Business Context and Reporting Period
Company: REX Stores Corporation (REX American Resources Corp)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2008
Business Overview: The Company operates two primary segments: consumer electronics and appliance retailing ("Retail") and alternative energy ("Alternative Energy"). As of July 31, 2008, the Retail segment operated 110 stores. The Alternative Energy segment includes consolidated operations of Levelland Hockley County Ethanol, LLC (commenced production in Q1 FY2008) and One Earth Energy, LLC (under construction), along with equity investments in other ethanol facilities. The Company is currently conducting a strategic alternative review process for its retail segment.
Key Financial Metrics (Six Months Ended July 31, 2008)
| Metric | Amount (in thousands) |
|---|---|
| Net Sales and Revenue | $114,198 |
| Gross Profit | $26,667 |
| Gross Margin | 23.4% |
| Net Income | $2,732 |
| Diluted EPS | $0.24 |
| Cash and Cash Equivalents | $79,608 |
| Total Debt (Current + Long-term) | $68,736 |
| Working Capital | $80,122 |
| Net Cash Used in Operating Activities | ($3,675) |
| Net Cash Used in Investing Activities | ($62,120) |
| Net Cash Provided by Financing Activities | $17,687 |
Material Changes vs. Prior Comparable Period
- Revenue Growth: Net sales increased 18.3% to $114.2 million from $96.5 million in the prior year period. This was driven primarily by $26.0 million in new revenue from the Alternative Energy segment (Levelland Hockley operations), partially offset by a 2.1% decline in comparable store sales in the Retail segment.
- Profitability Decline: Net income decreased 79.5% to $2.7 million from $13.3 million. The decline is largely attributed to the expiration of the Section 29/45K synthetic fuel tax credit program (which generated $10.1 million in income in the prior year vs. $0.7 million in the current year) and lower retail gross margins.
- Margin Compression: Overall gross margin decreased to 23.4% from 31.7%. Retail gross margin fell to 29.5% from 31.7% due to lower sales and pricing pressures. Alternative Energy gross margin was 2.7%, negatively impacted by high grain prices and a lower ethanol-grain spread.
- Interest Expense: Interest expense increased significantly to $1.0 million from $0.1 million, as the Levelland Hockley ethanol plant commenced operations and ceased capitalizing interest on its construction loan.
- Capital Expenditures: Investing cash outflows surged to $62.1 million (vs. $15.2 million prior year) due to heavy construction spending on ethanol plants at Levelland Hockley and One Earth.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects the effective tax rate for the remainder of fiscal year 2008 to range between 28% and 35%. The Company does not expect significant additional income from synthetic fuel investments as the relevant tax credit program expired on December 31, 2007.
- Market Risk: Subsequent to the quarter end, ethanol prices declined significantly (from ~$2.89/gallon to ~$2.33/gallon), while corn and sorghum prices increased (from ~$6.50/bushel to ~$7.60/bushel), compressing the operating margin for the ethanol segment.
- Legal Proceedings: Layne Christensen Company filed a lawsuit against Levelland Hockley regarding water treatment equipment lease payments and performance disputes. The Company intends to vigorously defend the claims.
- Discontinued Operations: The Company closed five stores in the first six months of FY2008, classified as discontinued operations. A gain of $0.2 million was recognized on the disposal of one such property.
- Strategic Review: The Company initiated a strategic alternative review process for its retail segment to evaluate a broad range of alternatives.
Investor Verification Checklist
- Ethanol Margin Sensitivity: Verify the impact of the widening spread between rising grain costs and falling ethanol prices on the Alternative Energy segment's future profitability.
- Retail Restructuring: Monitor the outcome of the strategic alternative review process for the retail segment and the impact of continued comparable store sales declines.
- Legal Contingency: Assess the potential financial exposure from the Layne Christensen lawsuit regarding the Levelland Hockley water treatment facility.
- Capital Requirements: Confirm the funding status for the remaining construction costs at One Earth Energy ($11.7 million in incomplete contracts) and Levelland Hockley.
- Debt Obligations: Review the terms of the new permanent term loan for Levelland Hockley and the interest rate swap agreements used to hedge variable rate debt.