Investors in retailer 99 Cents Only Stores
A shrinking top line has been hurting the bottom line. While industry No. 1 Dollar General
When 99 Cents Only reported fourth-quarter and 2004 revenue in January, the CEO cited "economic, competitive and executional issues" for the poor performance. Because the competition found the economy robust enough to build same-store sales, maybe the entire blame should be "executional" -- a word not in my dictionary and one best served with greater specificity.
In January, the company promised to report earnings today. Instead, investors were treated to a press release titled: "99 Cents Only Stores Announces a Potential Restatement of Its Financial Statements and a Delay in Its Earnings Release and Filing of Form 10-K." That doesn't sound ominous, does it?
Here is the hard reality -- and it's not part of that headline. "Management has identified material weaknesses as defined by the Public Company Accounting Oversight Board." That's not good, and neither is the fact that the independent accountants will express an adverse opinion on the effectiveness of internal controls because of these material weaknesses.
Distill today's news, and you conclude that management does not have the tools in place to manage the business properly. The company is not like Dollar General and other retailers that have been warning of restatements because of how they accounted for leasehold improvements and have made adjustments. At 99 Cents Only, the problems run much deeper and may not be resolved quickly.
The stock, at a little more than $14, is down 40% from where it was 52 weeks ago and is down 8% today -- but is still roughly $2 above the low it hit in August. The four-year chart of the stock's performance is, shall we say, sobering for this troubled company.
Troubled, though, is a deceptive word to use for a virtually debt-free company with net cash (defined as cash minus debt) of $100.7 million: For perspective, that's a little less than 10% of either the market cap or yearly sales. Just think about would happen if the company's 3.5% operating margin rose to the level of industry peers: Dollar General's margin, for comparison, is 6.1%.
The mean analyst estimate for 2005 earnings (19 analysts follow the company) is $0.49 a share. That prices the company at 29 times forward earnings -- even after today's fall. That's expensive, in this writer's opinion, when Dollar General and Dollar Tree are selling for 19 and 14 times forward earnings, respectively.