99 Cents Only Stores Inc. (NDN) reported fiscal second quarter results after the closing bell on Wednesday. The company recorded a net income of $9.6 million, compared to a net loss of $9.4 million in the year-ago period. Earnings per share came in at 14 cents, topping the Zacks Consensus Estimate by 7 cents. The company had reported a loss of 13 cents per share in the same period last year.
The deep-discount store operator’s sales posted a growth of 2.2% year over year to $324.7 million, as customers affected by continuing macroeconomic headwinds preferred to shop more in its stores. The City of Commerce, CA-based retailer’s same-store sales grew by 2.3% over the same period.
Non-Texas Operations
99 Cents revenues from non-Texas operations grew 4.0% year over year to $296.4 million driven by same-store sales growth of nearly 1% coupled with the effect of opening 11 new stores in fiscal 2009 and 3 in fiscal 2010. Non-Texas operations include California, Arizona, and Nevada where the company currently operates 240 stores and generates about 91% of overall sales. Gross margin expanded 110 basis points (bps) year over year to 40.3%. This growth was mainly caused by favorable product mix, efforts to drive sale of higher margin products and improved purchase cost margin on account of price increases.
Operating expenses, as a percentage of sales, decreased 310 bps to 33.2% reflecting management’s cost management initiatives, which lowered store labor costs, corporate expenses as well as distribution and transportation costs. Accordingly, operating margin came in at 5.0%, recording a strong growth of 430 bps over the year-ago quarter.
Texas Operations
Texas operations posted a 13.7% year over year reduction in revenues to $28.3 million, despite a 19.8% growth in same-store sales, as the company closed 17 stores in the region since fiscal 2009 fourth quarter. The company announced in September last year the planned closure of its 48 stores in Texas due to continued underperformance. However, in January this year management decided to continue operations citing a turnaround in the region. Meanwhile, gross margin grew 280 bps to 36.1% mainly due to reduced merchandise purchase cost coupled with a decrease in shrinkage and freight rates.
Operating expenses, as a percentage of sales, declined to 33.4%, compared to 68.3% last year. The year-ago quarter’s selling, general and administrative expenses included a $10.1 million impairment charge (30.8% of sales) related to the company’s decision to exit the Texas market. Accordingly, the company recorded an operating income of $0.1 million, helped by reduced depreciation as a result of permanent impairment of certain Texas assets over the past year, compared to an operating loss of $13.8 million last year.
Balance Sheet
The company has a healthy balance sheet, which is devoid of any debt. Cash and short term investments at the end of the quarter was $128.2 million, compared to $83.4 million in the year-ago period due to the strong earnings performance.  During the first half of the current fiscal, 99 Cents utilized $18.8 million and $13.2 million towards capital expenditure and purchase of investments, respectively.
Moving forward, management anticipates same-store sales to expand by low single digits during fiscal third quarter. Furthermore, gross margin is expected to improve further due to the holiday season product mix shifts. The company plans to open 10 to 12 stores in the entire fiscal year with openings skewed towards the second-half.
Meanwhile, the Zacks Consensus Estimate, derived from 11 covering analysts, for the full fiscal year has remained constant over the past 2 months at 57 cents per share. The most accurate estimate is more bullish at 59 cents per share.
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