99 Cents Only Stores
For 99 Cents Only Stores, it's Houston that's got a problem. While the average non-Texas store has yearly sales of almost $4 million, stores in Houston ring up about $3 million. Management claims that as its presence grows in that city, so will average store sales. The company is making a big bet on that, opening 14 stores there in 2004 -- more than in any other city.
All told, 99 Cents Only Stores will add 25% to its square footage in 2004 as it adds 48 new stores. With net income estimated at $66 million to $71 million (and paying no dividend), the company will use all its cash flow to fund a $70 million to $80 million capital-spending plan. If it falls short, there is a rock-solid balance sheet with $146 million in cash and cash equivalents waiting as a net.
In fact, drilling down into the fourth-quarter numbers, we see that sales actually jumped 17.4%, but operating expenses were up 31.3% (over a third of that was related to workers' comp). The upshot was a sharp decrease in operating margins from 14% in the fourth quarter last year to 9.4%. Clearly, resolution of this issue -- which has also plagued Motley Fool Stock Advisor selection Costco
Moreover, despite the rough quarter, 99 Cents Only Stores managed gross margins of 40% vs. Dollar Tree's 36% and Wal-Mart's
As it turns out, while 99 Cents Only Stores trades for a premium of 28 times forward earnings, if the company can grow to California proportions in Houston, and keep up its gross margins, 99 Cents is just about right.
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Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.