Rex Stores See Earnings Rise, A/V Sales Drop

By Alan Wolf

— Rex Stores, the discount brown- and white-goods specialty chain, reported lower sales but stronger earnings during its fiscal first quarter thanks to opportunistic flat-panel TV buys and solid returns on its synthetic fuel investments.

Net income rose 400 percent to $7.5 million for the three months, ended April 30, while sales slid 12.3 percent to $57.9 million and comp-store sales fell 10 percent. Gross profit margin on net sales and revenue rose to 30.3 percent from 27.7 percent during the period.

In a conference call, chairman/CEO Stuart Rose attributed the sales shortfalls to weakness in audio and video, particularly rear-projection and direct-view TV. "Audio and video are hurting very, very badly," he said. "Tube TVs are drying up, and we were hurt very badly by [rear- projection] CRT and light engine sets."

Sizzling sales of flat-panel LCDs — up over 100 percent year-over-year — did not compensate for the drop-off in older technology TVs, he noted, although revenue was also buoyed by big increases in major appliances.

The sales trends continued through May and are expected to carry into June, Rose said.

On the plus side, Rex was able to capitalize on "the slowing retail environment" by making opportunistic buys of flat-panel TVs from overstocked vendors. "A lot of [retailers] posted terrible numbers," Rose said, citing Circuit City and Tweeter. "When the industry slows up, it lets us buy merchandise the best [way]. Historically that has kept us profitable."

Rose anticipates another boom cycle in CE after the digital TV transition in 2009. "When the signal switch is over there will be a lot of obsolete sets out there," he observed.

Nevertheless, Rex's biggest long-term returns are expected to come from its interests in ethanol production, which yielded $7.8 million in income last quarter.

First-quarter results were also fueled by the April 30 sale of 86 current and former store locations for $74.5 million in cash, before selling expenses. Rex realized a total gain of about $14.8 million from the transaction, of which approximately $11.6 million was deferred in accordance with sale and leaseback accounting. In addition, Rex recognized pretax gains of about $2.2 million and approximately $1 million classified as discontinued operations and continuing operations, respectively.

As part of the deal, the chain leased back 40 of its locations from the buyer, Coventry Real Estate Investments.