Business Context and Reporting Period
Company: REX Stores Corporation (REX)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended January 31, 2009
Business Overview: REX is transitioning from a consumer electronics and appliance retailer to an alternative energy investor. The company is actively winding down its retail segment, having closed 25 stores in fiscal 2008 and leasing 37 owned locations to Appliance Direct, Inc. The company expects to exit the retail business entirely in fiscal 2009. Its primary growth focus is on ethanol production, with investments in four entities (Levelland Hockley, One Earth, Big River, and Patriot), two of which are consolidated subsidiaries.
Key Financial Metrics
| Metric (in thousands) | Fiscal 2009 | Fiscal 2008 | Fiscal 2007 |
|---|---|---|---|
| Net Sales and Revenue | $230,627 | $194,787 | $201,881 |
| Gross Profit | $47,080 | $58,279 | $56,782 |
| Gross Margin | 20.4% | 29.9% | 28.1% |
| Net (Loss) Income | $(3,297) | $33,867 | $11,351 |
| Loss from Continuing Operations | $(2,271) | $26,393 | $9,982 |
| Operating Cash Flow | $2,923 | $14,829 | $31,825 |
| Total Assets | $451,288 | $408,978 | $345,442 |
| Cash and Cash Equivalents | $91,991 | $127,716 | $43,008 |
| Long-Term Debt (net of current) | $103,939 | $35,224 | $31,236 |
Material Changes vs. Prior Period
- Revenue Composition: Revenue increased 18.4% to $230.6 million, driven primarily by the commencement of ethanol production at Levelland Hockley ($68.2 million). This offset a 10.3% decline in comparable retail store sales.
- Profitability: The company reported a net loss of $3.3 million, a sharp reversal from the $33.9 million net income in fiscal 2008. The loss was driven by a $9.0 million loss in the alternative energy segment (compared to a $22.4 million profit in 2008) and a significant drop in the retail segment profit to $1.1 million.
- Segment Performance:
- Retail: Segment profit fell 89.2% due to lower gross profit and $2.8 million in severance/restructuring charges related to the exit strategy.
- Alternative Energy: The segment swung to a loss due to lower investment gains (no Millennium sale in 2009), increased operating expenses for new plants, and $3.8 million in losses on derivative financial instruments (interest rate swaps).
- Debt: Long-term debt increased significantly to $109.1 million (weighted average rate 5.51%) to fund ethanol plant construction, up from $37.0 million in the prior year.
Guidance, Outlook, and Risks
- Exit Strategy: Management expects to complete the exit from the retail business in fiscal 2009. Remaining retail inventory ($22.3 million) will be liquidated. The company plans to lease or sell two distribution facilities (650,000 sq. ft.).
- Ethanol Outlook: One Earth Energy is expected to complete construction and begin operations in mid-2009. Levelland Hockley is operational but faces margin pressure due to the spread between ethanol and grain prices.
- Liquidity: The company holds $92.0 million in cash. Future uses include debt repayment, stock repurchases, and potential new investments. One Earth intends to borrow up to $54 million to fund construction.
- Key Risks:
- Debt Covenants: Levelland Hockley entered a forbearance agreement in April 2009 after failing to meet an EBITDAR coverage ratio. Management believes this will be cured by August 2009.
- Commodity Prices: Returns are highly sensitive to the spread between ethanol and corn/sorghum prices. Narrow spreads could lead to operating losses.
- Water Supply: Levelland Hockley's water treatment plant is not functioning as planned, creating operational risk.
- Tax Credits: Significant income from synthetic fuel investments ($59.9 million recognized historically) is subject to IRS audit risk regarding Section 29/45K credits.
Investor Verification Checklist
- Debt Covenant Compliance: Verify the status of Levelland Hockley's EBITDAR covenant and the terms of the forbearance agreement with GE Capital.
- Retail Exit Costs: Confirm the final costs associated with closing remaining stores, including lease termination fees and inventory liquidation losses.
- Ethanol Margins: Monitor the spread between ethanol selling prices and corn/sorghum input costs to assess the viability of the alternative energy segment.
- Water Infrastructure: Assess the resolution of the water treatment issues at Levelland Hockley and the cost of alternative water supplies.
- Derivative Exposure: Review the fair value and potential future losses on interest rate swaps, which contributed $3.8 million to the current year loss.