It's official. 99 Cents Only
Perhaps uncertainty is worse than reality. Even though the deep discounter's report offered no surprises -- it had reported preliminary figures a few weeks ago, and things were generally worse this time around than last year -- shareholders still bid the stock higher yesterday.
As I mentioned in the earlier report, while things are bad year over year, the company has been gaining traction in recent months. Certain improvements continued on a sequential basis. Comps have been growing for the past seven quarters, though they weren't as good as the numbers from competitors like Dollar Tree
With 99 Cents Only, investors need to monitor the overall economy, and that of California. More than 80% of the company's stores are located in that state, with a smattering of the remainder in a few other western states and Texas. A declining economy could have a big impact on results, particularly if it results from or causes inflationary pressures.
True, that might seem counterintuitive for a company selling products for less than a dollar. But because it has a set limit on what it can charge for its products -- no more than $0.99 -- the company isn't able to easily pass along cost increases to customers. If inflation rises, or the minimum wage gets hiked, for example, 99 Cents Only must eat a portion of that increase, which hits its bottom line. Its gross margins are healthy, but operating and net margins are razor-thin.
|
03/06 |
06/06 |
09/06 |
12/06 |
03/07 |
|
|---|---|---|---|---|---|
|
Gross |
37.5% |
37.6% |
38% |
38.6% |
39.2% |
|
Operating |
1.7% |
0.6% |
0.6% |
0.8% |
0.6% |
|
Net |
1.1% |
0.8% |
0.7% |
0.9% |
0.9% |
99 Cents Only still found it necessary to dole out stock options, despite the company's performance, making its knife-edged profit margin even thinner. In fact, expensing stock options caused the retailer to report a loss this quarter, rather than breaking even. Its $1.3 million charge cost the company a penny per share, the exact amount of its loss. Always nice to know that management is getting its cut, no matter how the company performs.
The extreme value retailer has been trying to turn itself around, and one can argue it's finally seeing positive results. Yet rivals like Big Lots
For more on the discount retailers, check out:
Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
