Thursday, in previewing Friday morning's Q1 2006 earnings release from REX Stores (NYSE:RSC), I looked ahead a year and suggested the following:
There's more bad news to relate, but it's a ways down the road. According to the company's latest 10-K, investments in the original ethanol partnerships have been sold and payments on those investments will only keep rolling in through 2007. That means that unless REX finds new places to invest, and makes similarly strong profits on its new investments, operating margins could begin crumbling sometime next year.
Um, make that this year. And, perhaps, right now. Friday morning, REX warned that Progress Energy (NYSE:PGN), which had purchased one of REX's previous synfuel investments, announced that it had ceased production at the facility. Based on this and "similar announcements in the industry," REX is now operating under the assumption that it will receive no further payments from its past sales of its synfuel investments. Bummer.
As a result, the company is going to have to depend on its primary line of business -- selling TVs, video equipment, stereo systems, and other high-tech electronics -- for its bread-and-butter profits in the future. How successful will that be? The latest results suggest: not very.
Actually, the company did better than expected on the sales front, beating consensus sales estimates by reporting $86.1 million in revenue and a 0.5% increase in same-store sales. But although REX beat the estimates, that doesn't make the news good. Those sales numbers represented a 2% decline from last year's results. Combined with synfuel investment profits that had already begun to taper off (plunge would be a more accurate description), net profits for the quarter fell 73% versus last year, missing analyst estimates by a penny and coming in at just $0.13 per share.
Meanwhile, REX's competitors continue to outperform the company's struggling primary electronics business. Quickly skimming the most recent quarterly numbers, we see that Wal-Mart (NYSE:WMT) reported earning 14% greater profits in May 2006 than it did a year ago. And Best Buy (NYSE:BBY) reported growing profits by 25% in March; CircuitCity (NYSE:CC) posted a 45% improvement in April; and Sears (NASDAQ:SHLD) did best of all, reporting 338% earnings growth in May.
Only RadioShack (NYSE:RSH) shared REX's downward trajectory, with profits sliding 71% in April. Let's hope misery loves company, because misery is all that REX is promising today.
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Fool contributor Rich Smith does not own shares of any company named above.
