99 Cents Only Chairman Likes Price of Company’s Texas Stores

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If 99 Cents Only Stores Inc. takes up its chairman on his offer to personally buy the company’s underperforming Texas operation, the transaction could boost its earnings. But it could also present a big conflict of interest.

Joan Storms, an analyst with Wedbush Morgan Securities in Los Angeles who follows 99 Cents Only, was present at the company’s shareholder meeting Sept. 23 when chairman David Gold made the offer to buy the company’s 48 stores in Texas. Storms said Gold believes he can make the stores more profitable. Gold made it clear at the meeting that he had opposed selling the company’s Texas operation.

The City of Commerce-based company announced last week that it was considering Gold’s offer. The company has temporarily suspended its wind-down process in Texas, and its board formed a special committee to consider the proposal as well as other alternatives for exiting the Texas market.

Storms said the board would most likely open up the sale of the Texas stores to a bidding process in response to Gold’s offer to avoid a conflict of interest. In such circumstances, shareholders can hold up transactions as they question whether an insider got a special deal.

A 99 Cents Only representative did not respond to requests for comment.

Storms said some of the unknowns surrounding a possible buyout by Gold, who had stepped down as chief executive in 2004 but remained chairman, include whether he could remain as chairman and whether he would get a better deal on the sale.

Last month, the company announced it would leave the Texas market to focus on its core markets of California, Arizona and Nevada, which make up about 90 percent of its revenue.

The Texas stores were generating only a little more than half of the sales of its stores elsewhere. The discount retailer owns 230 stores in other states.

The company said the Texas business had a combined operating loss of about $15 million for the four quarters ended June 28.

Although a sale to Gold could pose problems for the company, it could also prove positive.

“If they sell the entire operation at one time, you would see that lift in the company’s numbers quicker than if they sold it piecemeal,” Storms said. “They would also have cash from the real estate up front and could buy back some stock. Also, if they take a year to wind down in Texas, it would still drag on earnings. If someone took over sooner rather than later, you would start to see appreciation right away.”

It would not be the first time Gold bought a piece of 99 Cents Only. He acquired the company’s Universal International discount chain business for $34 million in 2000. The company had paid $17 million for it two years earlier. Gold ended up folding the operation, which had stores in New York, Minnesota and Texas.

Storms speculated that Gold might have offered to buy the Texas stores to get the operation off the balance sheet and have more time to sell it.

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