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, 1995 (Fiscal Year 1996)
Business Overview: A leader in consumer electronics and appliance retailing, operating predominantly in small to medium-sized markets in the Midwest and Southeast. As of October 31, 1995, the company operated 175 stores, an increase of 33 stores from the prior year. The company recently expanded into the West and anticipates further expansion.
Key Financial Metrics
| Metric (Nine Months Ended Oct 31, 1995) | Value (in thousands) |
|---|---|
| Net Sales | $278,799 |
| Gross Profit | $71,167 |
| Income from Operations | $12,980 |
| Net Income | $6,029 |
| Diluted EPS | $0.64 |
| Cash and Cash Equivalents (Oct 31, 1995) | $2,084 |
| Working Capital | $71,824 |
| Total Debt (Notes Payable + Long-term) | $84,467 |
| Current Ratio | 1.6 to 1 |
Margins (Nine Months 1995): Gross Profit Margin: 25.5%; Operating Margin: 4.7%; Net Profit Margin: 2.2%.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 21.0% to $278.8 million for the nine months ended October 31, 1995, compared to $230.4 million in the prior year. This was driven by 33 additional store locations, partially offset by a 3.5% decline in comparable store sales.
- Profitability: Net income rose 28.3% to $6.0 million from $4.7 million in the prior year. Operating income increased 46.4% to $13.0 million.
- Expense Trends: Selling, general, and administrative (SG&A) expenses increased 14.6% to $58.2 million due to higher payroll and advertising costs associated with new stores. However, SG&A as a percentage of sales improved to 20.8% from 22.1% due to operational efficiencies.
- Interest Expense: Interest expense more than doubled to $3.2 million (from $1.3 million) due to increased mortgage debt ($20.0 million added since Oct 1994) and higher borrowings on the revolving line of credit.
- Cash Flow: Net cash used in operating activities was $46.3 million, primarily due to a $68.5 million increase in inventory for new stores and the holiday season. This was partially offset by a $16.8 million increase in trade payables.
Guidance, Outlook, and Risks
- Expansion Plans: The company plans to open 24 additional stores in the fourth quarter of fiscal 1996 (totaling 34 for the year) and anticipates opening 35 to 40 new stores in fiscal 1997.
- Capital Expenditures: Capital expenditures for the first nine months were $19.6 million, with an additional $2 million to $3 million expected in the fourth quarter.
- Liquidity and Debt: The company maintains a revolving credit agreement with a maximum availability of $150 million (July-December). As of October 31, 1995, $51.2 million was outstanding with approximately $61.5 million remaining available. Borrowings are secured by fixed assets, receivables, and inventory.
- Risks and Contingencies:
- Covenants: The credit agreement includes restrictive covenants requiring maintenance of specific financial ratios, limits on capital expenditures, and restrictions on dividends and additional indebtedness.
- Store Performance: Management will continue to evaluate markets and may close locations that do not adequately contribute to profitability.
- Competition: Increased competition in certain markets and the introduction of lower-margin products (personal computers) have impacted gross profit margins.
Investor Verification Checklist
- Inventory Build: Verify the necessity and turnover rate of the $68.5 million inventory increase to ensure it aligns with sales velocity and does not indicate obsolescence risk.
- Comparable Store Sales: Monitor the trend of the 3.5% year-to-date decline in comparable store sales to assess market saturation or competitive pressure.
- Debt Covenants: Confirm the company's ability to maintain the financial ratios required by the $150 million revolving credit facility, especially given the high leverage and interest expense.
- Capital Allocation: Review the return on investment for the 34 new stores opened in fiscal 1996 and the projected 35-40 stores for fiscal 1997.
- Cash Position: Assess the sustainability of the $2.1 million cash balance given the heavy reliance on the revolving credit line for operations and expansion.