Editor's Note: The print version of this story incorrectly stated the wrong quarter for which 99 Cents reported same-store sales growth of 1.5 percent. The fourth quarter was when that growth occurred.


At a time when the cost of milk and gas are both approaching $4.99 a gallon, there's a place where 99 cents amounts to more than just change.

The 99 Cents Only Stores is still selling every item for less than a dollar, despite sharply rising energy and food costs.

The price guarantee has driven more and more shoppers into the company's 265 outlets, which this month reported same-store sales growth of 1.5 percent in the fiscal fourth quarter.

But it's also a guarantee that's getting harder, though not impossible, for the company to keep as the return of inflation eats into its bottom line.

Despite rising sales, the City of Commerce company reported a quarterly loss of $4.4 million as its gross margins slid two points to 37.3 percent.

In response to the inflation, the company has made subtle changes, including pricing items for other than 99 cents though never more. For example, two gallons of water used to cost 99 cents. Now each sells for 59 cents. Jumbo gift bags are no longer two for 99 cents. They're also 59 cents.

"This is how we recoup extra gas costs," said 99 Cents Only Chief Executive Eric Schiffer. "We've never done this before. But no one's going to complain that a gift bag costs 59 cents. Wal-Mart sells the same one for $2.97."

The company is also working with manufacturers to repackage items to sell less for more. A half-gallon jug of milk used to sell for 99 cents. Now it's down to a quart.

And some items, which have been particularly hit hard by inflation, are sometimes not on the shelf. Eggs, which once sold 99 cents for a dozen, are now going 99 cents for a half dozen. But they're not available in some stores.

However, the return of inflation has also been accompanied by a recessionary economy, which presents opportunities to companies like 99 Cents Only because it buys closeout merchandise.

"Every time the economy shifts, you're going to have excess merchandise," said analyst Ron Bookbinder of Global Hunter Securities. "Some businesses just don't make it and there's going to be more close-out inventory. For others, keeping surplus merchandise is getting expensive and they're looking for ways to unload them."



Proven model

The 99 Cents Only business model has been well documented over the years.

Unlike many dollar stores, the company carries lots of national brands using its heft to buy in bulk, but sometimes the items are in odd sizes. And aside from closeouts, it works with smaller manufacturers to have products specially produced for it.

It's a formula that has worked since the company opened its first store in Los Angeles near Inglewood 26 years ago. It's also a formula that has weathered inflation, including when it was founded and at the start of the last decade, when the consumer price index rose 5.4 percent in 1990.

"We've gone through inflationary periods before. When we started, inflation was 20 percent. We've gone through recessionary times before and several minimum wage hikes," Schiffer said. "So you run everything as cost effectively as possible. You take advantage of new buying opportunities that inflationary times create because people don't want to carry excess supply. You make it work."

However, the company also has benefited as has the whole U.S. economy over the past decade or so from the rise of cheap goods produced in China and elsewhere in Asia.

Now, with consumer prices up 4.2 percent over last year, largely driven by higher prices for energy and food, the company has taken several steps to soften the blow in addition to its repricing and repackaging strategy.

The company has long dealt directly with large global manufacturers, such as Coca Cola, Nestle and Kraft. But it has only recently begun buying directly from smaller manufacturers and purchasing imports straight from manufacturers in Asia and South America, Schiffer said.

The company also has scaled back its expansion plan, after announcing that it would open 30 new stores by the end of fiscal 2008. It closed its fiscal year with 14 new stores and plans to open less than 20 this year.

Schiffer has not directly related the cutback to the company's efforts to become profitable amid rising inflation, but analyst Joan Storms of Wedbush Morgan Securities said the move makes a lot of sense.

"Opening a lot of stores is a big distraction for the management when you're trying to improve the profitability of the company," Storms said.

The company also announced this month it is suspending its expansion and closing underperforming stores in Texas, though that is more related to problems resulting from its aggressive, ill-fated expansion in the state five years ago amid tough competition.

Stock decline

Shareholders have not been kind to 99 Cents Only. Shares experienced a brief run up in the spring, along with other discount retailers benefiting from a weak economy. But since late March the stock is off nearly a third.

The stock also took a hit after its June 11 quarterly earnings report, when the company disclosed that higher-than-expected thefts contributed to its loss. The company has announced plans to buy back up to $30 million worth of shares. Shares closed up 4 percent to $7.52 on June 19.

However, 99 Cents Only appears to be in a better position to weather this inflationary storm than just a few years ago with virtually an entirely new management team.

In 2005, Schiffer took over the company from his father-in-law and colorful founder David Gold, who remains the company's chairman. Gold's son, Jeff, was appointed president and chief operating officer.

A new chief financial officer, vice president of operations and senior vice president of supply chain were hired outside of the family. In short order, the company streamlined its inventory by upgrading its IT infrastructure. Its warehouse is being outfitted with a multi-million dollar automatic racking system that will barcode and computerize its merchandise.

Meanwhile, the slowing economy and rising inflation continue to draw shoppers into its stores. Indeed, these penny-pinching days are also turning into a historic time of opportunity for the company, which has always attracted its share of middle- and even high-income shoppers.

Now even more are coming through the door. On a recent Saturday afternoon, Wonda Sutton, a retired nurse, shopped at the Highland Park 99 Cents Only store for the first time. She grabbed wrapping paper, milk, strawberry jam, watermelon and a sack of potatoes. Altogether, her basket totaled a little over $5.

"Every little bit counts," said Sutton, who recently paid off her SUV but said she can't afford to drive the gas guzzler. "I came with a friend to see what these stores carry and I'm pretty surprised at the brand names."

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