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Jaffoni & Collins
Moderator: Stuart Rose
06-03-03/10:00 CT
Confirmation # 6138266
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Jaffoni & Collins
Moderator: Stuart Rose
June 3, 2003
06/03/03 10:00 CT
Operator: Ladies and gentlemen, thank you for standing by. Welcome
to the Rex Stores First Quarter Results Conference Call.
During the presentation, all participants will be in a
listen-only mode. Afterwards, we will conduct a question
and answer session. At the time, if you have a question,
please press the "1" followed by the "4" on your
telephone. As a reminder, this conference is being
recorded Tuesday, June 3rd, 2003. The speakers for today
are Mr. Doug Bruggeman, Vice President of Finance, and Mr.
Stuart Rose, Chief Executive Officer. Please go ahead, Mr.
Rose.
Stuart Rose: Thank you, operator. I'd like to welcome everyone to
our first quarter conference call. As people have seen by
the press release, we're pleased to announce a same-store
sale increase of 5 percent which is a turnaround from the
past few quarters. And again, it's caused by a large
increase in high-definition-ready big screen televisions.
That's become, by far, our biggest growth area, and the
prices of those items have come down significantly, which
has allowed them to become affordable to many of our
customers.
As people have noticed, operating profit was down
slightly. The biggest reason for that was that we changed
and started going back to television advertising, and we
also chose to increase our commissions in a period of time
where other people are cutting back commissions or taking
salesmen off commission. We want to do whatever we can to
attract the very best in the industry. So, we actually
increased our commission, so we think that has a lot to do
with our large increase in high-definition-ready
television. And again, to show the operating profit we
did, and to show the earnings per share we did during
these tough economic times when other people are showing
large same-store sale decreases caused by war, weather,
whatever, and some times large operating losses. We're
happy to report that earnings --
In terms of synthetic fuel, that was down a little bit,
but it was still a strong number. And again, we're limited
partners in that synthetic fuel operation and with that --
it's an asset that's still returning unbelievable returns
for our investment, something that North Carolina Power
and Light, the head partner, is keeping in good
production. We're happy to see that number.
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Jaffoni & Collins
Moderator: Stuart Rose
06-03-03/10:00 CT
Confirmation # 6138266
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In terms of the other big number, a different number on
our balance sheet to gain on the sale of real estate, that
was a closed store. Again, we've been fortunate enough,
again, when we closed the store, to report a gain on the
sale, whereas many companies report losses on the sale.
This is related to our strategy of owning properties
versus leasing properties in a period of greatly rising
property values. We think our strategy there is, again,
something that sets us apart from the rest of the
industry.
In terms of how things have gone since the end of the
quarter, we continue to show nice same-store sale
increases. They have actually increased for the period of
time a little bit over the -- they're doing a little
better than that 5 percent that we reported for the first
quarter. So, we're happy with that. Again, we caution
everyone, this is air conditioning season so, depending on
the weather, depending on whether it gets hot or not, that
can drastically change same-store sales one way or
another. With that, I'll leave the conference call open to
questions.
Operator: Thank you. Ladies and gentlemen, if you'd like to register
a question, please press the "1" followed by the "4" on
your telephone. You will hear a three-tone prompt to
acknowledge your request. If your question has been
answered and you'd like to withdraw your registration,
please press the "1" followed by the "3." If you are using
a speakerphone, please lift your handset before entering
your request. One moment please, for the first question.
The first question will come from the line of Scot
Ciccarelli with Gerard Klauer Mattison. Please go ahead.
Scot Ciccarelli: Hi, guys.
Stuart Rose: Hi Scot, how are you?
Scot Ciccarelli: Good, Stu. Couple of questions. First of all,
on the HDTV side, can you give us an idea of what
percentage of your product mix that is today -- I know TVs
themselves are a big segment, but you know, what is
digital television, what is big screens, etc?
Stuart Rose: Doug, do you want to go ahead?
Doug Bruggeman: Yeah, that's fine. Scot, in general, television sales have
grown to be a little bit more than 50 percent of our
overall sales so far this fiscal year in the first
quarter, and high-definition-ready TVs are about half of
our total television sales.
Scot Ciccarelli: Okay. And that's on a dollar basis, right, Doug?
Doug Bruggeman: That is correct.
Scot Ciccarelli: Okay. And then another question regarding the
operating expenses, you know, what we're seeing there.
Stu, you mentioned increasing commissions obviously, as
well as increasing advertising. I know that's something
you kind of alluded to before. How much of that may have
been front-end loaded and how much of that is continuing?
What is the game plan and what shall we expect to see on
the operating expense side going forward?
Stuart Rose: We are running roughly the same amount of television, give
or take, and I believe it's planned; some of it gets
preempted, that type of thing; or, sometimes we get extra.
But it would be my thinking right now to go with about the
same dollar amount per month. And again second quarter
with the air conditioning and everything else, it's
usually a little bit stronger quarter anyway, as I alluded
to earlier. At least for the first month and few days,
comps have accelerated a little bit on a percentage basis,
that should be going down.
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Jaffoni & Collins
Moderator: Stuart Rose
06-03-03/10:00 CT
Confirmation # 6138266
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Scot Ciccarelli: Okay. And can you just give us an idea of, you know, what
that increase was on a year-over-year basis on the
advertising, now that you've moved to television?
Stuart Rose: Sure, I think Doug can give you that.
Doug Bruggeman: Scot, the increase for the quarter was somewhere between
$500,000 and $600,000 in advertising cost.
Scot Ciccarelli: Okay. So, it's pretty meaningful, I got it. Okay. And then
the last question is, can you guys give us an update
regarding the synthetic fuel, what we're seeing, you know.
I know there's an audit going on, you've been putting
money into an escrow account. How should we be thinking
about that just in terms of, you know, kind of going
forward and what is the latest info you have on that?
Thanks.
Stuart Rose: The latest info is no change, that it is just a routine
audit, that no findings whatsoever been brought out one
way or another. And again, the proof is in the pudding.
We're limited partners, but the fact that our general
partner is still producing like they are producing
indicates that they're comfortable that things -- it cost
them a lot of money to produce this product. If for some
reason, there's a problem in the audit and they don't get
the tax credits as they expect to get, or it doesn't
generate the tax credits that it's expected to generate --
so, they're still producing at a very, very strong clip.
We also have another partnership that is not being
audited, to the best of our knowledge and that one is
producing also very, very strongly. That one is -- we're
partners with Sempra Energy. So, we feel real good about
that whole part of our business right now.
Scot Ciccarelli: Now, is that the segment, you know, from Sempra that we
see kind of flowing into the cash flow, with the stuff
from Empire going into the escrow account?
Stuart Rose: No, the part from Sempra we use to offset -- to lower our
own -- we use that tax credits to lower our own tax rate,
Scot. The other one, the one that's from Florida Progress
or North Carolina Power and Light, whatever you want to
call it, that one, part of it goes into escrow and part of
it is unescrowed. That's why it's --.
Scot Ciccarelli: I'm just confused how that's determined. What do you
determine what goes into escrow and what doesn't?
Stuart Rose: What goes into escrow is basically -- we had three
separate sales which are outlined -- they're pretty
complicated and we really don't know --
Doug Bruggeman: They're outlined in the Q.
Stuart Rose: In the Q, but the sale of the first one right now is not
escrowed. The second and third sales, we sold them each in
three separate transactions. The second and third sales
are escrowed, per their rights in the agreement.
Scot Ciccarelli: Got it. Okay. Thanks, guys.
Doug Bruggeman: Thanks, Scot. Appreciate it.
Operator: The next question will come from the line of (Buzz Zaino)
with Royce & Associates. Please go ahead.
Stuart Rose: Hi Buzz.
(Buzz Zaino): Hi, Stu. On the non-TV business, you know, earlier
experience may have been that air conditioning is weak and
(overly) weak in -- I think in terms of the East coast
generally has been cooler than normal.
Stuart Rose: Yes, it has been cold in parts of the country. On the
other hand, we didn't have a great early air conditioning
season last year so, we're doing just fine in that
category right now.
(Buzz Zaino): And the general appliances?
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Jaffoni & Collins
Moderator: Stuart Rose
06-03-03/10:00 CT
Confirmation # 6138266
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Stuart Rose: General appliances are, again, we seem to be doing fine
there too. They haven't been -- that's a more stable
business than -- I'd say a little bit more stable anyway,
than the rest of the business. And it's doing not
dramatically great or anything, but margin seems to be up
in that business and the volume would not include air
conditioning, since the first quarter seems to be holding
its own.
(Buzz Zaino): Has the early success of HDTV created traffic in the
stores leading to sales of other products from --.
Stuart Rose: It certainly helps a lot in accessory products needed to
hook up -- that is, one of our major suppliers, Recoton,
actually went bankrupt over the quarter. And believe it or
not that, we're going to use that as a positive for
ourselves. That gives us a chance to go in and talk to a
bunch of different vendors and we play one up against the
other. And so, that category, we're actually more excited
than ever about right now, and that's probably the biggest
thing that you get out of high-definition.
(Buzz Zaino): All right.
Stuart Rose: In terms of extra business, that's in accessory business.
(Buzz Zaino): Do you do any service, hook ups, installation, that sort
if stuff?
Stuart Rose: No, we do sell service policy, so, and that also -- is a
good product for (that).
(Buzz Zaino): Sure. Thanks very much.
Stuart Rose: Sure, my pleasure.
Operator: The next question will come from the line of Rick Shea
(Shea) with (Vardon). Please go ahead.
(Rick Shea): Hi, Stuart.
Stuart Rose: Hi. How are you?
(Rick Shea): Good. How are you?
Stuart Rose: Good, thanks.
(Rick Shea): Just give us some thought as to how you're seeing the
change in price points affect demand for the large screen
and HDTV-ready TV?
Stuart Rose: I can only you give you my personal feeling and that's --
(Rick Shea): Yeah, (indiscernible)
Stuart Rose: Once we got under $2000 for a 16 x 9 50-inch television,
the business started to fly. At that point, you could buy
a 16 x 9 high-definition-ready set for not much more than
what people thought they would have to spend on a regular
big screen, and that's really what's made the difference.
That's the price to me that makes all the difference in
the world.
(Rick Shea): Under $2000.
Stuart Rose: Under $2000 for 50-inch or above.
(Rick Shea): Right.
Stuart Rose: And 16 x 9.
(Rick Shea): What's the extent of the businesses under that price now?
Stuart Rose: I don't know exactly.
(Rick Shea): Okay.
Stuart Rose: I'm not sure. It is significant, though. It's a lot.
(Rick Shea): Okay. What are your thoughts on that price curve between
now and holiday?
Stuart Rose: I don't think -- I think it's going to go down, but
that's -- what will happen -- that's still the magic
price. I think you'll be able to get even a bigger set for
the money. It wouldn't surprise me if some manufacturers
-- 57-inch becomes $1999.
(Rick Shea): Uh-huh.
Stuart Rose: In fact, I would be surprised if it didn't.
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Jaffoni & Collins
Moderator: Stuart Rose
06-03-03/10:00 CT
Confirmation # 6138266
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(Rick Shea): Okay.
Stuart Rose: All right?
(Rick Shea): Yeah, thanks a lot.
Stuart Rose: Sure, my pleasure.
Operator: As a reminder to register for question, please press the
"1" followed by the "4" at this time. Once again, to ask
the question, please press the "1" followed by the "4".
The next question will come from the line of Bob McDorman
with Investment Counselors. Please go ahead.
Bob McDorman: Stuart?
Stuart Rose: Hi Bob. How are you?
Bob McDorman: Pretty good. Can you hear me?
Stuart Rose: Sure.
Bob McDorman: I have two questions. Number one, you may have addressed
this and I went out of the room for a minute. The other
synthetic fuel plant that you bought, is that still
sitting around unused in --
Stuart Rose: Right now, we're dismantling it, we have a letter of
intent with an operator. It is not a binding contract yet,
and so, but we have someone that we are talking to, and we
have hopes to have them operate the plant for us, where we
will receive some type of tax credits and some type of
royalty. And again, we're going full steam ahead on that.
It's not just sitting there.
Bob McDorman: When would that might -- if this agreement goes forward
when --`
Stuart Rose: When will it go forward, when will that happen?
Bob McDorman: Yes.
Stuart Rose: Towards the end of this year would be when -- towards the
end or early next year would be my guess when production
would start.
Bob McDorman: Okay. And then the other --.
Stuart Rose: And that plant again, the investment versus the potential
return is huge for all shareholders, should it happen.
Should it not happen, the risk of the investment is not
huge. Go ahead, Bob.
Bob McDorman: I was wondering if you -- couple of things. Number one,
given the share repurchases over the years, which is
reasonably timely, and the number of outstanding options
relative to the shares outstanding is huge, the flow has
been reduced. I was wondering if the new tax law has any
effect on your feelings on dividend distributions as
opposed to share repurchases or --.
Stuart Rose: Well, the only reason -- to me it's always been a
dividend. The only reason I like share repurchases still,
although it's much more marginal -- before, it was a
no-brainer, but you still lower the number of shares
outstanding when you do a share repurchase versus a
dividend. And so, by doing that, if you spend your money
that way, instead of just dividending it out, your future
earnings become much higher, your future -- I should say
earnings per share - become much higher. And so to me,
that's still an advantage, although it's not the huge
advantage it was when the tax rates were so high on
dividends. So, it's something we'll have to look at very
closely and decide. The disadvantage of a share
repurchase, which we've been able to take care of through
splits, is that you lower your float. That's the downside.
On the other hand, that could be taken care of also
through a split.
Bob McDorman: Did anybody ask about the big increase in inventory, is
that the timely purchase?
Stuart Rose: Yeah, as you probably know, Bob, our industry has had a
rough times the first quarter. A lot of people are
reporting way lower sales than they expected and that's
caused a lot of cancellations, and we're there to pick up
the pieces. We try very hard to be the manufacturer's
preferred supplier to do that. We don't destroy them in
the marketplace. We try to have -- we tried, when they
sell to us, to sell it in an orderly basis. We take their
overstocks. We take their canceled orders. In return, we
ask for much lower price and we think we've gotten that.
So, we'll see what happens.
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Jaffoni & Collins
Moderator: Stuart Rose
06-03-03/10:00 CT
Confirmation # 6138266
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Bob McDorman: All right, thanks.
Stuart Rose: I think we - this is something we've been doing for --
I've been doing for over 20 years and its something we
think that we do that's both good for us and good for our
suppliers.
Operator: Next question will come from the line of Scot Ciccarelli
with Gerard Klauer Mattison. Please go ahead.
Stuart Rose: Hi Scot.
Scot Ciccarelli: Hey guys. Just a follow-up or two. How much of the
inventory or, I guess, both inventory and inventory
increase is centered on the big screen televisions and
HD-ready TVs?
Stuart Rose: Doug, do you --?
Doug Bruggeman: I don't have a number readily available, Scot.
Stuart Rose: I can just tell you, since I do the television purchasing,
that there have been oppurtunistic buys in that category,
as well as every other category on the video side.
Scot Ciccarelli: All right. Let me ask in a different way. Do you think
inventory is roughly skewed to what the sales mix is?
Are we heavier, lighter in any particular categories?
Stuart Rose: I would say it's skewed -- probably we're a little
bit heavier. It's been a slight bit more - a little bit
heavier in video than we are in what I call video
camcorder, and I'm just talking on the video side right
now, a little bit more skewed heavily in camcorder, that
type of product, the video side, than we are in television
side. But the stuff that we have -- the purchases we've
made based on current prices -- look extremely good right
now.
Scot Ciccarelli: Okay. And then the other question was a follow-up on a
statement you made earlier, Stu, about the properties
you guys own. How many of your stores do you actually
own as oppose to lease today? And then what's
that average rate on the mortgage debt -- with the
implication -- are we potentially going to get additional
benefits down the road from additional re-fis, etc?
Thanks.
Stuart Rose: Doug.
Doug Bruggeman: Yeah. We own currently about a 153 of our stores, Scot.
We've pretty much refinanced everything last year, and
most of what we've done is taking them to a variable
rate at this point. So, you know, going forward, I don't
really see much more savings on refinancings, you
know, we did that about a year ago and did about a good
--.
Stuart Rose: They are variable rate, which means they should be a lower
rate over the last year, I would guess.
Doug Bruggeman: Yeah, that is correct. And we have started to anniversary
that here in the first quarter because we wrapped that up
last year in the first quarter.
Scot Ciccarelli: Okay. And what is that --
Stuart Rose: One thing I wanted to say, Scott, related to owning our
properties -- that's turned out to be huge edge because
real estate prices today are just doing -- good, topnotch
commercial real estate is -- when you can't find it -- the
raw land costs are going way, way up, even in small
cities. So, we actually have decreasing occupancy costs,
whereas our competitors, if they do have good locations
and they did lease stores have, at a minimum,
cost-of-living increases. And if they have to leave their
stores and do a lease somewhere else, so they're looking
at huge increases.
Scot Ciccarelli: Right. Okay. And then the last one is just a housekeeping
item. What was cash flow from operations?
Doug Bruggeman: We have not put that out yet. Scot, we'll put that in the
Q.
Scot Ciccarelli: Can you give us an idea?
Doug Bruggeman: From operations, actually, I mean there is probably a use
there because of the build in inventory, you know,
probably in the range of $9 million to $10 million. Again,
because of the build in inventory.
Scot Ciccarelli: Okay. All right. Thanks, guys.
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Jaffoni & Collins
Moderator: Stuart Rose
06-03-03/10:00 CT
Confirmation # 6138266
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Stuart Rose: Thanks, Scott.
Operator: The next question will come from the line of (Todd
Turchetta) with TGT Capital. Please go ahead.
(Todd Turchetta): Hi Stuart. Hey, Doug.
Stuart Rose: Hi, Todd.
(Todd Turchetta): Following-up on the buyback. Now that you're down to
200,000 shares and the stock's up a little bit, are there
any -- I may have a tax question after this, the tax
changes verus dividend versus stock buyback --
Stuart Rose: Yeah.
(Todd Turchetta): -- but is there any plan to authorize anymore, if you do
get done with that, or is the stock --?
Stuart Rose: I imagine, if you look at our history, we seem to --
a lot depends on the stock price, but we've been very
successful both for us and our shareholders, buying in
shares. It allows -- and so, I would -- There's nothing in
our thinking that has changed just because we're getting
down on that authorization. There's nothing in our capital
structure as such that, should we decide to increase it,
there's no major change in our thinking that would stop us
from doing that.
(Todd Turchetta): Okay. Thank you.
Stuart Rose: Okay.
Operator: The next question will come from the line of (Rick Shea)
with (Vardon). Please go ahead.
Rick Shea: Stuart, I just want to follow up on the synthetic fuel
plans you talked about in terms of -- you don't have a
binding agreement, but you're in process?
Stuart Rose: Right, we're in process. We're working with someone
very closely to try and basically do what we've done in
the other partnerships -- allow us to not be the general
and allow someone else to run it, someone else to find a
site for it and everything, and we would just receive
income or tax credits or both.
Rick Shea: Could you just give us some sense of the order of
magnitude?
Stuart Rose: We're not at that point now.
Rick Shea: Okay.
Stuart Rose: I wouldn't want to put in any numbers in on that yet.
We're not there.
Rick Shea: Do you consider it material?
Stuart Rose: I would say it would be -- certainly material to the
limited partnership (line).
Rick Shea: Okay. And is there any sort of time horizon over which we
would think that this might happen?
Stuart Rose: Yeah, I would hope that if it does happen, it'll happen
and be up and operating either -- hopefully late this
year, probably more realistic, the first quarter of next
year.
Rick Shea: Okay.
Doug Bruggeman: To follow up on Scot's earlier question. I've looked on
the balance sheet. We actually had an increase in
accounts payable, so that actually will probably result
in -- not a cash use, but a cash flow from operating
activities. And I don't have that calculation done yet, so
I will defer answering that till we get the Q filed.
Rick Shea: Right. Thanks.
Operator: The next question will come from the line of Bernard
Robinowitz with Smith Barney. Please go ahead.
Bernard Robinowitz: Yeah. Hi, Stuart. Bernie.
Stuart Rose: Hi Bernie, how are you?
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Moderator: Stuart Rose
06-03-03/10:00 CT
Confirmation # 6138266
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Bernard Robinowitz: How are you? Good quarter.
Stuart Rose: Thanks, Bern.
Bernard Robinowitz: Congratulations. I may have missed something, I've been in
and out. Did you talk about store openings and the
strategy there and where the stores might be and whether
you changed in any way this strategy of your openings?
Stuart Rose: I think I -- you didn't miss anything, but our
strategy has been right now, during the economic times, to
slow down on the openings and just concentrate on
same-stores. As you saw, we were able to increase
same-store sales 5 percent in the first quarter and we
think that's a healthier way -- If we can do it that way
right, during these times, that's the smartest thing to
do. Long-term, our strategy has not changed a bit, it's to
be the largest and to dominate the small towns in the
United States.
Bernard: Very good.
Stuart Rose: Thanks, Bernie.
Bernard: Yeah.
Operator: Gentlemen, I'm showing no further questions at this time.
Please continue with your presentation or any closing
remarks you may have.
Stuart Rose: Right. Well, we just want to thank everyone for their
support and thank you very much for listening. I
appreciate it very much. Bye.
Operator: Ladies and gentlemen, that does conclude your conference
call for today. We thank you for your participation and
ask that you please disconnect your line.