99 Cents Only Stores' Results Disappoint Again

Operating results at 99 Cents Only Stores ( NDN) have disappointed Wall Street for the third quarter in a row.

Shares of the discount retailer were moving downward in Tuesday trading after the company said first-quarter earnings fell despite healthy sales, while also guiding full-year 2004 earnings below a prior estimate.

Earnings fell to $9.3 million, or 13 cents a share, from $14.6 million, or 20 cents a share, in the year-earlier period. Results in the latest quarter included a charge of 5 cents a share from a class-action lawsuit settlement.

Excluding the settlement, the company earned 18 cents a share, which was below a 21 cents-a-share consensus estimate from Thomson First Call.

In the latest first quarter, sales increased 17.1% to $230.1 million, as retail sales rose 18.5%, helped mostly by sales of grocery products and household items. Same-store sales in the first quarter increased 0.2%.

First-quarter 2004 gross margin fell to 39.8% from 40.4% a year earlier, the company said.

The company's operations in Texas posted a loss of $1.2 million on sales of $11.5 million. "Houston store sales have not improved sufficiently to absorb operating and administrative costs," the company said in a statement. "We are new to Houston and our challenge has been to introduce our unique concept to this marketplace. Thus far, we have fallen short of our plan."

During 2004, the company plans to increase square footage by 25% by opening 48 stores, with 12 in Houston and 13 in Dallas. Capital expenditures for 2004 are estimated to be $70 million to $80 million.

Looking ahead, the company said total sales for full-year 2004, including wholesale sales, are expected to be $1.01 billion to $1.03 billion, while same-store sales for the year are expected to be flat to up 2%. 99 Cents Only lowered full-year EPS for 2004 to 76 cents to 79 cents, which is down from the company's March estimate of 90 cents to 96 cents. At that time, analysts were calling for 93 cents a share; they now expect 88 cents a share, on average.

On March 11, City of Commerce, Calif.-based 99 Cents Only reported a 25% decline in fourth-quarter earnings, but had said it expected full-year results to show improvement. Specifically, it said first-quarter earnings should be 20 cents to 21 cents a share.

Results in the third quarter also fell to 17 cents a share from 19 cents a share in the prior-year quarter. Analysts had been expecting 18 cents a share.

Despite the continuing disappointments, Robert W. Baird & Co. analyst J. David Cumberland said long-term prospects at the company look good. He cited high margins and return on investments, a unique competitive position and a solid balance sheet.

"We believe 99 Cents Only can achieve EPS growth near 20% over the next three years through square footage growth of 25% a year, low single-digit comps and maintaining a 10% to 11% operating margin," Cumberland said. He thinks the company's store count is low, presenting a capability of expansion momentum.

The company stands out from competitors for Cumberland in part because its merchandise mix holds 80% consumables and its name-brand selection is about half of its product mix. It also has larger, highly visible and easily maintainable stores, the analyst said. (Robert W. Baird & Co. does investment banking for 99 Cents Only Stores.)

But J.P. Morgan analyst Shari Schwartzmann Eberts is not so positive on the company. She called the operating results in the quarter disappointing. "Operating performance continues to deteriorate," she said.

However, Eberts thinks now is a good time for investors who are short shares of the company to cover their positions. "We expect the almost 20% short interest to limit downside for the stock," she said. (J.P. Morgan has an investment banking relationship with 99 Cents Only Stores.)

Recently, the shares were down 18 cents, or 0.9%, to $19.72 on the New York Stock Exchange, after falling as much as 2% earlier in the session. The shares are hovering near the new 52-week low of $19.63 reached Monday.

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