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Dollar-store merchant

99 Cents Only


has disappointed again.

The deep discounter said Tuesday that second-quarter profit tumbled from a year ago and missed the Wall Street consensus by a penny. Retail revenue, however, rose about 16% on a big jump in grocery-related sales.

Net earnings in the quarter fell to $2.6 million, or 4 cents a share, from $14.8 million, or 21 cents a share, a year earlier. Analysts were calling for 5 cents a share.

Retail sales were $226.3 million, up from $195.1 million, with grocery sales up 55%. Meanwhile, same-store sales dropped 2.5%. The company cited a shorter Easter selling season than last year, when total same-store sales were up 9.8%.

In June, 99 Cents Only had announced that its overtaxed warehouse in Los Angeles was causing late deliveries and products to go out of stock at its retail outlets. As a result, the company lowered its quarterly earnings guidance.

At that time, shares of the City of Commerce, Calif.-based company dropped about 26%; they were recently up 50 cents to $14.83 in Tuesday trading. The stock is currently down from its September high of around $35 and near its 52-week intraday low of $14.01 reached on June 14.

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Also in June, the company cited aggressive markdowns by competitors for the lower quarterly guidance, following the resolution of the Southern California grocery workers strike and higher-than-expected sales of low-margin products like food.

So, it's not surprising that gross margin in the latest quarter declined to 36.2% from 40% last year. The company cited in part the addition of more lower-margin grocery items to its merchandise mix.

Operating expenses expanded to 34.3% of sales from 28.9% last year. Part of that increase was from additional California workers' compensation accrual.

99 Cents is taking strides to solve inventory issues and said it has a new distribution facility in California, which is expected to ease out-of-stock issues. It did not, however, provide immediate forward guidance.

"We have begun addressing the operational issues discussed above as well as implementing further steps to help ensure that the proper management and systems infrastructure are in place to help re-establish desirable earnings growth," the company said in a Tuesday statement. It has obtained a consulting firm to review certain inventory management processes and reduce shrinkage.

The company expects gross margin declines related to more grocery items can be eventually offset "by opportunities in other product categories and improvements in our execution."

In addition, its new 200,000-square-foot distribution facility in California has relieved the capacity of its Los Angeles distribution center. "The additional warehouse space should help to more effectively manage in-store out-of-stocks by the fourth quarter in our non-Texas stores," it said.

Meanwhile, a new "flexible pricing strategy" is expected to give the company a way to promote special prices, which it expects will drive more traffic to stores. Through the new pricing plan, 99 Cents Only said it will be able to add new products at "favorable prices."

For example, the new pricing plan should allow the company to offer additional commodity items, such as milk, in Texas.

99 Cents Only also said its CEO and Founder Dave Gold, who underwent bypass surgery in June, plans to return to the office in late July. He has been able to attend some meetings and work from home.