Once again, 99 Cents Only Stores (NYSE:NDN) reported disappointing results. Net earnings for the second quarter fell to $2.6 million, or $0.04 per share, from $14.8 million, or $0.21 per share, a year ago.
For the quarter, the retailer was able to reach only the low end of its drastically lowered earnings. Last month, it lowered its earnings to a range of $0.04 to $0.07 from its earlier $0.19 to $0.20 range.
99 Cents Only just couldn't compete with its record-setting 9.8% increase in same-store sales reported in the second quarter last year. While retail revenues jumped 16% thanks to a 55% increase in grocery sales, the company posted a 2.5% decrease in same-store sales for this year's second quarter. 99 Cents Only also saw gross margins decline to 36.2% from 40% last year, while operating expenses increased to 34.3% of sales compared with 28.9% last year.
So why did investors bid the price of the stock up by 4% yesterday? It seems to me that they might be putting faith in the company's recovery plan. 99 Cents Only offered up a plethora of solutions to its recent troubles:
- A consulting firm has been brought in to work with management to improve inventory processes.
- Approximately 200,000 square feet of additional warehouse space has been purchased to relieve overcapacity in its main California distribution center. The additional space should improve the company's ability to replenish shelves in its stores located outside of Texas.
- Even something as simple as adding refrigeration to its Texas distribution center will benefit the company by allowing it to distribute frozen and deli products to its Texas stores from the Texas distribution center rather than waiting on the items to arrive from California.
Despite the positive signs, I'm still not convinced that 99 Cents Only is a good buy just yet. Competition from powerhouses such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) continues to increase daily.
I'm glad that management recognizes that change is needed and, thus far, has started taking the necessary steps to improve business. Talking about change and effectively changing operations and results are two different things, though. For now, I'll be watching from the sidelines to see how things develop for 99 Cents Only.
Fool contributor Mike Cianciolo welcomes feedback and doesn't own any of the companies in this article.
