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Executives

Doug Bruggeman – Vice President, Finance and Chief Financial Officer

Stuart Rose – Chairman

Analysts

Mike Nery – Nery Asset Management

Richard Dearnly – Longport Partners

Arnold Brief – Goldsmith & Harris

REX Stores Corporation (RSC) F2Q08 Earnings Call September 9, 2008 11:00 AM ET

Operator

Welcome to the REX Stores fiscal second quarter conference call. (Operator Instructions). I would now like to turn the conference over to Doug Bruggeman, Vice President of Finance.

Doug Bruggeman

Good morning and thank you for joining REX Stores fiscal 2008 second quarter conference call. We’ll get to our presentation and comments momentarily as well as a question-and-answer session, but first I’ll review the Safe Harbor disclosure.

In addition to historical facts or statements of current conditions, today’s conference call contains forward-looking statements that involve risk and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the Company’s current expectations and beliefs that are not guarantees of future performance, as such actual results may vary materially from expectations. The risk and uncertainties associated with the forward-looking statements are described in today’s news announcement and the Company’s filing with the Securities and Exchange Commission, including the Company’s report on Form 10-K and 10-Q. REX Stores assumes no obligation to publicly update or revise any forward-looking statements.

With that, I’ll turn it over to Stuart Rose, Chairman of the Board.

Stuart Rose

I’d like to thank everyone for listening and now get into the numbers. Sales this quarter were $67 million versus – approximately $67 million versus approximately $48 million last quarter. The biggest increase came from alternative energy, the ethanol plant, Levelland, which was $24 million this quarter versus zero the year before. Retail was down $42.5 million versus $48 million last year. Income was $1.2 million this year for the quarter versus $5.8 million last year, earnings per share at $0.11 a share versus $0.48 a share.

Biggest change in those numbers was due to the end of synthetic fuel got phased out last year. This was the last quarter where we had large income. We should not be up against anywhere near these type of comparisons in the future.

In terms of earnings in retail, there were $774,000 this year versus approximately $1.9 million last year. Biggest reasons for the drop in income were comp store declines, 3.9%. Margin declines from 31.8 to 29.8. Again, both of those things we feel is related to a tough economic environment and we feel our results are indicative of what’s going on in the economy today.

In terms of products that declined, we were down in DVD, camcorders, analog, projection TV and air conditioners. It was offset by large increases in LCD and plasma television, which were up 46%, but still not enough to offset the declines in those areas.

We’ve hired during the quarter, Brown Gibbons Lang to do a strategic review of our retail and real estate operations. We will update you. We have nothing to report at this point and time. If anything material does happen, we will update you at that time. The business environment in retail is still extremely tough.

Excluding air conditioners, August and September sales were down approximately 7% on a store-by-store basis. We lost some business due to Hurricane Gustav. We still have two stores that are closed. They may or may not reopen, but we do not expect large losses from those stores at this time, though there will be some write-off related to the storm.

Since the end of the quarter, we also have sold some land in Cheyenne, Wyoming, surrounding our warehouse and that should help us on the positive side of the ledger.

In terms of ethanol earnings this quarter were $783 versus $746,000, excuse me, $983,000 versus $746,000. They were up a little bit. Big River continues to perform well, our interest in that plant.

Levelland, Texas, is now open. It was slightly profitable during the quarter, but it’s still suffering from high grain prices. We are not at the new sorghum and we’re throwing in a large demand on top of an end of a seasoned situation; and since the end of the quarter, we’ve had ethanol prices drop so we for the first couple of months did have some losses in that plant. We hope to do much better starting in October when the new crops come in. Sorghum has historically sold for a lower price than corn, and it’s our goal to buy the sorghum at a lower a price than corn. If we can do that, then we should have a very, very good plant there. But that’s the key is getting the sorghum at the right price. The demand for ethanol in that area has been excellent. We’ve had no problem placing the ethanol product in the DDGs, which is a byproduct from the ethanol plant placing those two products at a decent price.

A third ethanol investment, Patriot, is now open. We think the timing on that couldn’t be better. The crops are starting to come in. We’re ironing the kinks out right not, so we’re very optimistic on that one.

The other investment that we have, One Earth, is scheduled to open some time early next year. It’s a little too early to give a progress report except to say that we continue to think that location is as good, if not better, than any location of an ethanol plant in the country.

With that update, I’ll leave it open to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Nery - Nery Asset Management.

Mike Nery – Nery Asset Management

You said there are two stores. How many stores are in total are currently closed that you’re shopping the locations for?

Stuart Rose

What I mentioned two stores were, we have two stores that are currently closed because of the hurricane, that were put out of business because of the hurricane. That had nothing to do with… They may or may not reopen depending on what happens and damage and that type of thing, so we’ll see on that.

But, Doug, you can answer the question of how much… I think your other question is how many stores are marketing that we own.

Doug Bruggeman

I believe it’s currently four stores that are closed that we’re marketing.

Stuart Rose

We’ve done a really good job, not just a pretty good job over historically when we have closed a store, being able to make money on those closed stories. I don’t know if that will happen on these four, but historically that’s been a second chance for us if we don’t do well in retail, when we go into real estate, we’ve done okay.

Mike Nery – Nery Asset Management

In terms of the balance sheet, how much of the cash on there is encumbered by future needs for the ethanol?

Douglas Bruggeman

Of the cash, about $75 million of it relates to REX Stores Corporation and then about $3 million is for alternative energy.

Mike Nery – Nery Asset Management

On the retail side, what are net assets there currently on the balance sheet. I see the total assets, but do you know what the net number is?

Douglas Bruggeman

I don’t have that in front of me right now. Should we say net of the liabilities?

Mike Nery – Nery Asset Management

Yeah, the retail liabilities. Also, does the retail number, does that include the deferred tax and deferred income?

Douglas Bruggeman

Deferred tax is in corporate and then the deferred income, yes, is in the retail section and it would be the liability obviously against the asset.

Mike Nery – Nery Asset Management

It looks like you’ve been pretty aggressive buying back stock and I’d just like to tell you again I think that’s fantastic and I think it’s a good investment for the Company, and I support it completely.

Stuart Rose

I did not mention that we have been aggressive doing that. We’ve repurchased 706,000 shares during fiscal 2008 and that’s a lot for the number of shares we have. Our feeling is that when you can buy assets at X cents on the dollar, and that’s what we’re talking about with our share buyback, and we think they’re good assets, very good assets. We think it’s a wise use of shareholder money and we still have an open to buy on shares. Every time we buy a share, we’re increasing the book value of the stock.

Mike Nery – Nery Asset Management

I agree.

Operator

Your next question comes from Richard Dearnly - Longport Partners.

Richard Dearnly – Longport Partners

Since we’re talking about the share buyback...

Stuart Rose

Can I make one amendment, I meant the book value per share of the stock, not the book value of stock; I apologize. I just wanted to clarify that. Go ahead, Rich.

Richard Dearnly – Longport Partners

What’s your sense or the average price of the purchases during the quarter and subsequent to the quarter?

Douglas Bruggeman

For the quarter, in the quarter, the average price was $12.81. Subsequent to the end of the quarter, I don’t have it in front of me but it was something [inaudible] or less.

Richard Dearnly – Longport Partners

About the same area?

Douglas Bruggeman

Yes, about the same area.

Richard Dearnly – Longport Partners

Then would you clarify your discussion of the… Oh, first of all, where is sorghum relative to corn now, and what’s the normal discount to corn? Then were you saying that since the new sorghum crop at Levelland hadn’t come in, obviously you were using more corn…

Stuart Rose

No, no, we’re still using sorghum. The problem… I’ll be happy to explain that to you. We’re in a very good sorghum area, but our plant creates a huge demand in the area. Because of that, we’ve had to go further outside. We’re still using sorghum, but we’ve had to buy sorghum at places further and further away and price has been above corn. Historically sorghum should run significantly, by significantly roughly 90% to 95% the price of corn. So again with the new crop coming in, we’re trying to make arrangements as we speak with local - - with the locals, some of which are partners in the plant to lock in sorghum at a price below corn. If we can do that, then we should have a really good plant.

Richard Dearnly – Longport Partners

Is that working?

Stuart Rose

We’re working on it hard. We have no agreements at this point and time, but we hope to shortly. It will work if we can get that done. That’s our plan of what we have to make this plant better.

Richard Dearnly – Longport Partners

If you have to either pay the same as corn or use corn in the plant, what would that do…

Stuart Rose

If we pay the same as corn, we still will have a good plant as long as the industry doesn’t completely fall apart, which we don’t believe it will. Some people do believe it will, but we think we still are very high in the industry with oil where it’s selling for, with gas where it’s selling for, especially in the sorghum area, it’s not a human food crop, we think there’s room to expand sorghum production for our plant. Like I said, we think it’ll be a good plant. The ethanol and the DDG price have got for those two products has been up to or better than our expectations.

Richard Dearnly – Longport Partners

What again makes the One Earth location so good?

Stuart Rose

Well as I mentioned before, the whole key in my mind to this business is buying, I come from a retail standpoint, and if you can make a good buy on the product going into your plant and you do that better than everyone else, you should have a good chance to do better. Especially a commodity like ethanol, you should do better than everyone else in the end, and we’re surrounded by grain elevators, so we should have a significant advantage in the purchasing of corn in that area. It’s there way more… Our plant won’t make a significant impact, it’ll be an impact, but not as huge an impact on that area as it is where we are. We also have two major railroad lines which is very unusual with access to our plant which should give us, again, access to more markets than most people have for our end product. We’re also far enough away some of the plants are a long way from the DDG markets. We’re not a long way from the DDG markets. Although we won’t get as good a price as Texas for the DDG, DDG is basically cattle food, we’ll get a better price than a lot of ethanol plants.

Richard Dearnly – Longport Partners

Thank you for the clarification there. In terms of new investments in alternate energy or anything else, I would think given what it’s been, the depressed state of the ethanol markets, there are opportunity. Obviously you haven’t announced anything, but have you been shopping? Are you active?

Stuart Rose

We would never comment on whether we’ve been shopping, but there are definitely opportunities and we’ll see. There’s people looking both ways, I guess. To me there’s a lot of excitement in this business. We’ve always sort of done better or done better than most people in bad times in retail and we’ll see what happens in ethanol.

Operator

Our next question comes from the line of Arnold Brief from Goldsmith and Harris.

Arnold Brief – Goldsmith & Harris

Could you give us… I’m not asking what the conclusion is or the timing on a transaction, but if you could just tell us when the strategic review itself will be completed.

Stuart Rose

I would think that everything should be completed by the next conference call that we have.

Arnold Brief – Goldsmith & Harris

Hopefully that you would show.

Stuart Rose

Yeah, I would hope, but you never know.

Arnold Brief – Goldsmith & Harris

On your balance sheet, you list your assets by retail, ethanol, and then you have $107 million of corporate assets. What is that comprised of?

Doug Bruggeman

Primarily cash, we list our corporate cash there as well as the deferred tax assets.

Arnold Brief – Goldsmith & Harris

But there’s no real estate involved in that at all?

Douglas Bruggeman

No, we keep the real estate with the retail section.

Arnold Brief – Goldsmith & Harris

With the retail, okay. I should know the answer to this one, but I just don’t remember. You have a $5 million note that you can convert to equity. What’s the impact on the equity participation if you convert the note?

Douglas Bruggeman

We’re currently at about 57%. I think it would take us to about 63%.

Arnold Brief – Goldsmith & Harris

63%?

Douglas Bruggeman

I think.

Arnold Brief – Goldsmith & Harris

I just had a couple others here somewhere. Yeah, at current prices of corn and ethanol, assuming they prevailed, would all your plants be profitable?

Stuart Rose

Everything changes from day-to-day, Arnold. It’s tight margins; I wouldn’t… At current prices, Levelland’s not profitable today because, like I said, we’re expecting better prices in October, but today’s prices it’s not profitable. It continues to money and we’ll see on the other two.

Arnold Brief – Goldsmith & Harris

Does the completion of your ethanol facilities require any more investment than the $3 million that you indicated before? Invest any more money in ethanol to complete the [inaudible]?

Douglas Bruggeman

I’m sorry, can you repeat that question?

Stuart Rose

I can answer it. We’re not required to make more investments, although we would not rule out making more investments. We are not…

Arnold Brief – Goldsmith & Harris

You don’t have to lay out any more cash unless you want to?

Stuart Rose

Correct.

Arnold Brief – Goldsmith & Harris

An increase in outlay would result in further gallon increases so to speak.

Stuart Rose

Absolutely, or it might be convertible that which doesn’t increase our gallonage because it gives us a chance to increase it later on, similar to what we did in Levelland.

Operator

Our next question is a follow-up question from the line of Richard Dearnly from Longport Partners.

Richard Dearnly – Longport Partners

Were there any significant option exercises in the quarter?

Douglas Bruggeman

I don’t think there was any significant during the quarter. Subsequent to the end of the quarter, [Larry Thomson] did exercise and hold his options that would’ve expired at the end of the, towards the end of this year.

Richard Dearnly – Longport Partners

How many loosely speaking was that?

Douglas Bruggeman

I think it was about 140,000 that he exercised.

Richard Dearnly – Longport Partners

With the change in the ethanol economics, as you see it, how did the farmers view investing in ethanol plants these days as opposed to before?

Stuart Rose

I don’t how much they like investing, but they love ethanol plants as they should. The price of corn has more than doubled in at least a small part to the ethanol plants, which of course were criticized, the industries criticized every day for, but the farmers basically love the ethanol industry.

Richard Dearnly – Longport Partners

They like the prices.

Stuart Rose

Yes, they do.

Richard Dearnly – Longport Partners

It looks as though the… Of course, we have a presidential election and rhetoric is cheap and plentiful, but it seems as though the political issue is kind of blown over. Do you read it that way or…

Stuart Rose

It’s certainly not going to be a presidential political issue. Whether they start up again next year, I don’t know. I agree with, I think it’s long over. I think the Democrats were always in favor of ethanol and the Republicans yell and scream and talk all the time about energy independence, and ethanol has to be a big part of it whether it’s just ethanol or cellulosic ethanol down the road. So I think at the moment, we’re not going to be a political issue.

Operator

Gentlemen, we have no further questions at this time.

Stuart Rose

Well, I like to thank everyone for listening and I appreciate your support very much. Thank you very much.

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