REX Stores: Ethanol Must Turn Around

Jun.12.08 | About: REX American (REX)

REX Stores Corp. (RSC) is an interesting hybrid company. It operates a regional chain of electronic stores, but has been investing in the Ethanol business the last few years, and closing down a significant number of stores. RSC reported earnings on June 5 and held a conference call to discuss the results. Here are highlights from the first fiscal quarter ending 4/30/08:

Financial Highlights

Sales - $47.1 million.
Net Income - $1.5 million.
EPS - $0.13 per diluted share.
$1.7 million of income from synthetic fuel limited partnership investments and equity in unconsolidated affiliates (tax credit program related to this has been discontinued).

Retail Business

SSS - decline of 0.3%.
Store Count - 111 (39 owned and 72 leased)
Another 10 owned stores are closed or sublet to others.

Three distribution centers owned and on books at $12 million.

Dayton, OH - 470,000 square feet.
Pensacola,FL - 180,000 square feet.
Cheyenne, WY - 45,000 square feet.

We are cutting margins a little bit to keep our volume. We feel that during a slower economy, during tough times, it’s better to cut margins a little bit, trying to keep the volume steady....And we seem to be getting some benefit from these rebate checks. The economy of course is still very tough.

REX also announced the launch of a strategic alternative review process of its retail segment. The Company expects to consider and evaluate a broad range of alternatives during this process, including opportunities to monetize its real estate portfolio.

The real estate is worth significantly more than it’s on the books, and even retail without real estate due to the service policies and the fact that it’s profitable for this value.

Ethanol Business

Ethanol Investment Summary

Levelland Hockley County Ethanol, LLC - $16.5 million capital investment.
Patriot Renewable Fuels, LLC - $16.0 million.
One Earth Energy, LLC - $50.8 million.
Big River Resources, LLC-W. Burlington and LLC-Galva - $20.0 million.

"Our belief in ethanol is that with oil prices where they are, that business, our feeling, has to turnaround. We are still making some money. Most or many in the ethanol field are not making money."


Were closed stores leased or owned?

"They were all leased properties that were on short-term leases."

Breakdown of Debt?

"REX (retail) has $13 million left of long-term debt, and the $32 million was for Levelland/Hockley."

Capex in quarter?

"For Levelland/Hockley, it was $5.5 million and One Earth was $23 million."

Stock Buybacks?

"Our history has always been when the stock sells below book value to look at doing some buyback."

Political Backlash against Ethanol?

"I don’t think that this country can afford to just shutdown basically a 15 million gallon a year business...if we didn’t have ethanol, the price per barrel of oil would even be higher and we’d have a worse balance at trade."

Are distribution centers worth $40 million?

"It is worth less than $40 million..but our opinion is it’s worth significantly more than book value ($12 million)."