With the bargain-basement retail sector consolidating, 99 Cents Only Stores is poised to swallow up similar chains if it doesn't become a target itself.
The Commerce-based chain, which opened 10 new stores in Southern California this year, has about $34 million in cash that could be used to fund new acquisitions, notes Deborah Lowenthal, an analyst with the Oregon-based Red Chip Review.
Just last month, 99 Cents Only Stores paid $4 million for a 48 percent stake in Universal International Inc., a Minneapolis-based discounter. Company officials say some poorly performing Universal stores may be converted to the 99 Cents nameplate.
"I have no problem thinking that they would make another buy like the Universal International stake or something bigger," Lowenthal said. "They have quite a bit of cash and no debt."
The November acquisition of Mac Frugal's Bargains Close-Outs Inc. (parent of the Pic N' Save chain) by discounter Consolidated Stores Corp. has prompted speculation that 99 Cents Only could become a target, but company officials say they are focused on growing their own operation.
The 99 Cents chain, whose 53 outlets are all within 50 miles of downtown L.A., plans to expand in Southern California by 20 percent a year, said Eric Schiffer, the company's senior vice president for finance and operations. He said the region roughly extending from L.A. to San Diego can support around 200 stores.
The company's financials have been positive. The chain saw earnings grow to $4.8 million for the third quarter up from $3.6 million for the like period in 1996. Over the past year, the company's stock price nearly doubled to the $36 range prompting a five-to-four stock split Dec. 1.
Also fueling the stock is the industry consolidation.
"There is an indirect effect in that having one less player around helps their valuation in the market," said John Rouleau, a senior associate analyst at Everen Securities in Chicago.
The company is also helped by its focus on consumable goods with about 40 percent of its product line in food and beverages, noted Beth Richard, an analyst with Everen.
"The 99 Cents Stores focus on consumable goods is unique among discounters," Richard said. "No other discount chain has nearly the concentration on products people use every day. There is a degree of overlap, but most other chains are more like the old five-and-dime stores."
Richard said the company is wise to expand at a "relatively slow" pace of 20 percent a year. "Wall Street has a bad taste in its mouth after a few dollar stores grew too fast and failed," said Richard. "I think the 99 Cents stores are expanding a little slower than they need to."
As one of the "most finely managed" chains around, 99 Cents has one of the most desirable retail stocks on the market, said Brent Rystrom, vice president of research at Piper Jaffray Securities Inc. in Minneapolis.
"It has been a difficult stock to buy sometimes because few people want to sell," Rystrom said.
Rystrom and Richard both noted that the costs of opening new stores are recouped by 103 percent, far above the average of 35 percent to 50 percent for retail stores. "This is almost unheard of," Rystrom said.
The chain was founded by Chief Executive David Gold, a long-time L.A. closeout wholesaler who opened the first 99 Cents Only store near Los Angeles International Airport in 1982.
The company will move into other regions when management finds the right opportunity to quickly open a "cluster" of stores in a densely populated area, Schiffer said.
The wholesale division at 99 Cents is responsible for about 20 percent of the company's revenues. The division sells closeout goods to many of the chain's small competitors and other discounters some of which the company has sued for stealing its name or look even as it sold them products, Schiffer said.
Analysts said investors sometimes express concern that the availability of closeout goods may not be adequate to support the expansion of 99 Cents and other chains.
Rystrom said there is no reason to worry. About 2 percent or 3 percent of the more than $1 trillion worth of retail goods sold each year end up as closeouts, he said. That means there are "tens of billions of dollars worth of closeout goods each year, which is far more than all the closeout chains need."
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