REX American Resources Corp (REX) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Rex Stores second quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1followed by the 4 on your telephone. As a reminder, this conference is being recorded Thursday, September 4, 2003. Your speakers for today are Mr. Stuart Rose and Doug Bruggeman. I would now like to turn the conference over to Mr. Stuart Rose, Chief Executive Officer. Please go ahead, sir.

Thank you, operator.

This conference call contains forward-looking statement within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by use of forward-looking terminology, such as may, expect, believe, estimate, anticipate or continue, or the negative thereof, or other variations thereof, thereon or comparable terminology.

Listeners are to caution that there are risks and uncertainties that could cause actual events 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 consumer electronics industry, changes in the national and regional economies, changes in tax law or tax policy, weather, the effects of terrorism or acts of war in consuming -- spending patterns, availability of certain products and technological changes.

Also, listeners should be cautioned that during the course of this discussion, management will attempt to respond to questions based on publicly disclosed financial and operating information. Some cases, however, answers may include estimates of financial information or operating performance that have not yet been disclosed in form 10-Q, 10-K or 8-K filing with the SEC. Vesters should, therefore, consult filings made subsequent to this discussion for definitive answers to their questions.

In terms of our quarter, everyone, we're quite proud of it. It's a very tough industry and a very tough economic environment. We managed to have flat same store sales, and same store sales increase by a percent, if we pull out air condition sales, which were certainly climate affected by a very, very cool summer.

In terms of income, again, air conditioners were, last year, a very, very profitable item, this year less profitable and caused some decrease income, but still a very, very solid quarter from our standpoint. Something that, again, our people and myself can be very proud of.

In terms of current business conditions, and in terms of the last quarter, high-definition television picked up -- high-definition-ready television picked up significantly during that quarter. Summer quarter, historically, is not our biggest high-definition television quarter. It really starts in the fall. And we're right in the sweet spot right now. Our business from last quarter for the first -- through Labor Day anyway -- or a little past Labor Day, is up significantly in same store sales and in actual business over what it was during the previous quarter.

And we're, like I said, in the sweet spot with high-definition television, which at the moment is more than offsetting some of the price declines. In fact, the price declines that are going on are actually bringing the high-definition-ready television right into the price range that our consumers really like -- the bulk of our consumers like to buy their television sets. With the low interest rate environment, with government stimulation that's going on, things at this point in time look significantly better than they have for -- from my standpoint in a long, long time.

In terms of products -- in terms of products, like I said, that are doing well, high-definition is doing well. In terms of products doing poorly, plasma television -- or LCD television is what I should call it -- is up significantly over last year. It's also become a very good product for us this year, whereas last year was not a major product. It is now becoming one.

In terms of products that aren't performing well, they are the ones you would expect. VCRs are not doing what they should. Camcorders that aren't digital camcorders are significantly down. Some of the audio is down. That's not related to television. That's not related to home theatre.

But overall, things, like I said, are very, very bright for our company. Again, we -- with the people we have and with the way things are going right now, I'm very, very optimistic.

On that, leave it open to questions. Are there any questions?

Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three- tone prompt to acknowledge your request. If your question has been answered, and you would like to withdraw your question, please press the 1 followed by 3. If you're using the speakerphone, please lift the headset before entering your request. One moment, please, for our first question. Our first question comes from the line of Ryan McEwan with [inaudible] Management.

Good afternoon.

Hi.

Hi. I've got to two questions for you. One, I was just wondering if you could touch on how you're able to keep gross profit percentages so well, given the fact you were comparing against such a tough air conditioner compare from a year ago.

A lot of it has to do with we've changed our mix significantly. We're selling so many more high-definition -- high-definition-ready televisions versus the lower-end television. So that's helped our profit. The other thing that -- probably the biggest reason is, as you know, the economy was very, very weak during the first half of the year. And when the economy-- especially our industry -- and when our industry is weak, we rise to the top. That's when we get to have the most fun. I do most of the television buying myself. Larry Tomchin, the President, does most of the audio. We've made ourselves the outlet available to suppliers when someone cancels an order, when someone goes bankrupt -- The Wiz, for example, closed down their stores during the first quarter -- when someone goes on credit hold -- there's a number of companies in our industry that are struggling. Even some of the other public companies are showing losses and significantly down same store sales, they start canceling orders and suppliers come to us, and we have made ourselves the outlet of choice for suppliers, and we do a lot of opportunistic buying. We don't destroy the suppliers in the marketplace. We don't destroy their other customers in the marketplace. We try to make it a win-win situation for both of us, and it's really worked out that way. Again, results show great profit margins.

Gotcha. Second question is, just on the inventory, I was wondering if you could touch on that. They were up 22% on sales decline. Just sort of curious why the big increase, and if there's any sort of risk in the inventory?

No. In my opinion, there's virtually no risk different than -- there is risk in any inventory purchase, but we've been doing this a long time. And we've made a lot of opportunistic buys and chosen a little bit. Basically, bought our Christmas inventory in some cases a little early. The increase is due to opportunistic buying. Which, again, as you pointed out in your first question, that's been a great thing for us. It's what allowed us to keep our profit margins during very, very difficult times. And I don't know -- I've talked a lot about it in the past, but we buy on a return-on-investment basis. If we can buy low enough price where we can make -- instead of on a turn basis where we can make a good return on our money -- we will inventory longer than our normal period of time. There's a significant amount of that going on now, which is benefiting our company greatly.

Gotcha. The last question, just to clarify, you said your business quarter to date is up significantly over -- is that over the levels that you just reported for this quarter, over the flat levels?

It's up over the flat levels, and it's up -- it's actually up even with the cool August like we just had, it's also up over the number. We were up 5% comp store sales for the -- excluding air conditioning, we're up over that number also, including air conditioning.

Gotcha. Thank you very much.

Air conditioning is still down significantly.

Okay. Thank you.

Sure.

Our next question comes from the line of Bob McDermott with [Investment Councils of Maryland].

Hi, Bob.

How are you doing?

Great, Bob.

I know this comes up every time. As I understand it, the audit of this [SYNFUEL] partnership, is all this top issuing private letter rulings, and they're auditing a lot of these things, has to do with not the financials but the chemical, question of whether there's a chemical change in the product.

That's what the last IRS release said, yes.

And, you know, this has been going on for nine months. Seems like you'd throw a couple of unbiased chemists in the lab, and they could tell you in about ten minutes. Do you have any idea why this thing is taking so long?

To date, the IRS has not reported that they disagree, they just said they are looking into the chemical change aspects. I guess we're limited partners in this. We're as frustrated as you that this is going on. More frustrated. Our general partners control the audit.

No. I understand. I didn't know whether -- since you own another plant, which obviously can't be set up because you can't get a private letter ruling, whether you -- in your investigation --

We're very frustrated by it, but there's bigger people than us, Progress Energy, TICO, Sempra, huge energy companies that are arguing the case. And so we -- all we can do at this point in time -- the IRS, like I said, has not come out with a ruling disallowing any taxes or anything of that nature.

I know that. It seems bizarre that it would take this long if it was just a question of whether there is a chemical change.

I agree completely with you. On the other hand, we have absolutely no control over it.

No, I understand that. I didn't know whether --

The best lawyers in the country are trying to speed this along.

In your conversations -- I guess this plant, what -- is on the books for a couple million dollars?

That's correct.

At what point do you have to decide whether to say that it's impaired?

I would guess the tax credits run out December 31, 2007, and it's not, in my mind, impaired until -- we could still make money if we got it up and running in 2005, to answer your question.

And you have someone if you get a private letter ruling that's waiting to invest?

We have been working diligently on that. I would not say that we have someone ready to go. But we -- as you pointed out, that's a major issue right now is getting this whole thing behind us. We would -- we have people and have had people that are very anxious in doing this. It's a very, very profitable business.

Um hmm.

And it's probably the most profitable business we've ever been a part of. So I would guess, if we can get the IRS stuff behind us, getting the rest of the pieces of the puzzle -- my feeling is would come into line fairly quickly.

Thanks.

Okay. Thank you, Bob.

Our next question comes from the line of Scot Cicarelli with Harris Nesbitt Gerard. Please go ahead.

Hey, guys, couple questions. The first is, can you give us an idea of what we should be looking for in terms of operating expenses? If I recall correctly, they were higher than what we were looking for in the first quarter. Kind of like a lot of that was due to higher advertising expenses, and yet they came in below what I thought they would be on the second quarter. Is there any kind of change on the advertising, or could you help us out giving us a way to think about the run rate for operating expenses for the back half of the year?

Doug, do you want to answer that?

Scot, for the second quarter, we did continue withe the television advertising. So there really wasn't much of a change in that area in the second quarter. We were able, you know, to control the administrative cost very well in the second quarter. As far as projecting forward, I'm really not in a position to do that right now.

Okay. Second question is, can you give us an idea of what the change in air conditioner sales was, either from a percentage basis or dollar basis, just so we know how much that actually impacted on the dollar basis?

Sure. I'll give you actual actual number. Air conditioner sales this year were 7,660,000 last year. This is during the quarter, May, June, and July. This is pretty -- not to the penny, but it's a good number. Last year 11,836,000.

Okay. Thanks. Then the last question is, regarding second quarter sales trends, can you give us an idea of what the impact of big-screen television sales were? I know when you reported your 10-Q from the April quarter, you actually outlined the television category as having impacted comps by about 9 1/2%. Can you give us an idea of what the performance of that key category was for you? Thanks.

It was --

In general, the television category positively impacted second quarter sales by around 7%. So it continued to be a strong category, obviously, in the second quarter.

Okay. And just a clarification. When you say "positively impacted," I am assuming you mean that category had comped positive by 7%; is that correct?

Actually, if you just looked at that category, it would have comped more than that. That's the impact it had on the overall comps for the company. If you just took a television category in and of itself, that category increased around somewhere between 15 and 20%, probably.

Okay. Thanks a lot, guys.

The next question comes from the line of Todd Cherchetta with [TGT Capital]. Please, go ahead.

Hi, this is Campbell Gibson for Todd. I wanted to ask about stores and real estate in general, what you're doing as far as store openings, if you're still -- have a moratorium on that, and if you're still closing stores or re-locating stores. I know you've had some real windfalls from real estate in the past, where you've either moved or closed stores and sold the underlying real estate. I know you have a low historical cost on a lot of that real estate. I'm just wondering what's going on with regard to basically new stores and moving and closure of stores?

Two things. One, this year we -- because we expected a slow year have not planned any new markets. We've been working very hard on comps, and as you can see, have been very successful. I think that makes a much stronger business, in my opinion. Now, the comps are starting to improve,there's a chance we'll start looking at more markets. We have a real real estate opportunity coming next year. A bunch of old leases expire, and the good ones we'll take options on. The ones that aren't good will go and either replace a store or look to make a better real estate transaction.

In terms of past performance, when we have closed stores, and there have been some stores that just didn't work in markets, we've been fortunate enough to show a nice increase in some cases, in some cases anyway, just selling the underlying property. And our real estate is significantly -- at least based on what it would cost to put up new stores today. It's a great asset. Our real estate is a great asset. In terms of planned closed store, we really don't have -- there may be -- it may happen, but it's not something that we generally do in the second half of the year. And as you can see by our numbers, things are getting much better. So I wouldn't expect any huge amount of store closings.

That's great. Thanks very much.

Sure.

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We'd like to thank everyone for listening and thank everyone for their support. Again, we'll keep working hard for you. Thanks for being on the call. Bye.

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