As evidence grows that the economy might be slipping into a recession, is it finally time for 99 Cents Only Stores’ long-awaited rebound?
The City of Commerce company has seen declining income for years, but discount retailers benefit from a counter-cyclical business model cheap goods for bad times.
Moreover, 99 Cents Only may be more likely to profit from the downturn than its competitors.
“They are in a good position to attract customers migrating to cheaper stores. They have a great concept, which boasts a bigger box than the other chains and also focuses more on grocery items,” said Joan Storms, an analyst with Wedbush Morgan Securities. “(But) investors are getting really anxious. And they have every right to be concerned.”
The company has seen its net income steadily slide to $9.7 million in the 2006-2007 fiscal year from $60.7 million five years ago. Along the way, the stock dropped to less than $7 a share from heights above $35 in 2003.
After hitting a 52-week low of $6.51 on Jan. 15 shares rebounded somewhat and hit $8.75 on Feb. 1. Last week, shares closed at $8.26 on Feb. 7.
Much of the problem stems from an ill-conceived, 2003 entry into the Texas market, where the company has opened 42 locations with little or no returns.
Over the last three years and to ease investors’ concerns, 99 Cents Only has brought in several new executives, including a new chief financial officer, as well as two in supply and operations. Also, founder David Gold stepped down as chief executive in January 2005, though he still holds the title of chairman.
But investors are getting impatient to see some results. The company lost $5.17 million in the second quarter ended Sept. 30 after essentially breaking even the same period a year before. Sales were up 11.5 percent to $291 million.
Last week, Akre Capital Management LLC, a Middleburg, Va.-based investment firm, sent a letter to the company criticizing its current strategy and asking for additional details regarding the chain’s turnaround plan.
Akre owns about 9.4 million, or 13.4 percent, of outstanding shares. It said in the letter that 99 Cents Only needs to “provide sufficient background so that we can understand what has gone wrong and the logic of your proposed solutions, including any potential restructurings to eliminate unprofitable products, stores, or regions.”
The company has not responded to the letter, nor did it return calls for comment to the Business Journal.
But Storm said there is no doubt that current efforts to turn around performance are not going far enough.
“They need more outside, seasoned retail minds in the front office,” she said. “They also need a concrete plan that addresses their key problems, such as trimming store operating costs and tightening up their distribution and transportation systems,” she said. “Those areas are just stealing money from the company.”
Still, outside events appear poised to give 99 Cents Only a lift.
The counter-cyclical trade down effect should bring in more Wal-Mart shoppers seeking even better deals, and increases in the minimum wage across the country will put more money into the pockets of the chain’s main customer base, even as it may raise wage costs.
