Just as it was for many US companies, most of 2008 and 2009 was brutal for REX Stores Corp.
The company’s Retail division, whose modern history essentially began in 1980 when a then 24-year-old entrepreneur and current CEO Stuart Rose acquired the four-unit chain, effectively ended operations as of July 31, 2009.
The company’s Alternative Energy (Ethanol) division, which currently has approximately $115 million invested in ethanol production entities, witnessed ethanol margins drop precipitously as the price of corn and sorghum skyrocketed over the period. Investments made in plants under construction appeared in jeopardy as many producing ethanol plants ceased operation and their owners filed for bankruptcy, their assets liquidated at auction for less than current construction costs in some cases.
Rex’s Real Estate division, which essentially came into being as the company attempted to monetize its vacant store and distribution warehouse portfolio, saw an agreement entered into with Appliance Direct under which AD would lease 37 retail store locations owned by the Company unravel and eventually be dissolved.
All this activity was occurring while the economy as a whole was in the midst of a severe credit crisis and commodity bubble.
Multiple quarterly earnings losses over the period combined with the schizophrenic appearance of all the seemingly unconnected business segments caused most in the investment community to shun RSC’s stock. As a result, share prices plummeted well below REX’s approximate $25 tangible book value. At one point in the period (2008 – 2009), share prices traded as low as $5.52 a share despite the fact that REX is essentially debt free and had approximately $8 per share in unrestricted cash at the time. Some investors were lucky enough to purchase RSC shares for less than cash on hand and received the ethanol and real estate assets for free as part of the purchase.
What a world of difference six months can make! With today’s 3rd quarter earnings release (period ending 10/31/2009), REX has reintroduced itself to the world as a profitable ethanol producer rich in tangible assets. Years of thriving and surviving in the cut throat world of specialty retail has taught REX management how to make a profit on razor thin margins, and now that ethanol is undergoing a resurgence, REX is uniquely poised to capitalize as those margins expand. A wealth of cash and other tangible assets also makes acquisition of superior ethanol properties under favorable terms possible.
REX Management has long understood the undervalued condition of its company shares and has been buying back stock at below tangible book value prices for many quarters. During the fiscal 2009 third quarter the company repurchased 254,042 common shares. In the first nine months of fiscal 2009, REX repurchased 535,000 shares of its common stock in open market transactions. The Company's Board of Directors has authorized the repurchase of up to an additional 500,000 shares of its common stock. As of 10/31/2009, the Company had approximately 8,995,000 shares of common stock outstanding.
Also as of October 31, 2009, REX had lease or sub-lease agreements, as landlord, for all or parts of eight properties (including a portion of one distribution center). REX owns seven of these properties and is the tenant/sub landlord for one of the properties. REX has 38 owned properties (including one former distribution center), that were completely vacant at October 31, 2009 and which it is marketing as vacant properties to lease or sell.
REX’s ethanol nameplate capacity ownership is approximately 143 million gallons per year.
As of October 31, 2009, REX had unrestricted cash and cash equivalents of approximately $75.8 million (exclusive of approximately $8.7 million of cash at consolidated ethanol production facilities). Total REX shareholders' equity was $236.6 million or $26.30 per share.
In short, if you believe the current ethanol boom has legs, and you’re looking for a prudently managed, profitable, asset rich, undervalued way to participate in that boom, then RSC is the stock for you.
My only suggestion to Mr. Rose would be to apply a little of his marketing savvy gained from 29 years of retail experience to spreading the word that today’s REX is no longer the "specialty retailer in the consumer electronics and appliance industry" of old.
Disclosure: Long RSC