REX

Business Context and Reporting Period

Company: REX Stores Corporation (REX American Resources Corp)

Filing Type: Form 10-K (Annual Report)

Reporting Period: Fiscal year ended January 31, 1996

REX Stores Corporation is a national chain of consumer electronics and appliance retailers operating 199 stores in 29 states, primarily in the Midwest and Southeast. The company focuses on small to medium-sized markets, utilizing a strategy of everyday low prices, deep product selection, and extensive newspaper advertising. During fiscal 1996, the company expanded into the Northwest region, opening 34 new stores.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 15.5% to $442.2 million, driven by the addition of 34 new stores and the first full year of sales for stores opened in 1995. This growth occurred despite a 5.4% decline in comparable store sales.
• Profitability: Net income rose 15.7% to $14.6 million. Operating income increased 27.2% to $28.6 million, aided by an improved gross profit margin (25.9% vs 25.3%) due to opportunistic purchasing.
• Expense Increases: Selling, general, and administrative (SG&A) expenses rose 15.9% to $86.0 million, primarily due to higher payroll, advertising, and depreciation costs associated with expansion. Interest expense more than doubled to $4.7 million due to increased mortgage debt and higher borrowings on the revolving credit line.
• Liquidity: Cash and cash equivalents decreased significantly from $12.7 million to $0.7 million. Operating cash flow was negative ($4.0 million used) primarily due to a $31.2 million increase in inventory to support store expansion and opportunistic buying.

Guidance, Outlook, and Risks

• Expansion Plans: Management plans to open approximately 35 to 40 additional stores in fiscal 1997, with anticipated capital expenditures of $20 million to $24 million.
• Financing Strategy: The company intends to fund expansion through cash flow, mortgage financing (typically 75% of owned store costs), and its revolving credit facility. A $10 million mortgage commitment is available.
• Seasonality: The business is highly seasonal, with the fourth fiscal quarter (Christmas season) accounting for 36.9% of net sales and 58.6% of net income in fiscal 1996.
• Risks and Contingencies:
  • Competition: The company faces substantial competition from department stores, discounters, and warehouse clubs.
  • Debt Covenants: The revolving credit agreement restricts dividends, stock repurchases, and capital expenditures, and requires maintenance of specific tangible net worth levels.
  • Legal: The company is involved in various legal proceedings incidental to business, which management does not believe will have a material adverse effect.

Investor Verification Checklist

• Comparable Store Sales: Verify the reasons for the 5.4% decline in comparable store sales despite overall revenue growth and whether this trend is expected to reverse.
• Inventory Levels: Assess the $31.2 million increase in inventory and the company's ability to convert this stock into sales without significant markdowns.
• Cash Position: Monitor the low cash balance ($0.7 million) relative to the high capital expenditure requirements for the planned 35-40 new stores in fiscal 1997.
• Debt Service: Review the impact of rising interest expenses (doubled from prior year) on future net income margins.
• Store Profitability: Confirm the timeline for new stores to become profitable (typically after the first Christmas season) and the performance of the 34 stores opened in fiscal 1996.