99 Cents’ Q1 Tops View

99 Cents Only Stores Inc. (NDN) announced fiscal first-quarter results yesterday after the closing bell. The company posted GAAP net income of $9.5 million, compared to a net loss $1.5 million in the year-ago quarter. Earnings per share came in at 14 cents, easily beating the Zacks Consensus Estimate by 75%, or 6 cents. The company reported a loss of 2 cents per share in the same period last year.

The deep-discount store operator’s sales recorded a growth of nearly 9% year over year to $332.1 million, ahead of the Zacks Consensus Estimate of $322.2 million, as customers battered by the worst recession in decades preferred to shop more in its stores. The Commerce, CA-based retailer’s same-store sales also expanded 7.2% over the same period.

Non-Texas Operations

99 Cents revenues from non-Texas operations grew 10.7% to $303.3 million, while same-store sales rose nearly 6%. Non-Texas operations include California, Arizona and Nevada, where the company currently operates 238 stores and generates about 91% of overall sales. Gross margin swelled 210 basis points (bps) year over year to 40.7%. This growth was attributable to improved purchase cost margin driven by price increases, reduced spoilage and shrinkage and on promotional efforts to drive sale of higher margin products.

Operating expenses, as a percentage of sales, dipped 300 bps to 32.7% primarily due to cost-cutting efforts, which lowered store labor costs, further helped by reduced distribution and transportation costs. Accordingly, operating margin came in at 5.9%, recording a strong growth of 530 bps over the same period last year.

Texas Operations

Texas operations reported a 6.2% year-over-year decline in revenues to $28.9 million, while same-store sales expanded 23.6%, as the company closed 11 stores during the quarter. The company announced in September of last year the planned closure of its 48 stores in Texas on continued underperformance. However, the management has now decided to continue operations, citing improved results. Meanwhile, gross margin fell 30 bps to 35.5% primarily on account of higher shrinkage and spoilage caused by the exit plan, partially offset by higher purchase cost margins and lower freight rates.

Operating expenses, as a percent of revenues, grew 210 bps to 42% as SG&A expenses increased due to lease termination charges related to store closures. However, operating loss improved slightly to $2.6 million, compared to a loss of $3.7 million last year mainly due to a substantial reduction in depreciation as a result of impairment of various assets over the past year.

Balance Sheet

The company has a healthy balance sheet, which is devoid of any debt. Cash and equivalents at the end of the quarter was $131.9 million, an increase of $51.9 million year over year, primarily driven by robust earnings performance. The company deployed $3.7 million and $3.6 million in the quarter towards capital expenditure and purchase of investments, respectively.

Outlook

Looking ahead, management expects same-store sales to grow by low single digits in the fiscal second quarter, and earnings to be approximately half of the first-quarter level of 14 cents. The Zacks Consensus Estimate on fiscal second-quarter earnings is currently pegged at 6 cents per share. Seasonally higher temperatures leading to increased utility, transportation and spoilage costs -- along with wage increases in Texas and Nevada -- were cited as factors for the low earnings guidance.

99 Cents expects earnings before taxes of about 4.5% of total sales for the full-year ending March 2010. Meanwhile, the Zacks Consensus Estimate for the year has edged up a penny over the past month to 49 cents per share, as 3 of 9 covering analysts raised projections. The company plans to open 10 to 12 stores over the entire fiscal year, with openings skewed towards the second-half.

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