REX American Resources Corp (REX) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Rex Stores third 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 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded, Tuesday, December 2, 2003. I would now like to turn the conference over to Stuart Rose, Chief Executive Officer. Please go ahead, sir.

Thank you. This conference call contains forward-looking statements within the meanings 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 thereon or comparable terminology.

Listeners are cautioned that there are risks and uncertainties that could cause actual results or 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 retail industry, changes in national or regional economy, weather, the effects of terrorism or acts of war on consumer spending patterns and the availability of certain products and technological changes and any possible synthetic field IRS developments.

Going to our quarter, everyone, I'd like to talk to you about, first of all, the net income. We're happy to report that the net income this quarter was up 32 cents versus 31cents. Income from operations was down a little bit. The bulk of reason for that was due to increases in commissions. Again, we feel very strongly that a commission sales force is the way to go and we've continued to go with commissions and have even increased commissions to get better people to sell our high-definition television sets.

Comp stores were up and again with us emphasizing HDTV, that was the biggest part of the comp store increase that and LCD television, we were up a couple of percent. We also received a favorable -- or our partners received a favorable ruling from the IRS relating to the chemical change issue. So, we're hopeful that that audit will be ended shortly and money that's presently in escrow will be released to the company. Again, that's something that appears production has picked up significantly in the limited partnership and should be very good for us for the next few quarters, should things continue to go the way they appear to be going.

In terms of same-store sales, currently for the month of November we were down 3.5% but for the weekend, the Friday, Saturday and Sunday after Thanksgiving, we were -- that's approximately 3.5% -- we were up approximately 4% for that weekend. So, we're optimistic on the holiday season. Again, that was in comp stores, we were up 4% for the holiday weekend. Again, we're optimistic for the holiday season. November we were, again, a little bit down, but that was due mostly to the timing of a private mailer which was moved to December. In my own opinion that I think people are waiting that Thanksgiving weekend to really get shopping because of the bargains that are out there. Customers have become accustomed to those type of bargains.

At this point, I would like to leave the conference open to questions and answer any that I'm capable of answering. Thanks.

Thank you. Ladies and gentlemen, if you want to register a call on today's conference, 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'd like to withdraw your registration, you may then press the 1 followed by the 3. If you are using a speaker phone, we ask that if possible, you lift your handset before entering your request. One moment please for our first question. Our first question is from the line of Scot Cicarelli with Harris Nesbitt. Please proceed with your question.

Hi, Scot.

Hi, guys, how you doing?

Great.

Good. Just wanted to clarify a couple of things. The down 3.5% comp in November. That obviously includes the up 4% for Thanksgiving. So, you're saying inclusive of that it was down 3.5%.

Up to that period we were down a little over 5.8%, Scot.

So, down almost 6% before that?

Right. And that does include -- actually, yes it does include that 4%.

Okay. Maybe can you walk us through exactly what happened during the course of the third quarter? Because, I think the last time you updated us you said comps were running over that kind of 5% threshold and obviously you finished below that and November seemed to be even worse than that.

I think comps slowed down toward the end of the quarter and I think a big part of it had to do with people waiting for that Thanksgiving weekend. That's my biggest opinion. We also, probably toward the end of the period, we did something a little bit different with our advertising, cut back a little bit on the television, that type of thing, to see if it was effective and maybe we overreacted a little bit and have to adjust that back again, but definitely slowed down toward the end of the quarter and the beginning of this quarter.

Okay.

Also, Scot, the tax rebates, stimulated some purchases but, the tax checks that came, and so there might have been another reason. Why we did better at the beginning of the quarter than the end of the quarter.

Okay, and so can you give us more clarification on what slowed down? Was it --

The important thing looking forward is we had a great Friday/Saturday/Sunday relative to last year. So, we're up 4% during that period.

Okay. I understand that part.

On a store for store basis.

Can you tell us what slowed down, was it across all of your markets, was it all categories or was there a dichotomy on what you saw?

No, I think it was across all, basically. I didn't see any regions that slowed down. I think it was just a slow down and in my opinion, again, waiting for the holidays.

Okay. And then the last part is, it looked like inventory finally started to stop rising at the same level as it had earlier in the year. Can you kind of give us your perspective on your inventory levels and expectations for that? Thanks.

Yes, good question and inventory levels are actually significantly down from last year and I expect at the end of the year you'll see inventory levels even down further, which is a two-edge sword. I've never been that concerned about inventory levels because we buy opportunistically, and when the buys are out there, we've always been able to translate that into higher margins. It is myself doing the buying and Larry Tomchin, and maybe three people. We've all been doing it a very long time and we'd like to think we know what we're doing in that area.

But right now inventory's down about -- or at the end of the quarter, inventory was down about $12 million from the year-ago period and I think it's going to be down on January 31 significantly from last January 31. And again, that's great, our cash will be through the roof. The negative of that is that there aren't any great -- the opportunistic buys that we sometimes see are not there right now, but they may reappear shortly. There's actually the opposite of it in some of your products, LCD television sets, in particular. They've become a very, very hot product and we're scrambling and using our relationships right now in a different way to just get product and we're working real hard to do that, but we're still not getting the amount of product that we need in that particular category.

In terms of the industry itself, with LCD television sets, I think this industry's going to have the biggest boom, since I've been in the business, for an item that's fairly relative to plasma. And some other items, fairly inexpensive and a big jump in technology compared to the current high-definition-ready television sets that are out there. So, we're excited about it and think we're well positioned to be in that business. Right now we're carrying Sony and Hitachi and Sharp and we'll look to carry other ones and that, I think, is a future of our company and our industry.

Okay. I do have two follow-ups and then I will turn it over. First of all, in terms of not having the LCD product you thought you might like to have, as you said you were scrambling, do you think in-stocks actually hurt your sales at all during the quarter? And part two of that is -- well, why don't you answer that first if you don't mind.

No question it's hurt us during November. During the quarter, it probably hurt a little bit. I'd say to answer both ways, yes, if we can get out the LCD television, the demand is out there for our business, would be through the roof. It's an odd situation that the new technology is not that much different price than the old technology and so it's -- most people, rightly, would like to -- I wouldn't say most people, but a lot of people would like to get that product and we're getting as many as we can get our hands on, which isn't enough.

And then the last part is, you're suggesting that inventories going to be down substantially year-over-year. Is that saying something about what you're seeing on the sales end? Should we read more into that? How do you plan on manage the business, given what you're seeing on the opportunistic buys? Thanks.

It's all related. Inventory is going to be down, all related to the opportunistic buys. I buy, as you know, Scot, on a return on investment basis. If I can get a return, I don't. That's more important to me than anything, getting the return for investing the money. And it will be down because we're not, at this point in time, seeing the buys that we were seeing earlier in the year. That could change tomorrow, but just to give you a snapshot of where it is today.

Thanks a lot, Stu.

Sure, Scot.

The next question is from the line of Bob McDermott from Investment Council of Maryland. Please proceed with your question.

Hi, Bob.

Hi, Stuart. How you doing? This isn't the proper form, but I was thinking hopefully maybe in the letter to shareholders, in the annual, that we could talk a little bit or you could talk a little bit more about the future of the company, we've done a great job, I think, in managing for profitability and taking cash flow and buying shares back. There is a big dilution factor from the substantial amount of options that are outstanding, and certainly the partnership that you very astutely invested in a few years ago has worked out well, but at least from my perspective it seems a little bit, I think difficult to kind of envision what your plans are for the company looking out over the next few years. As I said, this probably isn't the right forum.

Anyway, I can still talk a little bit about it, Bob. A couple of things, in the synthetic field, we have one asset that's not in service right now. We'd like to get that one going. I expect to generate large amounts of cash. We're not the general, but we're the limited, but the general appears to be ramping up, which should be great for our earnings going forward for the next few quarters and I hope to next year, turn some of the lease property, leased assets that we had, that were bad leases, we were in 15-year leases with, I say a leaseback company that wasn't the most favorable deal in the world for us. We get out of that next year and can continue with the stores that are good and the stores -- and if it was a bad real estate deal, we can move to our own company-owned stores, so I'm looking forward to doing that next year which should have a good impact on our bottom line the year after that. Assuming we can keep the same store comps going. I would look to start opening stores again, probably at the rate of about 5% a year.

Again, we have lots of markets, small markets, that need a company like us. We have professional salesmen that are capable, more capable than anyone in these markets to sell products that are brand-new and as you know, high-definition television, every set is going to have to eventually be replaced with high-definition television sets and in the small markets, we want to be the outlet of choice.

Uh-huh.

Does that answer your question?

Yes.

We just happened to make a lot of money in the side investment that turned out to be huge.

Uh-huh. So, in synthesizing that, it looks like your plan is to try to resume square footage growth, et cetera, beyond next year.

Yes, next year our plan is to turn some of these lease properties, or to own some of the lease properties and get out of some unfavorable leases, which we've had to eat those for 15 years and we didn't lose money or anything, we made more money, but we can make more money by owning the properties. Which as you know, we've been very astute at doing. The other advantage we found of owning properties, even when a store doesn't work out, most people, in fact almost every company I know, has a write-off. We have had write-ins and that's taking place and so, in fact, that happened this quarter, we closed two stores. We got a little bit of a write-in when we sold that real estate.

Okay. Now, the plant that you own, the synthetic fuel plant, when you were talking earlier about the general partner ramp, is that the one you're talking about?

No, I'm talking about the one in Gillette, Wyoming that we own, and it's not in service because we couldn't find a general. Our belief was we couldn't find a general because the IRS, everyone was waiting for the ruling on chemical change and now we've gotten a positive ruling. The industry has gotten through one of our other plants that were limited positive ruling. So, we're hopeful, but there's no guarantees but we are hopeful to get that plant up and operating. If we do that, that will add significantly to our bottom line. To our cash flow.

Do you have to get a letter ruling on that plant?

We have a letter ruling. We'll probably want to get it revised.

Revised? Okay.

But we already have a private letter ruling on that plant.

And you still think share repurchases are better than dividends at this time?

At this time I do, if nor no other reason there's still a double taxation in dividends and also a share repurchase allows us to reduce the share -- if we repaid a dividend instead of a share repurchase, the earnings per share wouldn't have been as high.

I understand that.

In this quarter, it actually made the difference between being up and down on earnings per share.

I didn't know if you wanted to pass along some of the cash flows from sin [ph] fuel to shareholders.

Well, let's wait and see and start learning again. We hope to be in that position to make that decision, Bob.

Okay.

I don't like to, as I pointed out, that money is still in escrow and it looks good and everything, but I don't want to spend money that's not in our pocket yet, if you follow what I'm saying.

Yep, yep. Okay, thanks.

The other side of the coin, too, is that our debt should be, a short-term debt should be, except for real estate debt by the end of the quarter, it's our hope to be out of the banks, except for mortgage debt.

Okay, thanks.

Thanks, Bob.

Our next question is from the line of Richard Dernley [ph] with Longford Partners. Please proceed with your question.

Good morning.

Hi.

Three questions if I could. There's been some discussion about, in just retailing in general, about heavy promotions early in the Christmas season, like around now, since inventories tend to be light to sort of wet the consumers' appetite and then basically back off on the promotion, essentially raise prices for the rest of the season. Do you hear, see, intuit anything along those lines?

I know from our standpoint we're not planning through Christmas to go as low as we did during the Thanksgiving, that Friday, in particular, after Thanksgiving. I think that's just become, it's a huge pie out there and you have to be very low-priced to get a piece of it. In terms of actually raising prices, I guess if you mean not going as steep on sale, that's probably a realistic thing to shoot for during this season.

Uh-huh. And how representative --

I also think there is going to be some shortages in supply and we're very well positioned to go through the season without being short in anything that I can see, except the LCD television.

Uh-huh. I see. And how representative was the Thanksgiving weekend in '02 relative to the fourth quarter of '02?

Doug, do you want to answer that?

Just like a lot of retailers last year, we didn't see the follow through after Thanksgiving. We had a really strong Thanksgiving weekend and then there was not as much follow through as had been hoped for. That remains to be seen for this year.

Uh-huh. And then the last one is, how many leases are involved in that sale leaseback?

Doug?

It's roughly 25 properties in total.

And any indication as to how many of those you will end up keeping?

We're still working on that.

Okay.

So, we don't have a number right now.

Okay. Thank you very much.

Ladies and gentlemen, as a reminder, to register a question on today's conference, please press 1 and then the 4 on your telephone at this moment. Mr. Rose, there are no further questions at this time. I will turn the conference call back to you. Please continue with your presentation or closing remarks.

Okay, again I'd like to thank everyone for listening and appreciate your support very much. Thank you.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.