REX American Resources Corp (REX) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Rex Store Second Quarter Results Conference Call. During the presentation all participants will be in a listen-only mode. Afterward, you will be invited to participate in the question & answer session. At that time if you have a question press the one followed by the four on your telephone.. As a reminder, this conference is being recorded Wednesday, September 4, 2002. I would now like to turn the conference over to Stuart Rose, CEO of Rex Stores. Please go ahead, sir.

This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. Such statements can be identified by the use of forward-looking terminology such as may, expect, believe, estimate, anticipate, or continue or the negative thereof or other variations or comparable terminology. Listeners are cautioned there are risks and uncertainties that could cause actual results to differ materially from those referred to in such forward-looking statements. These risks and uncertainties include, among other things, a highly competitive nature of the consumers electronics industry, tax audits, changes in the national or regional economy, weather, effects of terrorism or acts of war on consumer spending patterns and availability of certain products and technological changes.

Rex is pleased to report its 10th consecutive quarter of double digit earnings. Earnings this quarter were up 39%. More importantly, per share earnings were up about 28%.

And the beauty of this quarter from our standpoint is operations were a big, big contributor to the up earnings. Income from operations was up 19%. In our industry, as far as I know, no one is reporting anything close to this. And this quarter was a good example of what can happen in a down economy.

Same store sales were down a little bit, down 6%. But because the whole industry was down and because it was a bad air conditioning year last year, we were able to take advantage of some opportunistic buys and raise our gross margins to around 31%. We did have a pretty good air conditioning season that helped both in sales and in gross margins.

And for our future, high definition television was a great quarter, and again, that's something that eventually every house will have a high definition television. And that's -- we expect every household -- everyone that has a television to have to replace their existing television with high definition. We want to be the leaders in that field in our markets. I think we are making great strides to do that.

In terms of negative, VCRs seem to be coming down in price and coming down in sales. Lower end television is very, very competitive. Analog television in general is tough right now. We are sort of in that period where people don't really need an analog T.V. you can really only sell them by price, and that's what it takes. Camcorders and audio had a tough period during this quarter.

Again, many of these products are commodities and they aren't as important to our profit as they are to our volume. They were a cause for some of the volume drop.

Another good thing we had going for the quarter, our limited partnership income went up about $250,000. That was part of that was a settlement of a lawsuit which brought in - which facilitates potential future production in a partnership we weren't receiving many tax credits on. And in terms of that business, it its production from our bigger partnership also brought in a fair amount of income.

The negative side of that business, the IRS is doing what we are told is a routine audit on one of the partnerships, and the general partner took the opportunity, as his right, to escrow some of our income or some of our payments. Again, that's something that we are paying close attention to, and something that we are watching very closely because it could effect future income.

In terms of interest expense, both future and past tax credits. In terms of interest expense, that declined by a million dollars. Again, we are running a good business. We lowered our inventory. We have better -- by lowering our inventory, we are better to get better cash flow. We are getting better cash flow from our operations now. We are using that to pay down the interest.

The second thing we are using to buy in shares. Over the quarter we bought in -- since the last conference call, I should say, we bought in about 193,900. That includes what was bought in during the quarter and since the quarter ended. And, again, that is an area where we can use the cash flow we are generating. And hopefully both support the share price and decrease the number of -- decrease the amount of shares that are outstanding which should help future earnings per share. We have about 960,000 left on our current authorization.

In conclusion, with net income up 39%, earnings per share 28%, it was a heck of a quarter. And I think all our people deserve a real congratulations in a very, very tough economic time in comparing us to the rest of the industry, this is really the time where we can use a lot of our skills. The opportunistic buying, the lower overhead and stand out maybe a little bit above the rest of our peers in the industry. I would like to thank everyone for listening. I will now leave it open for questions. Doug Bruggeman is also here with me to answer questions.

Thank you. Ladies and gentlemen, if you wish to register for a question for today's question and answer session, you will need to press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling question press the one followed by the three. If you are on a speaker phone, please pick up your hand set before entering your request. One moment, please, for the first question. Our first question comes from David Schick with Robinson Humphrey. Please go ahead, sir.

Hi, good morning.

Hi, David.

I guess I have three questions. I can ask them all up front.

The first is how important was air conditioning to the comp, and therefore where are sort of other comp trends? As we head into the Fall and Christmas, where should we think about comp trends? I guess comparisons are a little more difficult but still easy on an absolute basis headed into the back half. How would you have us think about that?

The second question is also related to AC, I suppose. On gross margin gains what's happening outside of AC in terms of overall mix shift as we enter a season where AC is not going to be a factor?

And I guess third would be could you give us a little bit more detail on the IRS audit, you know what you expect? When do you expect to hear something? Best case, worst case. The way you are framing your thinking.

Thanks.

Doug, do you want to answer the first question about air conditioning, what percent that was of our comps?

Air conditioners were very important to the second quarter. Air conditioner sales were up about 50% for the quarter. Had it not been for air conditioners, our comps would have been about minus 10 to 11%.

In terms of second -- in terms of third and fourth quarter, we are about to embark on a new advertising campaign. We hired a firm out in New York that we think will make a big difference.

Again, we are in a tough economic environment and we don't look for materially better comps. What we hope for is, to again, keep running a better business to -- in tough times there's a lot more opportunistic buys. And our hope is that we can run during these tough times.

I don't think, in my opinion, it's going to get significantly - the overall economic environment for our industry, and we have all been hit very hard is going to get a lot better. But I think the better companies will rise to the top. We consider ourselves one of the better companies. And maybe even the best company to perform in tough times in our industry. So that's -- I don't look for the trend to materially change during the next two quarters.

Maybe next year, and maybe as high definition comes into more of our markets, and as the FTC starts mandating more high definition televisions being made, maybe then we'll see a material shift in the business, even with the tough economy. But, again, we are not planning on anything being much different than it's been for the first two quarters.

In terms of how important air conditioners were to gross margin, we made some opportunistic buys last year, and they came through beautifully for us. Now, we are hoping to do the same thing in the electronics business. During bad times, we actually, from a buying standpoint, have the most fun. We are certainly in bad times in our industry.

In terms of IRS audit, again I want to emphasize we have sold this partnership. We do not own this partnership any more. We are led to believe that all it is is a -- all it's been so far is a routine audit, and it's nothing out of the ordinary. It's owned by Florida Progress. They were 100% guaranteed to have a routine audit at some point. They are audited almost all the time. I should say Carolina Power and Light bought it from Florida Progress. It's actually owned by them today.

We have nothing again. These lines have a PLR, and we know nothing that would cause us any future problems.

But we felt, because there is an audit, and we try to be very, very conservative in everything we do, it's better to tell people that there is an audit, and that we have taken -- put out the number of tax credits that we have taken. Again error on the side of conservatism. Again, we don't think, in our opinion, there should be -- we know of nothing that should cause any problems in this audit.

Okay. So thank you. And as, I guess a follow-up on the -- would you expect your ability to buy opportunistically would be a back half that could look weak from the top line from the whole macro standpoint, would that offset the fact that ACs are not going to be seasonal? Meaning, could you show this kind of margin gain in the back half?

We can buy opportunistically, but we bought those air conditioners so well, I would not want you to factor in this type of gross margin for the rest of the year.

Understood. Thanks.

I think we can -- I think we can -- we will buy opportunistically, we're buying opportunistically right now, but very few companies have the guts to do what we did on air conditioning, which is to buy opportunistically in August for the following June. There are other people that will be out there competing to drive the price up for stuff that could be sold during the season. So it's not -- -- we can't get that type of edge to drive that type of margins. But again, there's lots of opportunities out there right now.

Thanks.

Thanks, David.

Our next question comes from Scott Cicorelli with Gerard, Klauer, Mattison. Please go ahead, sir.

It's Rick Weinhart for Scott.

Hi, Rick.

I have a couple questions. Following up on David's question in reference to the LP, you said that it's a routine audit. Do you know, is a routine audit for the company to be audited themselves or just the partnership, or is it all part of the same bundle?

Doug, do you know the answer to that question?

I believe it's an audit of the partnership. I'm not aware if it's an audit of the full corporation or not, but I believe it's just on the partnership.

Again, they are a company that bought these -- we have sold our interest in the partnership, but I put in the press release, they paid us $39 million that is not in any way at risk that we know of by this audit.

In fact -- they paid us a lot of money. And they run the partnership. They are actually the operators. So if they felt there were any problems, certainly they paid us a lot of money for these tax credits that we would receive under any circumstances. So I'm sure they feel they have done everything by the terms of the PLR.

Okay. I have a couple more questions on the partnerships then. Then some questions on sales. So is it reasonable to assume it's about 2.5 for quarter that will go into escrow until this is resolved?

It's 2.5 million that -- again, we don't operate the partnership. And they control the volume completely. But if you were doing just your projections, that's probably as good a number as any.

Okay. In reference, you talked about the lawsuit settlement. You were hinting that you'll be getting some additional production starting, I don't know when. Is there any kind of schedule we should expect for additional production?

We believe this facilitates additional production. And again, we -- I think it's too early to give you a schedule. But that is very good news that it would happen there. For our company.

Okay. Great. Then just switching back into sales, I guess. Can you comment anything about the trend throughout the quarter? We had a lot of retailers have already reported in your industry that had stated sales had dropped pretty substantially in July and into August. I'm wondering if you could comment on the trend throughout the quarter and also what you are seeing in August?

August, I would say, again August had a pretty significant drop. It was --

Last year August.

Versus this year's August, the one that we just finished, was down roughly 11%, something like that. Which, again, was made up for by great margins. And I think it will -- that's why I say the quarter will be not that different than -- that's why, again, I think it's verifying everything I have said that in tough times, when everyone's off a little bit, we come to the top. We had great margins in August.

Okay. Thanks very much, guys.

Sure.

Our next question comes from Robert McDorman with Investment Counselors. Please go ahead, sir.

Hi, Stuart.

Hi, Robert. How are you?

Great. Um -- these partnerships are confusing. You sold one of the partnerships, but you still receive, um, proceeds --

We sold --

They realize the tax credits, is that the way it works?

Right. It's on an installment basis.

How long does that go?

For another 5 1/2 years.

Then there is another partnership; is that correct?

Yes.

Is that it, there's two?

Yes.

Okay. Um -- I haven't been on a conference call in awhile. Have you talked at all about whether the competitive environment in your -- where you operate is changing as some of your bigger competitors went out of business a few years ago.

Um -- at this point in time I think most of the -- to answer your question, Robert, I don't see a whole lot of change in the competitive environment. Not many people are opening, that I've seen, there's always a few people that open stores in our markets. But it's not -- no one is really focused on the small cities.

And the people that have tried to come in, in my opinion, have not done a good job. They have done a very poor job and have not made it work. When you don't make money once, you don't go spending a lot of money -- there's not a lot of volume for the real big players. They are in some of our markets, but I think we have proven, once more, that we more than hold our own against just about anyone.

At this price, I guess the stock looks awfully attractive. You still have almost a million shares in the share repurchase?

Yes. We agree with you. And we, at this price, have been, in the past have been aggressive buyers.

Okay. Thanks a lot.

That's -- and we do have, I think it's 960,000 shares and we think -- our stock buy backs are not lip service. They are the real thing. We put our money where our beliefs are.

Okay. Thank you.

Thank you.

Our next question comes from Campbell Gibson with TGT Capital. Please go ahead.

Hi. I had a couple questions. My first question I didn't catch what you thought -- I know it's hard to predict what the IRS is going to do. But in you have any sort of timeframe that you think this audit question might be resolved over?

And I don't know that you said what the possible outcomes are, and if you have any feel for what they are looking at. Is it a question of the application tax credits? I'm just curious, you know if it's -- you feel fairly confident, I'm curious what you think they are looking at, or what is potentially a risky proposition within it and what sort of timeframe that might happen over, and when we might get some resolution on it.

I have a couple other questions. I don't know if you want to address that first.

Okay. To answer the first question, we -- this is strictly, and again we are airing on the conservative side. This is strictly from what we have been told. We do not own the partnership. We sold the partnership.

Everything we have been told it's a routine audit. Sometime they expect the auditors to give any findings, if there are any findings, by -- or to complete the audit by sometime early next year is what we have been told. Again, we don't expect, we have a private letter -- the company that's being audited has a private letter ruling on these lines.

And the only -- potentially the worst -- even in the worse case scenario, as far as -- and if the IRS had a finding, and if the IRS prevailed in court, and if they threw out all the tax credits, we would have then made $37 million on a $3 million investment for our shareholders. But, again, that's being kind of ridiculous to throw those things out from what we know right now.

Again it's just a routine audit. No findings, nothing -- it's -- if you talk to any company, any large size company in the United States, the bulk -- I shouldn't say any but the bulk of large size companies have audits going on continually. Again may be we are erring on the side of conservatism saying there is an audit going on because it is strictly routine, we know nothing other than that. Better to put it out there, they were some way, if the -- hypothetically, if the general partner didn't follow the PLR, and this is just hypothetically, then hypothetically, the tax credits could be disallowed.

But they paid us a lot of money, and everything we have been -- everything we have been told is that everything, again just routine and should be done early -- the results should be done early next year.

And is -- is Florida Progress or CPL--

Actually Carolina Power and Light.

Are they the general partner of this?

They are the general partner.

They are the general partner so it's not like they have regulatory staff looking at the application of the PLR?

They have taken hundreds -- as far as I know over a million dollars in tax credits.

So it's not incidental to them?

No. They would have no -- if -- as far as we know, there's, again, no problem with what is going on.

I understand.

But, again, to be conservative in this environment, the way it is today, we thought it was better to just put it out there and go with it.

I agree. I have a couple other questions about the stocks now under $10. And assuming that we are resolved on this, I mean just looking at what I guess some of the Wall Street analysts have you are now selling under five times next year's projected earnings. And substantially below book value. I know you have been buying stock.

For a company that has grown at double digit increases during a tough, tough recession and a tough time every quarter for the last 10 quarters in net income.

I'm not doubting that management's done a excellent job. And my question is more to, I guess Q2, 2000 we had negative same stores of 13% if I'm correct. Then last year it was a negative 8%. And then this year --

Right.

So it just seems like the margins get potentially harder to replicate going forward. It's more --

Again, either high definition shifts into another gear, or we hit, again the comparisons get easier and easier. We expect to turn that comp store number around. Again, I think we are working hard at doing that.

We really changed the nature of our television business to become -- where high definition is a large part of our sales. We are going to start a new advertising campaign in about 30 to 45 days, and we are very optimistic.

But again, maybe we paid a price for being conservative and not trying to paint a better picture before it happens. But we don't want people running numbers on what might be, we want them to run numbers on what we are, which is a well-run company that operates in great times and bad.

I'm not trying to question management's skills.

No, I understand.

I think you guys have done a excellent job considering a very tough environment. My question is more to the point that we have talked about in the past that when you sell real estate, that the proceeds from selling real estate are substantial in light of, you know, what the stores are producing and what historical cost is. And you are well below book value which I would imagine has to be pretty understated with regard to what current real estate --

More than real estate the partnerships that are generating all this income are on the books -- Doug correct me if I'm wrong, I believe they are on the books at zero.

That's correct.

I was just curious --

There's a huge market value from the income from these partnerships.

I agree. I'm curious what your thought process of potentially doing a LBO or something not only to realize more shareholder value, but potentially take advantage of the fact that the stock is as cheap as it is relative to your competitors?

We don't want to preclude any possibility. But what we are doing right now and it's right out in the in the open is buying shares any time when we are able to get them. When the stock is at this price, there are certain periods, like right now, when -- when we are -- where we are, because the news is coming out on the company where we can't buy shares.

So we have been very aggressive at this price level, or even a little bit higher than this price level at buying in shares. We bought in over 190,000 shares. Although it's not by any means taking the company private, but everyone that owns part of the company, when we do that, receives a bigger part -- in the end has a bigger part of the company, has more earnings per share for their shares. And when we -- and should greatly benefit once the market starts to see what we see in our company.

I have two more very quick things. One, when will you be able to get back in the market? And two, what your average price was on last quarter's buys?

Um -- that's up to legal counsel when we can get back in the market. Typically it's been 24 to 48 hours.

Uh-huh. But there's no --

There's no magic amount.

I see.

24 to 48 hours from the time of the press release. That doesn't mean we will -- I'm not trying to guarantee people we will be in the market.

I understand.

If you look at past history at this price level, we have been very active.

Last quarter shares, almost 200,000 shares, do you have an average price that you paid for that stock?

Doug, do you have that?

It's around 10.50.

That's great. I appreciate your patience.

Sure, my pleasure. Thanks for listening.

Next question comes from Bill Armstrong with CL King and Associates. Please go ahead.

Good morning. Given the very difficult overall environment, could you discuss the competitive pricing situation as we go into the fall and Christmas selling seasons?

Um -- in terms of competitive pricing, it will be a very, very competitive Christmas on the low end. There's no doubt about it. On the higher end, prices are coming down for high definition television into the 1500 to $3,000 range. That's where the bulk of the sales will be made. And it sort of hits our sweet spot. That's a level that our customers in the past have been very comfortable affording.

That may not be quite as competitive to people like Wal-Mart and Target that really have not been able to show they can sell product at that price level. Again, that's with our salespeople, we have done -- we know we can do that, and that's really a great -- it's really at a great price level for our company.

In terms of low end, it will be brutal. Ugly, brutal. You are going to probably -- I wouldn't be priced if you saw $29 DVD players. It's almost going to be the same price for a DVD player as the DVDs which is totally ridiculous. But it's a heck of a brutal Christmas on the low end in my opinion.

Are you shifting your product mix, either towards the low end or towards the high end?

We are shifting it very much towards the high definition end. That was a huge growth gainer for us in the second quarter and offset some of the low end losses that we -- some of the VCR, low end television losses that we sustained. Again it's a much higher margin product and it makes for a very nice bottom line.

Mmmm-hmmm. In your markets, you know you operate in a lot of smaller markets, are you seeing smaller local competitors that, you know, would -- may escape the national media coverage. Are you seeing them going out of business or struggling, you know, down at that local or, you know, small chain type of level?

Well, again, I think we saw on a bigger level, and I think it's going to happen in some of our smaller markets. But the WIZ announced they are closing a lot of stores, and I think we'll see some of the smaller chains close. At this point in time, we have not seen much closing or -- not a lot of opening, either in our markets. They are fairly stable.

Thank you.

Sure.

Our next question comes from Marcello Deselo with Willow Creek Financial Services.

It's Willow Creek Capital.

Yes.

What would you say is the present value of the income that you are supposed to receive from your limited partnership interests?

Depends on what present value factor you use. But --

What are you using?

In this quarter, on income, $5 million for one quarter. So figure 20 million. You know, for your purposes 20 million. In a year it will last $5.5 million. It would be up to you to use your own present value.

Right. Would you say $4 a share, so -- it might be a good estimate of what the present value of that income is?

Um -- well, again we also -- one of the partnerships is also now generating tax credits. So that income isn't stable. But again, you have to use your own present value number for that to get there. But it's a lot. That's probably not that -- that might be a little high.

So would you say -- I mean when you look at a worth case scenario from this IRS audit, would you --

Again, I keep telling people not to -- again it's an audit, it's not a findings. It's not a -- we are just being very, very conservative saying that we were sure -- every company in the world at one time or another gets audited. And very few put out that they are being audited. And again, we think, in this environment, we want to be very, very conservative.

Right. So trying to be --

That's all it is right now.

So trying to be as conservative as I can be and trying to back out that income --

The worst that could happen, you know, if the -- again we put that out there is there would be no more income and the tax credits that we have received are disallowed, we still would have the $37 million investment -- still would have the $37 million payment on the $3 million investment.

Payment that you have already received, right?

Already received, right.

What I'm talking about is future income, not income that you have received already.

If for some reason Congress passed something and said no more tax credits on synthetic fuel which, and -- I don't care what the past law was, that doesn't matter, no more, done. Then you would have to -- then we would not receive that $20 million.

Right the $37 million is obviously irrelevant, right, when you are looking at these kind of cash flows?

Right. That would -- that is not something -- that is already in our pocket. It has nothing to do with future earnings, correct.

Okay. Thanks.

Okay. Thanks for listening.

Ladies and gentlemen, as a reminder to register for a question please press the 1 and then the 4. Our next question comes from Bruce Olefant with Fawn Stock and Company.

Thank you.

Hi, Bruce.

Hi. You made a comment that you consider yourselves one of the best retailers and the company has 10 consecutive quarters of up earnings.

Double digit up earnings.

Right, which is great. The question I have and I have been following the company for quite sometime, going back to the days of audio/video affiliates. When you look at your income statements and some of the questions on the call were, some people can't understand why the stock is selling at 5.5 times earnings and the stock looks cheap and you keep buying back stock and I understand that. The thing that bothers me is people on Wall Street can look at your company and say is Rex Stores in the consumer retail business, or are you in the synthetic fuel business? And the thing is, what I'd like to know, is that the income from the limited partnership, I know it's been going or for quite sometime, if you look at the six months you are showing $9.64 million in income. And yet, the net income for the company is 9.5 million. What I would like to know is if you back out the synthetic fuel, what are the actual earnings from -- I mean we are a retail company and not a fuel --

What you are doing, Bruce, isn't exactly right because the interest expense is -- the 9 point -- the income, you are taking the full tax -- the bottom line is income from operations right now is 5.5 million. And income from synthetic -- from the limited partnership is 9.6 million.

Let me ask a question of Doug.

Then you have interest, then there's interest expense that goes against that.

If you went ahead and broke out what the actual earnings are --

And taxes, also.

If you broke out and somebody says what is the EPS on the retail operations, forget about the synthetic fuel, if that was a separate line item, what actually is our bottom line EPS from our retail operations?

Doug, do you want to answer that? I'll tell you it's very hard because how do you -- again, I'll let you do the number yourself, but included in the income from operations, there are things like executives and we spend some time on synthetic fuel. It's a big part of our business. But just taking the most conservative number, it would be --

For the second quarter earnings per share would have been 9 cents a share if you completely back that out and restore --

Don't put any expenses towards it which, again is not fair, either. We certainly have expenses --

You are saying the actual earnings from the retail operations would be about 9 cents a share?

If you put it back at the historical tax rate.

What about the six months earnings which showed 78 cents?

13 cents.

Okay. Um -- the other question that I wanted to ask is that I believe from the -- do you know when we actually split the stock, the date?

Um -- I don't know the exact date. The splits were in August and February. I don't know the exact dates.

Okay. Because, you know what's kind of confusing is that -- I remember one time we had bought back, I believe over 4 million shares of stock.

Yes.

Right. It just seems like we were taking out a lot of stock off the market place, and then all of a sudden, you know, we split the stock again, all right, and I'm questioning, you know, really why we split the stock.

We took the stock out, Bruce, to increase everyone's pro rata interest in the company. Then splitting the stock put some float back in it so that everyone now has more shares has a better ability, theoretically, to sell their shares should they desire to sell the shares.

Mmmm-hmmm.

But the reason for the split was not to dry up the float, it was to increase the earnings per share, and to increase your earnings on each share you own. And it's -- it was -- one of the consequences of doing that was it does dry up the float. So we did split the shares to put that back into it.

My last question is, is that from the period of January to April, I believe of this year, there was quite a bit, I remember the filings, there was quite a bit of insider selling.

Yes.

Okay. And I would just like, if you can make a comment on that.

Again, a lot of it was option-related where we, if you -- when you exercise options, if you don't sell at the same time, you are basically forced to pay a large amount of taxes. It's just the way the law is. So some of these options were coming due and people in the stock at the time looked at a level where people felt it was in their best interest -- people have different personal things that they, in different needs including that it's hard to diversify and there was some selling.

On the other hand, I don't think there's been, since the stock, at this level, I don't -- at least I don't know of any filings, in fact exact opposite. The company is buying in and has bought in a fair amount of stock and continues to have an active share repurchase program.

And the last question I wanted to ask you is that is there any chance of the company expanding their product lines, you know, few examples -- I'm just going to compare you to some of the stores in my area, I'm in New Jersey.

Right, Bruce.

I'm curious, I know you are a basic consumer electronic items. Did you ever entertain the thought capacity of carrying video games? Because it just seems like that industry is going to be going through probably a three to five-year growth cycle.

We have looked at it, and we decided it's -- a video game business is the hardware which we would be good at selling is negative margin item. The profit is made on the games themselves. The games are coming down in price.

It's very hard to pay professional salesmen any commission -- our salesmen are all on commission. It's very hard to get them excited to sell something that they are only going to make 50 cents or $1 on. So, for that reason it's better -- the people have been better able to sell that business have been places participate in that business are places that have -- where check-outlines like a Toys R Us, where you get it off the shelf, bring it through the check-out line. The hardware we could sell, but it would be like computers, we would lose money.

What about the software? I think it would generate traffic in the stores.

It would generate traffic. But if our salespeople can't make a living on it and it ties up our salespeople, it's not -- we felt to date it hasn't been in our best interest to go into that business.

The other thing is that it just seems like --

Then I want to emphasize, Bruce, we have the biggest product that we are ever going to have in my career in this business coming right down the pike when high definition T.V. Eventually they are going to and the FTC is pushing real hard. Everyone wants those lines back from the television stations and the television stations don't want to broadcast in both high definition and analog. So eventually all the analog TVs aren't going to work any more.

And that's -- we are pushing real hard to be the place in our markets to buy the high definition television, and it's a huge replacement market. We are obviously going to be around to see that -- to see the -- to see this boom, and that's our future. So that's really -- to tie our people up selling $20 games when we are trying to hire a very, very professional person to sell a $2,000, $3,000 television set and pay them to do that, and make them a higher paid employee in this community is not, in my opinion, in our best interest.

Okay. Last question. In doing like channel checks I follow a lot of the companies in the industry. In doing some channel checks in this area for the last year and also last year's Christmas season, one hot item seemed to be karaoke machines and the software, meaning the music that goes with it. It seems to be an item that's picking up steam and some companies are starting to enter that industry. And I was just curious, I know Toys R Us carries it, best buy carries it and in the fall Circuit City will carry a line of it. I'm wondering that's something that's hot and that sort of fits the consumer electronics area of a Rex Stores. I was wondering if you would be carrying anything like that for the holiday?

The would be for the buyer in that area looking at. I don't know we are going to carry it. That would be the type of thing that would be a possibility.

Right. Thank you very much.

Thanks, Bruce.

Ladies and gentlemen, our last question for today will be from Kurt Beller, private investor. Please go ahead.

Hi, Kurt.

Hi. I was wondering how many new stores you plan to open over the next 12 or 18 months? And how many stores you were planning on closing? And what would be the net increase or decrease on a percentage basis?

We have not announced any new store openings at this time.

And the main reason being it's pretty obvious we have to work on our comps to open more stores and take people out of our existing stores and dilute the good people we have in those stores. Really great people we have until the industry turns around and until comps turn around is kind of silly.

In terms of closing stores, every year we close a few for whatever reason. The leases run out, or they are not making money. It's our feeling if we have something that has cost us a lot of money for a period of time, we are better off focusing on the better stores. There will probably be a few closings. Our emphasis, what we have to do, we are great operators, we are great at keeping our overhead down, we have to work and do a better job on the comp store line, and we are well aware of that. We don't have our head in the sand. We are going to open with this new advertising campaign. We hired a New York agency for the first time. We'll see what happens. I think -- and we have high definition coming into our markets in a big way. So it should be a lot of fun over the next 12 months. And if we can turn the comps around, then we can, for our existing stores, then we can start again looking at expanding into new markets.

Thank you.

Sure, my pleasure. Ladies and gentlemen that does conclude the question and answer session. At this time I would like to turn the conference back over to Mr. Stuart Rose. Please go ahead, sir.

I would like to thank everyone for listening. We very much appreciate your support. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask you please disconnect your line.