Store Strategy: No new stores were opened in fiscal 2002, and none are under development for fiscal 2003. The focus remains on optimizing existing locations in small markets.
• Accounting Changes: New FASB rules (Statement No. 145) require the reclassification of losses on debt extinguishment from "extraordinary items" to "income from continuing operations" effective January 31, 2003.
• Seasonality: The business is highly seasonal, with the fourth fiscal quarter (Christmas season) accounting for approximately 34% of annual sales and nearly 60% of operating income.

Investor Verification Checklist

• IRS Audit Status: Verify the status of the IRS audit regarding the synthetic fuel partnership tax credits, as $6.3 million is currently in escrow and denial could impact future earnings.
• Inventory Valuation: Assess the risk of inventory obsolescence given the $41 million increase in inventory levels and the rapid technological changes in consumer electronics.
• Debt Maturities: Review the schedule of balloon payments on mortgage debt, totaling approximately $4.3 million due over the next two fiscal years.
• Comparable Store Sales: Monitor trends in comparable store sales, which have declined for three consecutive fiscal years (5.1% in 2003, 7.9% in 2002, 5.6% in 2001).
• Liquidity Position: Confirm the company's ability to manage working capital needs given the drop in cash equivalents from $39.4 million to $1.4 million, despite having $76.9 million available on its revolving credit line.