REX American Resources Corp (REX) 2005 Q3 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by, and welcome to the REX Stores third-quarter results financial conference call. (OPERATOR INSTRUCTIONS). Your speakers for today are Stuart Rose and Doug Bruggeman, CFO at REX Stores. I would now like to turn the conference over to Mr. Stuart Rose, Chairman and CEO at REX Stores. Please go ahead.

  • Stuart Rose - Chairman & CEO

  • Thank you, operator. This conference call contains forward-looking statements 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 or comparable terminology. Readers are cautioned that there are risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. These risks and uncertainties among other things the highly competitive nature of the consumer electronics industry, changes in the national regional economy, weather, the effect of terrorism or acts of war and consumer spending patterns, availability of certain products, technological changes, new regulatory restrictions or tax law changes related to the Company's synthetic fuel investment, the fluctuating amount of quarterly payments received by the Company with respect to sales of its partnership and its interest in synthetic fuel investments and uncertain amount of synthetic fuel production and tax credits received from time to time from the Company's synthetic fuel investments.

  • For the quarter, we are happy to report that our net income rose 104%. Income from operations were up 62%. Comp stores were up 4.6%. Included in the net income was operating income this year of a little over $1 million versus a loss last year and a nice increase in our synthetic fuel operation of 8.4 million versus 5.2 million last year. Comp stores were related almost exclusive or basically I should say to increases in appliances and flat-panel products such as LCD television and plasma.

  • In terms of going forward, our synthetic fuel for next year is still up in the air. Price of oil has come down, so we're optimistic that that income will continue next year, although there cannot be any guarantees. There is also a bill going through Congress that is in one of the committees right now that would allow for that, for our synthetic fuel -- for the partners that are producing the synthetic fuel to properly continue to operate, although again that is out of our control.

  • In terms of things we're looking for going forward, we are looking actively at other alternative fuel investments. We hope to invest in ethanol facilities. We're looking at a number of other things. Again, we have hopes that we can continue our synthetic fuel success in other areas of operations and other areas of alternative fuels.

  • In terms of retail, we appointed a new President, Dave Bearden, last quarter. He is off to a good start, and again we hired someone who we think is very very professional who will turn us into a more professional operation and do great things for our retail side of the business. November comps continuing to run single -- mid single digits increases, again it is due mostly to appliances and flat-panel. The flat-panel part of our business I think would be significantly higher, except for a plasma shortage, which is restraining our same-store increases.

  • In terms of a word of caution, it got extremely aggressive out there during Thanksgiving, and there could be margin pressure that continues -- there was margin pressure during the Thanksgiving week for sure, and if that continues, that could be a problem. People seem during the Thanksgiving week to -- whoever gives away or loses the most money on any given individual product seems to drive the companies in, and we have to be competitive, and again we are affected like everyone else is when people go so aggressively after the business.

  • In conclusion, we went through an amazing period. We had storms. We had a terrible hurricane hit us basically head on. Our employees just went right through it. We opened all our stores back up again. The stores where the hurricane took place actually are comping better than the rest of the Company, and again it is a great tribute to our people that they can increase operating income in the face of what we were up against. And I would just like to congratulate our people, and we have high hopes for the future that with the type of people we have working for us and with some of the changes we made, which will continue to show nice increases like we did the last quarter.

  • Thank you and I would now like to leave it open for questions.

  • Operator

  • (OPERATOR INSTRUCTIONS). Boniface Zano (ph), Royce & Associates.

  • Boniface Zano - Analyst

  • Given the change in mix over a year ago, the price point of the television sets being sold now are substantially higher by a factor of what, three or four times, which would suggest your units per store are down.

  • Stuart Rose - Chairman & CEO

  • Well, our units per store may be down. That is mostly due to -- and I'm not -- the price points -- the price again looking at plasma is way down. Looking at LCD, it is way down. So some of the price points in categories are -- most price points are falling, but you're right that our mix is changing, and we are not nearly as strong in the low-end $99, 13 inch, 19 inch category as we used to be. We're working real hard to take advantage of products that our salespeople can sell like plasma, like flat-panel where the customer needs someone to explain it to them, and that is not near the same amount of units as low-end 13 inch and 19 inch, and again I think we have to turn our business in that direction.

  • If we try to live on 13 inch and 19 inch loss leaders, you won't see us around in retail for very long. And I think we're doing a good job of changing our people to focusing on those products that really are our future.

  • One thing I did not mention when I was talking earlier, as prices continue to come down, we are in smaller markets, a little less affluent markets. We think some of the boom you have seen in the bigger cities could hit our cities, and we have hopes that it will hit our cities in the next year or so in those type products. If it does, that will bode very well for us.

  • Boniface Zano - Analyst

  • If you would look at the gross profited dollar per unit sold today versus what it was a year ago in the change of mix, even with the current pressures, what does that look like?

  • Stuart Rose - Chairman & CEO

  • Well, in the quarter our gross profits were up, but again I caution everyone even though our comp stores looked very good, it was brutal given -- I mean brutal. So I don't have the final figures in, but margins are certainly very tough right now, and I would forecast that they will continue. I think people in December realize they have to get the business, and I expect that to continue.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Stuart Rose - Chairman & CEO

  • One thing I wanted to say to people, we will go after the business. We're not going to sit back and get beat by anyone. We are going to do our best to be competitive, and we will not back down if prices get to whatever they have to be. We will be the right in there with them, although we will not be the leader in the price front. Sorry. Go ahead, operator.

  • Operator

  • Rick Weinhart, Harris Nesbitt.

  • Rick Weinhart - Analyst

  • I have a couple of questions. You mentioned comps running up mid single digits so far in November. Did you know -- do you have the figures on Thanksgiving day weekend yet, whether that was positive or negative?

  • Stuart Rose - Chairman & CEO

  • Yes, that is in the figures. I don't really want to get into any given days but to tell you that the month was up.

  • Rick Weinhart - Analyst

  • Okay. Great. Also in the past you have given us what the comps were running. When you have an unusual hit from air conditioners, you have given us the comp number without the air conditioners. I'm wondering if that was a substantial either positive or negative in the quarter?

  • Stuart Rose - Chairman & CEO

  • Doug, I don't believe it made --

  • Douglas Bruggeman - CFO

  • Air conditioners were positive. Primarily we sold air conditioners in August, so, you know, even continuing through September and October, we did fine.

  • Rick Weinhart - Analyst

  • Okay. Great. Thanks. And you talked about I believe the drivers being flat panels and appliances. Now one thing that we have been doing our research here we have noticed is that there is some strong appliance demand in some of the areas where the hurricanes, in particular where Katrina had gone through. Is that -- can you say that that is a primary driver of the appliance business right now or is it --?

  • Stuart Rose - Chairman & CEO

  • I don't know about primary, but we would concur with what you're saying that right now we're doing a heck of a lot of business in appliances in areas that were hit by the hurricane, and again, like I said earlier, we got our stores. We earned it. We really worked hard to get our stores open. They are all open, and we are getting some payback from just being quicker and better than what I think the competition was.

  • Rick Weinhart - Analyst

  • Okay. And with that in mind, I believe that the impact from the hurricane and the boost that you get in terms of sales, that can sometimes last I believe several quarters. Am I right in that assumption, or from your experience in these regions, could you --?

  • Stuart Rose - Chairman & CEO

  • Last year we certainly had some good benefit for awhile in Florida when the hurricanes hit Florida, so we will see what happens. I would hope so, but I don't know. This hurricane was worse than anything that has ever hit us.

  • Rick Weinhart - Analyst

  • Okay. (multiple speakers). Okay. Moving on to the gross margins in the quarter, they were up from last year, even though you said that certainly Thanksgiving Day weekend will have been brutal. Is it being driven primarily by mix at this point, or are you seeing increases in or decreases in -- I guess my question is, what is driving it? Is it being impacted on the pure product level at all, negatively or positively?

  • Stuart Rose - Chairman & CEO

  • Doug, do you want to get that?

  • Douglas Bruggeman - CFO

  • That is fine. I would say some of it is mix. We have increased the appliance sales as we've talked about, and we were able to get some good buying opportunities on certain appliances, which has helped the margin in the appliance category even as the appliances have grown. And then the rest would be attributable to the mix and buying opportunities.

  • Rick Weinhart - Analyst

  • Okay. And you are cautious --?

  • Stuart Rose - Chairman & CEO

  • One thing, Rick, I should say appliances have always been lower margin for us, but it's not near as brutal in the white goods business as electronics was during the Thanksgiving --.

  • Rick Weinhart - Analyst

  • Right. Okay. Thanks. And your cautious comments about Thanksgiving Day weekend, I'm curious given if we can see a continuation of that type of promotional environment whether or not it drives comps, we will assume it does, but on the gross margin line, would you expect gross margins in the fourth quarter to be positive or negative at this point?

  • Stuart Rose - Chairman & CEO

  • My guess is if that continues, it will be negative. How negative I cannot tell you.

  • Rick Weinhart - Analyst

  • Okay. Just directionally, that is helpful then.

  • Stuart Rose - Chairman & CEO

  • We are going to be competitive. We're not going to sit back and let people take our -- we work really -- we are not going to let people -- we are going to do everything we can to prevent people from taking our market share.

  • Rick Weinhart - Analyst

  • Great. And then a couple other ones here. The real estate sale you had in the quarter, you had a gain of about a 0.25 million. Do you know what the cost base was on that? I'm trying to determine what the gain was in percentage terms.

  • Douglas Bruggeman - CFO

  • Really what that was was that was a parcel of land where we have a store, so we did not sell off the whole property. It was just a parcel of land that --

  • Stuart Rose - Chairman & CEO

  • They had some excess land.

  • Rick Weinhart - Analyst

  • I see so it is sort of attached. Okay. And then just a couple of more quick ones here. Your 8-K disclosure regarding the ethanol investment that was filed this morning, I just want to try and understand what the probabilities of that going into production are. Is this kind of an early read on an investment? In other words, you've located an investment, but it is not a done deal by any means because it sounds like the payment is not going to occur until sometime mid next year on that?

  • Stuart Rose - Chairman & CEO

  • It is not a done deal. They have completed their equity raise. Now they are going to go raise their debt, and so until the debt is raised, we cannot be sure they are going to operate the plant.

  • Rick Weinhart - Analyst

  • But assuming that you are kind of given this initial investment here or at least you've signed the primary starting out, do you have any figures as to what the expectation is from that if it goes into production?

  • Stuart Rose - Chairman & CEO

  • We do but we're not ready to disclose those at this time, except to say that ethanol at the price currently would be an extremely profitable investment for us.

  • Rick Weinhart - Analyst

  • Okay. That is based on --?

  • Stuart Rose - Chairman & CEO

  • At the current price.

  • Rick Weinhart - Analyst

  • Okay.

  • Stuart Rose - Chairman & CEO

  • And the current corn price. There is a few variables at the current corn price and the current gas price for the current ethanol.

  • Rick Weinhart - Analyst

  • Okay. And then the last question I have for you, just based on some competitives we hear on what we see happening at Wal-Mart, which I believe is probably one of your biggest competitors, they have recently announced that they are revamping their consumer electronics departments. They have already done a majority of those expanding the areas, adding new products, more higher end products, and also started offering warranties. So I'm wondering just from your perspective, number one, have you seen any impact on your business yet? (multiple speakers). And then also do you expect that this is going to have an impact, or what is your kind of take on that?

  • Stuart Rose - Chairman & CEO

  • If Wal-Mart continues what they are doing, my own personal opinion is Wal-Mart has upset tremendous amounts of customers with their five per store running stuff way below cost in 10 per store. And they are driving people into our stores. I hope they -- if they continue that form of advertising, I think it will be -- my own opinion is I think it will be to our advantage. They don't have salespeople. They have people lining up and getting very very upset with them. And they used to be the greatest at taking care of their customers. When they do that type of baloney, I think at least my experience, my own feeling is they are very very much upsetting customers. People are coming into our stores saying that they have had it with them with their advertising, with the way they wake up at 4:00 in the morning and cannot get the products.

  • I look forward -- if they continue that and we continue professionalizing our sales force, I think more and more people will be very happy to shop our stores, especially if we are competitive with anything that is out there. And I think we are seeing that the comp store number was good. It would have been a lot better if we would have had -- if we could have gotten a plasma supply that we could have sold, and again I don't fear Wal-Mart and I don't think what they are doing in consumer electronics, I don't think is driving any loyalty to their stores. I think it is doing the exact opposite and driving people into our stores.

  • Rick Weinhart - Analyst

  • Okay. Well, thanks very much.

  • Stuart Rose - Chairman & CEO

  • In terms of warranty, it is an after the sale item, and at least on -- we offer a program where a customer can increase his warranty for 9.95 to two years, and we are more competitive than just -- I don't know anyone that is as competitive as we are in the whole country in that particular category.

  • Operator

  • (OPERATOR INSTRUCTIONS). Mike Nery, Nery Asset Management.

  • Mike Nery - Analyst

  • I had a couple of questions. What were basic shares at the end of the quarter and options -- total options outstanding?

  • Stuart Rose - Chairman & CEO

  • Doug, do you have those numbers?

  • Douglas Bruggeman - CFO

  • Hold on. I can get you the --.

  • Stuart Rose - Chairman & CEO

  • They will be in the Q. And I'm not -- all I can tell you is the buyback is continuing, and we believe that buying our own stores and buying our own synthetic fuel operation is a great use of our company's funds, and the number -- we continue to look and continue to buy back our shares.

  • Mike Nery - Analyst

  • Okay --.

  • Douglas Bruggeman - CFO

  • Options outstanding at the end of the quarter was about 4.8 million shares.

  • Mike Nery - Analyst

  • Okay. And what did you spend on the buyback in the quarter? If you don't have these numbers, I will just look in the Q when it comes out.

  • Douglas Bruggeman - CFO

  • If we could, let's just wait and we will put it in the Q.

  • Mike Nery - Analyst

  • Sure. And your partners for synthetic fuel production for next year, I would assume you're going through lots of conversations about that now. What are the current thoughts there with production relative to what you did this year?

  • Douglas Bruggeman - CFO

  • We have built our operations, but we receive payments based on their production, and we don't have any say whatsoever in how much they produce. So we are totally at their mercy, and my gut feel is, well, it's going to be very simple. My feeling is if oil prices fall, they will produce. If they go up, they won't produce, but there is some legislation that is in committee right now that would allow them to produce next year and so -- two-thirds -- two out of three scenarios they produce, one out of three they don't produce. One out of three being oil prices go up, and the legislation does not go through.

  • Mike Nery - Analyst

  • If they do produce, do you have a sense of what type of levels they can produce at, I mean similar to what we did this year?

  • Stuart Rose - Chairman & CEO

  • We could have more than this year because we would have one of the -- one plant open. We would receive income from one plant the full year. As a word of caution next year and this is a little complicated, but next year even though we will be an alternative minimum tax from a tax standpoint will be – I'd encourage any analysts on the call to use the full tax rate for our tax liability. Because we won't be -- since we sold our synthetic fuel operations instead of generating tax credits, we generate cash out of those operations. And that will -- the actual cash number everything -- if everyone produces the same as this year, we will be much higher, but we will not be receiving tax credits.

  • Mike Nery - Analyst

  • Okay.

  • Stuart Rose - Chairman & CEO

  • But we have plenty of tax credits that we are carrying forward, many many tax credits that we are carrying forward that will cover it on a tax basis for next year.

  • Douglas Bruggeman - CFO

  • From a cash flow standpoint?

  • Stuart Rose - Chairman & CEO

  • From a cash flow standpoint.

  • Mike Nery - Analyst

  • Right. And in terms of production, how quickly could -- I know you don't have any say in the operations anymore, but how quickly can they adjust production in response to different prices? Could they shut it off in a day or --?

  • Stuart Rose - Chairman & CEO

  • I would think it would take a couple of weeks to get up and running. The biggest problem is buying the coal, which is the main ingredient of synthetic fuel.

  • Mike Nery - Analyst

  • Okay and there is --

  • Stuart Rose - Chairman & CEO

  • And there is a huge demand for the synthetic fuel. It is not the demand -- it is basically that what makes the synthetic fuel profitable is -- or what allows -- there is a large amount of tax credits involved in making synthetic fuel, and it is tied to the oil price, and that is where the variable is.

  • Mike Nery - Analyst

  • Right. And how do the phaseouts work? Do they take effect during the year, or do they take effect after the year is over and they look back at the year's average price?

  • Stuart Rose - Chairman & CEO

  • The way it currently is, it is a look back. What the legislation would change into it's a look forward based on the price of this year's -- based on this year's oil prices.

  • Mike Nery - Analyst

  • Okay. Thank you very much.

  • Stuart Rose - Chairman & CEO

  • Right now the way it is people would produce and really not know what the tax credit is until a year later.

  • Mike Nery - Analyst

  • Right. All right. Thank you.

  • Operator

  • Richard Ginley (ph), Longport Partners (ph).

  • Richard Ginley - Analyst

  • Do you still think you will get a million plus tons of production out of Gillette this year?

  • Stuart Rose - Chairman & CEO

  • Again, we don't control production. I would not want to speculate on what we will get out of any --.

  • Richard Ginley - Analyst

  • Well, at the end of the last quarter, you were on a million plus ton run-rate. Are you still on that run-rate?

  • Stuart Rose - Chairman & CEO

  • Again, I don't want to speculate. I don't know. We don't control production. I do not know what they are producing on a day to day basis.

  • Douglas Bruggeman - CFO

  • I could tell you for the quarter of the 8.4 million, 1.2 million was attributable to the production from that facility.

  • Richard Ginley - Analyst

  • Okay. Thank you. And then going forward in '06 and the future with the change in option accounting regs, could you talk about what role options will play in your comp plans in the future?

  • Stuart Rose - Chairman & CEO

  • Most of our -- and correct me if I'm wrong on this, Doug -- but most of our options we had stopped issuing options this year. Most of our options are fully vested and would not have any real impact on earnings. There are still some out there that would. Doug, you may want to talk about that, but I don't think it is significant.

  • Douglas Bruggeman - CFO

  • There will still be options that are vesting. That will impact the earnings per share. We are not in a position to discuss that right now. We haven't finalized all the calculations. But currently investors (indiscernible) did not issue options in the current year, and I don't believe there is plans to do that in future years either.

  • Richard Ginley - Analyst

  • So options are going to be replaced by what as the incentive -- long-term incentive?

  • Stuart Rose - Chairman & CEO

  • Right now the options are -- we have basically looked at -- we hope to have it replaced by better bonuses based on better performance of our operations.

  • Richard Ginley - Analyst

  • Okay.

  • Stuart Rose - Chairman & CEO

  • If we have worse performance of our operations, then theoretically the bonuses will not be as good. So it will impact basically bonuses, cash bonuses tied to our operations.

  • Richard Ginley - Analyst

  • Okay. And then could you give some color on your statement about your lower income markets? The boom in TVs hasn't gotten to that level yet.

  • Stuart Rose - Chairman & CEO

  • The average income in our markets, again we are in so many disbursed markets that I believe -- and some are higher -- we are in Naples, but we are in many many lower income markets, and I feel that as prices come down on plasma and flat-panel televisions, that people look at them as affordable options. In the market share in our markets, TVs have always had -- higher end TVs, big screens, that type of thing have always been great items in our market. And I think we will see a lot of people replace their big screens with some of this flat-panel technology that gives them a -- gives the customer a truly better picture. I just think cost was a much more restraining item for our customers than some of the larger markets, especially since we have not had the huge -- many of our markets have not had the huge increase in home values that allow people to remodel and put those in there and put video rooms in their house and that type of thing. So with prices falling, I think we're going to see a nice boom.

  • Richard Ginley - Analyst

  • Where -- what kind of pricing do you think you need to get to, and where are you now relative to where you think you need to be?

  • Stuart Rose - Chairman & CEO

  • I think we are there. We just could not get enough product in plasma. In LCD television, we did get a lot of product, and we did very very well. You can get a very nice plasma television set for under $2000. That is where I think the market is -- a big part of the market.

  • Richard Ginley - Analyst

  • Your market?

  • Stuart Rose - Chairman & CEO

  • Our market.

  • Richard Ginley - Analyst

  • And what was the shortage in plasma? What was causing that?

  • Stuart Rose - Chairman & CEO

  • The biggest shortage that happened was Panasonic did not ship what we had ordered, and we ended up not getting the product that we hoped to get. And that is -- we scrambled around to replace it, and we have done the best we could, but that is where our big shortage was.

  • Richard Ginley - Analyst

  • Were they backlogged or have production problems, or just did not like you?

  • Stuart Rose - Chairman & CEO

  • No, they like us a lot. We just hired their President, their ex President Dave Bearden, so they like us a lot. They also have to be fair -- and fair to all their customers. Everyone was short on Panasonic. They are a very very hot line in plasma right now, probably I guess as close to 50% of the business, which is amazing in one category.

  • Operator

  • Allen Montomid (ph), Boston Partners.

  • Allen Montomid - Analyst

  • Two quick questions. First of all, the gentleman earlier had asked the question about gross margins, and my line was a little fuzzy. You said something about negative. Was that negative relative to last year as a percent of sales? Can you clarify that?

  • Stuart Rose - Chairman & CEO

  • (multiple speakers) -- it was positive during the quarter. I just gave a warning going forward that the promotion that it is a battle out there right now, and I don't know what is going to happen in December, but Thanksgiving Day was a battle with people really going to extremely low prices to get customers in the door. And just gave a cautionary note that it could be that way in December, and if it is, it will affect our margins.

  • Allen Montomid - Analyst

  • So a negative relative to last December a little bit?

  • Stuart Rose - Chairman & CEO

  • Right.

  • Allen Montomid - Analyst

  • That is what you mean. And then the second one was, looking at the partnerships on SynFuel, is there a point that we would know when they are producing, you know, or how should we look at it to evaluate whether this is going to happen or it is not going to happen? What would you --?

  • Stuart Rose - Chairman & CEO

  • I would say (inaudible) progress or Progress Energy, which one is it, Doug?

  • Allen Montomid - Analyst

  • Pardon me?

  • Douglas Bruggeman - CFO

  • It is Progress Energy.

  • Stuart Rose - Chairman & CEO

  • Progress Energy. Pay attention to their conference calls, and they are our biggest partner, and they have been pretty wishy-washy on whether they are going to operate or not operate. So again it depends on price of oil and the legislative stuff.

  • So they -- I assume they will have -- it's a big part of their earnings also. I assume they will have some sort of press release out or some sort of conference call, one or the other, some time in December to say what is going to happen. (multiple speakers) -- to give a definitive statement on what is going to happen.

  • Allen Montomid - Analyst

  • Perfect. Thank you very much.

  • Operator

  • This does conclude the Q&A session. Mr. Rose, I will now turn the conference back to you to continue with your presentation or closing remarks.

  • Stuart Rose - Chairman & CEO

  • Very good. I would like to thank everyone for listening and thank everyone that has invested in our stock, and we will continue to do our best to do everything we can to try to make this stock do well. Thank you.

  • Operator

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