REX

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, 2000 (Fiscal Year 2000)

Business Overview: A leading specialty retailer in the consumer electronics and appliance industry. As of October 31, 2000, the company operated 251 stores in 36 states, primarily under the "REX" trade name in small to medium-sized markets.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 2.6% ($2.7 million) for the quarter and 1.5% ($4.7 million) for the nine-month period compared to the prior year. Growth was driven by a net increase of 23 stores.
• Comparable Store Sales: Comparable store sales declined 7.0% for the quarter and 5.6% for the nine-month period. Key negative drivers included the appliance category (impacted by cool weather and competition) and video/audio categories (impacted by declining prices and competition).
• Profitability: Net income increased 16.1% for the quarter and 16.6% for the nine-month period. This improvement was significantly aided by income from limited partnerships ($3.0 million for the quarter; $7.4 million for nine months) related to synthetic fuel tax credits.
• Expenses: Selling, general, and administrative (SG&A) expenses increased 4.4% for the quarter due to advertising for new stores and occupancy costs. Interest expense rose significantly (77% for the quarter) due to higher borrowings on the line of credit to fund inventory and store construction.
• Liquidity: Cash and cash equivalents decreased from $25.6 million at the start of the fiscal year to $3.7 million at period end. Working capital declined from $100.8 million to $54.4 million, primarily due to a $46.1 million increase in inventory and a $78.0 million increase in notes payable.

Guidance, Outlook, and Risks

• Store Expansion: The company plans to open approximately 10 to 15 new stores in fiscal 2001, a reduction from the previously planned 35 to 40 stores. Estimated capital expenditures for these openings range from $4.0 million to $8.0 million.
• Capital Allocation: The company continues an aggressive stock buyback program, purchasing 2.43 million shares for $44.8 million during the first nine months of fiscal 2000. Authorization remains for an additional 927,900 shares.
• Financing: New store openings are expected to be funded by cash from operations, investments, and additional mortgage debt. As of October 31, 2000, approximately $41.1 million remained available on the line of credit.
• Risks: The company faces risks from an increasingly competitive environment, particularly in appliances and consumer electronics. Unseasonably cool weather has negatively impacted air conditioner sales. Forward-looking statements are subject to uncertainties detailed in the company's Form 10-K.

Investor Verification Checklist

• Inventory Build: Verify the necessity and turnover rate of the $46.1 million increase in inventory, which was the primary driver of negative operating cash flow.
• Debt Levels: Confirm the terms and interest rates of the $78.0 million increase in notes payable and the impact on future interest coverage ratios.
• Comparable Sales Trend: Monitor the 7.0% decline in comparable store sales to determine if it is a temporary weather-related issue or a structural shift in market demand.
• Partnership Income: Assess the sustainability of the $7.4 million income from limited partnerships, noting it is derived from tax credit sales rather than core retail operations.
• Capital Expenditure Revision: Understand the rationale behind reducing the fiscal 2001 store opening plan from 35-40 stores to 10-15 stores.