99 Cents Only Stores Wisely Stay in Texas

I was fortunate enough to attend the first annual Wharton Hedge Fund Conference in Philadelphia last week thanks to the generosity of my friends at Seeking Alpha dot com.

It was a terrific conference with great speakers and I was able to -- for at least one day -- imagine what it might be like to be a wicked-smart MBA candidate at the Wharton Business School. Alas, but for my age and IQ, it could have been me. But I digress.

For me, the most impactful speaker of the day was Mark Fisher, the Founder and CEO of MBF Clearing, one of the financial industry’s leading Futures Clearing Merchants (FCM).

Mark is a trader’s trader: fast-talking, colorful, no BS, frenetic, uber-confident, long on energy, short on patience. He made a lot (a lot!) of good practical points, but the mantra he kept repeating regarding his trading philosophy, the one thing that resonated the most with me, was this overused cliché: “think outside of the box.”

Mark’s point: markets aren’t rational, they move on psychology and you can’t make money if you think like everybody else. He takes a Constanzian approach to trading: always bet the opposite of conventional thinking.

As a meteorologist who advises companies and investors on how the weather will shape consumer spending and correspondingly, retail sales volatility, I pretty much live outside the box which is, I guess, why I was so impressed with Mark’s presentation.

So what does any of this have to do with 99¢ Only Stores (NYSE:NDN), the weather, and out-of-the-box thinking?

NDN management recently made the decision to reject the bid by Dave Gold, Chairman of the company, to buy their Texas stores and have suspended plans to exit from Texas because of a “significant improvement in January sales results.”

Here’s what they said:

CITY OF COMMERCE, Calif.--(BUSINESS WIRE)-- 99¢ Only Stores® announced today that its Board of Directors has decided to suspend the Company’s exit from its Texas market for up to six months to re-evaluate its Texas operations in light of a significant improvement in January sales results and the potential beneficial opportunities resulting from a recessionary economy. (Source: Gridstone Research)

This may have been a very prescient decision by the board. Why?

The weather. Yep, I said it.

Going into the spring selling season, when weather once again becomes a significant driver of consumer activity, the weather expectation – both on a comparable basis to last year and to normal – is pointing to a very favorable retail selling environment in Texas over the next few months, particularly in March.

Last March it rained in Texas. A lot. In fact, according to the National Climatic Data Center (NCDC) it was the 20th wettest March on record. Rain has a direct impact on traffic into stand-alone stores and results in significant disruptions in sales patterns. Last year’s rainy and sometimes cool Texas weather overlapped with a very early Easter holiday and literally threw a wet blanket on Easter sales.

Compounding the issue were gas prices that were through the roof, food price inflation, and the beginning of the precipitous slide in consumer sentiment. It was a month fraught with headwind and the headlines tell the story:

March Retail Sales Hit 13-Year Low

Gas Prices, Job Insecurity, Cold Weather Hampered Consumer Enthusiasm

(AP) The nation's retailers reported the weakest March sales in 13 years on Thursday as consumers - fretting about mounting economic problems and enduring a frigid Easter - limited their shopping to food and other essentials.

On a comparable basis, when you factor in both the physical (weather) and economic environment, it looks like a layup for NDN in Texas over next month and perhaps beyond.

Here’s why:

• Warmer and drier weather leading to increased consumer activity and springtime selling. In fact, much warmer and drier weather this January may have contributed materially to the strength that resulted in the strategy change.

• Gas prices a buck and half cheaper than last year

• The promise of a slightly fatter paycheck thanks to the Obama stimulus plan

• Selling “value focused” merchandise during the worst economy since the 30s

NDN’s board plans to monitor sales in the Texas market over the next six months before making a final determination as to the disposition of the business, specifically:

The Board anticipates that if sales trends become sufficiently strong to support a profitable business model with an acceptable return on investment, any long term plans would likely involve building a small local dedicated team of buyers, senior operations management and financial analysis support in Texas. (source: Gridstone Research).

From a holistic and yes, out-of-the-box perspective, it appears likely that NDN will see continued strength in Texas over the next few months resulting in a retrenchment and perhaps expansion into that very large market.

Disclosure: no positions

Comments

[cyborg1939:]

Thank you for the very interesting ideas. I surely hope they will be the case. My understanding is that there is one chain, that sells both food and merchandise, that dominates Texas and, as been mentioned by management, runs everyone else out of Texas. Do you have any information on this? Cyborg.

Feb 24 03:42 PM