Business Context and Reporting Period
Company: REX Stores Corporation (REX)
Filing Type: Form 10-K (Annual Report)
Period Ended: January 31, 2008 (Fiscal Year 2007)
Business Overview: REX operates as a specialty retailer of consumer electronics and appliances in small to medium-sized markets and as an investor in alternative energy (ethanol) entities. The company is actively divesting its retail footprint, having closed 78 stores in fiscal 2007, while simultaneously expanding its ethanol portfolio through significant capital investments.
Key Financial Metrics
| Metric | Fiscal 2007 (2008) | Fiscal 2006 (2007) | Fiscal 2005 (2006) |
|---|---|---|---|
| Net Sales and Revenue | $223.98 million | $235.70 million | $244.83 million |
| Gross Profit | $65.96 million (29.4% margin) | $65.31 million (27.7% margin) | $71.08 million (29.0% margin) |
| Net Income | $33.87 million | $11.35 million | $28.27 million |
| Diluted EPS | $2.89 | $0.98 | $2.31 |
| Total Assets | $408.98 million | $345.44 million | $304.54 million |
| Cash and Cash Equivalents | $127.72 million | $43.01 million | $21.36 million |
| Long-Term Debt | $35.22 million | $31.24 million | $21.46 million |
| Operating Cash Flow | $14.83 million | $31.83 million | $19.04 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 5.0% to $223.98 million, driven by a 6.7% decline in comparable store sales. This was attributed to increased competition and a shift in consumer preference away from CRT and projection televisions toward flat-screen technology, which has lower average selling prices.
- Profitability Surge: Despite lower retail sales, Net Income increased 198% to $33.87 million. This was primarily due to a $24.0 million realized gain from the sale of the company's interest in Millennium Ethanol, LLC, and a $10.2 million gain from the disposal of discontinued retail operations.
- Store Count Reduction: The company closed 78 stores in fiscal 2007 (67 classified as discontinued operations), reducing the total store count from 193 to 115. No new stores were opened.
- Alternative Energy Expansion: The company invested approximately $60.8 million in ethanol entities during the year. It consolidated two new entities, Levelland Hockley County Ethanol, LLC and One Earth Energy, LLC, significantly increasing assets in the alternative energy segment.
- Real Estate Monetization: The company sold approximately 60% of its owned retail and vacant stores, generating approximately $71 million in net cash receipts and recognizing significant gains on disposal.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Retail Strategy: Management anticipates additional store closings in fiscal 2008 to eliminate unprofitable locations but does not plan to open new stores. The focus remains on monetizing the real estate portfolio.
- Alternative Energy: The company expects its ethanol plants (Levelland Hockley, Patriot, and One Earth) to begin operations between May 2008 and mid-2009. Future profitability is highly dependent on the spread between ethanol and corn prices, as well as natural gas costs.
- Liquidity: The company holds $127.7 million in cash, with significant portions held by ethanol subsidiaries to fund construction. The company has a $75 million revolving credit facility with $33.8 million available.
Risks and Contingencies
- Synthetic Fuel Income Cessation: Income from synthetic fuel tax credits (Section 29/45K) expired on December 31, 2007. The company expects no further income from these partnerships beyond fiscal 2007, which will significantly reduce future net income.
- Commodity Price Volatility: Ethanol margins are sensitive to corn and natural gas prices. High corn prices (reaching $5.01/bushel in early 2008) could render ethanol production uneconomical.
- Tax Credit Risk: Approximately $25 million in synthetic fuel tax credits have not been audited by the IRS. Disallowance of these credits could result in significant tax liabilities.
- Construction Risk: Ethanol plants are in development stages and face risks of construction delays, cost overruns, and permitting issues.
Investor Verification Checklist
- Sustainability of Earnings: Verify the extent to which the $33.9 million net income relies on one-time gains (Millennium sale and real estate disposals) versus recurring retail and ethanol operations.
- Retail Comparable Sales: Monitor the trend of comparable store sales, which have declined for two consecutive years, and the impact of the transition to flat-screen televisions on gross margins.
- Ethanol Construction Progress: Confirm the timeline and cost adherence for the construction of the Levelland Hockley, Patriot, and One Earth ethanol plants.
- Commodity Spreads: Track the spread between ethanol selling prices and corn/natural gas input costs to assess future profitability of the alternative energy segment.
- Debt Covenants: Review the financial covenants associated with the ethanol construction loans (Levelland Hockley and One Earth) to ensure compliance as the plants move toward operation.