Tune into one of its quarterly earnings conference calls, and you'll hear management go from talking about corn and ethanol prices to discussing the latest trends in home theater. Its latest quarterly numbers, especially on the retailing end, suggest that engaging in two very distinctive and unrelated businesses comes with severe drawbacks.
Same-store sales from its retail operations fell a dramatic 10%. Despite the decline, REX did manage to improve gross margin from 27.7% to 30.3% year over year. Strong sales from plasma big-screens and LCDs helped boost profitability. Sales of these high-end units, however, couldn't offset softness in audio and video, and from older "tube" models, which is the reason for the drag on comps.
The call contained very little discussion of REX's retailing business, however. Management and analysts alike seem primarily focused on REX's ethanol investments, and with good reason -- the fuel segment is becoming an increasingly important part of the company's business.
REX managers asserted that as long as refineries remain relatively scarce, and gas prices high, the company's ethanol business will continue to do very well. Management said that the company's "big investments" will remain in ethanol, and it has no intention "to throw money in retail."
That said, the company gave no indication that it plans to exit the retailing business altogether. REX is in the process of downsizing stores -- which grants the company the opportunity to sell some warehouse space, executives said, since REX currently has more distribution capacity than it needs.
Comparisons between REX and Best Buy
But can management create long-term value for shareholders by increasingly focusing on a historically cyclical business in fuel? Only time will tell.
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