Business Context and Reporting Period
Company: REX Stores Corporation (REX)
Filing Type: Form 10-K (Annual Report)
Period Ended: January 31, 2010 (Fiscal Year 2009)
Business Overview: REX has completed its exit from the consumer electronics and appliance retail business as of July 31, 2009. The company has transitioned to an investment holding company focused primarily on the alternative energy sector, specifically ethanol production. Current operations consist of the Alternative Energy segment (consolidated and equity method investments in ethanol plants) and a Real Estate segment (leasing and selling former retail properties). Retail-related activities, including extended service plans, are classified as discontinued operations.
Key Financial Metrics
| Metric | Fiscal 2009 (2010) | Fiscal 2008 (2009) |
|---|---|---|
| Net Sales and Revenue | $170.3 million | $68.6 million |
| Gross Profit | $19.7 million (11.6% margin) | $1.2 million (1.8% margin) |
| Net Income (Attributable to REX) | $8.7 million | ($3.3 million) Loss |
| EPS (Diluted) | $0.91 | ($0.32) |
| Operating Cash Flow | $11.0 million | $2.9 million |
| Total Assets | $451.5 million | $451.3 million |
| Long-Term Debt | $126.7 million | $103.9 million |
| Cash and Equivalents | $100.4 million | $92.0 million |
Material Changes vs. Prior Period
- Revenue Surge: Net sales increased 148% to $170.3 million, driven primarily by the Alternative Energy segment ($169.2 million), which saw significant growth due to the full-year operation of the Levelland Hockley plant and the commencement of operations at the One Earth plant in Q3 2009.
- Profitability Turnaround: The company swung from a net loss of $3.3 million in the prior year to a net income of $8.7 million. This was largely due to a $17.8 million segment profit in Alternative Energy (compared to a $9.0 million loss previously), attributed to favorable "crush spreads" (the margin between ethanol and grain prices) and increased production capacity.
- Discontinued Operations: The retail business was fully exited. Income from discontinued operations was $2.1 million, including a $1.4 million gain on the disposal of properties, compared to a $2.2 million loss in the prior year.
- Debt Increase: Long-term debt increased by approximately $22.8 million to $126.7 million, primarily due to $49.0 million in borrowings by the One Earth subsidiary to complete its ethanol plant construction.
Guidance, Outlook, and Risks
- Outlook: Management expects future operating results to be based on annual production of 130 to 140 million gallons of ethanol, assuming Levelland Hockley and One Earth operate near nameplate capacity. However, they explicitly state they cannot predict future results due to the inherent volatility of the crush spread.
- Commodity Risk: Financial returns are highly dependent on the spread between ethanol prices and corn/sorghum prices. A decline in this spread could result in negative operating margins, forcing production cuts. The company hedges only 10-15% of forecasted production and feedstock usage.
- Interest Rate Risk: The company holds significant variable-rate debt. While interest rate swaps currently fix approximately 81% of indebtedness, the Levelland Hockley swap expires in April 2010, reducing fixed-rate coverage to 55% thereafter. Declining interest rates have resulted in losses on derivative instruments ($2.5 million in 2009).
- Real Estate: The company owns approximately 911,000 square feet of vacant former retail and distribution space. Failure to lease or sell these properties could result in impairment charges and ongoing carrying costs.
- Regulatory Risk: The ethanol industry relies on federal tax incentives (e.g., the blender's credit), which are subject to expiration and legislative changes. Additionally, environmental regulations regarding greenhouse gas emissions could impact future operations.
Investor Verification Checklist
- Crush Spread Volatility: Verify current market prices for corn, sorghum, and ethanol to assess the sustainability of the 2009 profit margins.
- Debt Covenants: Review the financial covenants for Levelland Hockley and One Earth to ensure compliance, particularly regarding EBITDA and debt service coverage ratios.
- Real Estate Disposal: Monitor the progress of leasing or selling the 31 vacant former retail stores and distribution centers to mitigate impairment risks.
- Derivative Exposure: Assess the impact of the April 2010 expiration of the Levelland Hockley interest rate swap on future interest expense.
- Discontinued Operations: Track the administration of extended service plans to ensure warranty claims do not exceed the deferred revenue reserves.