99 Cents Only Stores Inc. (NDN) recently reported its fiscal 2010 third quarter results. The company recorded a strong 97% growth in earnings to $24.5 million from $12.4 million in the year-ago period. Earnings per share came in at 35 cents, easily beating the Zacks Consensus Estimate by 10 cents. The company reported EPS of 18 cents in the year-earlier quarter.
 
The company has an impressive track record of surpassing earnings expectations as it has topped the Zacks Consensus Estimate in each of the last four quarters with an average positive surprise of nearly 79%, or 7 cents. For the full fiscal 2010, the Zacks Consensus Estimate climbed 9 cents in the past week to 73 cents per share as 7 out of 11 covering analysts raised expectations. The most accurate estimate is more bullish at 78 cents per share indicating an upside potential of nearly 7% over the Zacks Consensus Estimate.
 
99 Cents’ sales grew by 2.3% year over year to $359.1 million, as customers battered by one of the worst recession in decades continued to prefer the deep discount retailer’s stores. The California-based company recorded a growth of 3.1% in same-store sales during the same quarter.
 
Non-Texas Operations
 
99 Cents revenues from non-Texas operations rose nearly grew 4% year over year to $328.2 million. This was primarily due to a near 2% growth in same-store sales as well as the opening 2 new stores during the quarter. Non-Texas operations include California, Arizona, and Nevada where the company currently operates 240 stores and generates about 91% of overall sales. Gross margin increased by 210 basis points (bps) year over year to 43.1%. This increase was mainly the result of improved purchase cost, lower shrinkage as well as favorable product mix and efforts to sell higher margin products.
 
Operating expenses, as a percentage of sales, reduced by 210 bps to 32.4% due to aggressive management efforts to control expenses, which led to lower payroll-related costs, corporate expenses as well as distribution and transportation costs. Accordingly, 99 Cents’ operating margin surged to 10.6%, recording a growth of 410 bps over the year-ago quarter.
 
Texas Operations
 
99 Cents’ Texas operations posted a 12% year-over-year decline in revenues to $28.3 million primarily due to the closure of 17 stores in the region since fiscal 2009 fourth quarter. The company earlier announced the planned closure of its 48 stores in Texas due to continued underperformance. However, in August 2009, 99 Cents withdrew that decision citing a turnaround. Meanwhile, gross margin rose by 610 bps to 41.0% mainly due to reduced lower shrinkage and freight costs.
 
Operating expenses, as a percentage of sales, decreased to 31.8% from 48.2% in the year earlier quarter. The year-ago period’s selling, general and administrative expenses included a $1.4 million severance expense (4.3% of sales) related to the company’s decision to exit the Texas market. Accordingly, 99 Cents recorded an operating income of $3.7 million, helped by reduced depreciation as a result of permanent impairment of certain Texas assets in fiscal 2009 and fiscal 2010, compared to an operating loss of $3.7 million in the year-ago period.
 
Balance Sheet
 
99 Cents ended the quarter with cash and short term investments of $170.8 million, compared to $115.0 million in the year-ago period.  During the first nine months of the current fiscal, the company deployed $64 million towards investments and $24.4 million towards capital expenditure.
 
Outlook
 
Looking ahead, 99 Cents expects same-store sales to increase by low single digits in fiscal 2010 fourth quarter. The company plans to open 3 stores during the quarter, all in California.
 
For the fourth quarter of fiscal 2010, 3 analysts out of 10 raised, while 1 lowered expectation over the past week, sending the Zacks Consensus Estimate up a penny to 14 cents per share.
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