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99 Cents Only Making Serious Money
Ultimate discount retailer 99 Cents Only (NYSE: NDN) showed how selling things cheaply can deliver tons of profit. For the 2010 fiscal fourth quarter and full year, 99 Cents earned 24 cents and 87 cents, respectively. This compares with 10 cents and 12 cents in the 2009 comparable quarter and full year, respectively. The blowout performance results were due to a perfect combination of sales growth, gross margin expansion and reduced costs. It appears that the company's operational improvement efforts are starting to show up on the bottom line.
A Great Time To Be Frugal
It seems obvious that selling cheap everyday goods would be a guaranteed recipe for success in today's world. High unemployment has created a much more frugal consumer in the U.S. Those who lost jobs have no choice but frugality. For others, the decline in housing brought about a sudden decline in family savings. However, that has not meant instant success for 99 Cents.
As the name implies, everything in the store sells for under a buck. That's a great marketing pitch to consumers, but it can hurt the business if its costs aren't kept in check. If you continually keep the price of your goods stagnant, then any increases in costs not met by sales volume can lead to problems. With great items like milk, food and other household products selling for 99 cents, the company has to keep its costs under as much control as possible. (For more, see Save Without Sacrifice.)
Different Strokes
So even though the past couple of years have been tough on consumers, rival discount retailers like Big Lots (NYSE: BIG), Family Dollar (NYSE: FDO), TJX (NYSE: TJX) and Dollar Tree (Nasdaq: DLTR) have seen greater bottom line improvements than 99 Cents. While these companies also sell deep discounted items, they can price them at levels that can better ensure quality margins.
So for 99 Cents, sales volume is important, and the 2010 figures prove why. In 2010 sales increased by $53 million while the cost of sales increased by $6 million. Total selling expenses declined by $34 million. As a result, net income leaped from $8.5 million to $60 million.
Wait And See
If 99 Cents can maintain the efficiencies of its turnaround plan, the company has a great future ahead. However, the 99-cent ceiling set on its prices means the company will always have to remain incredibly lean to maximize profits. (For more, see The Bottom Line On Margins.)
A Great Time To Be Frugal
It seems obvious that selling cheap everyday goods would be a guaranteed recipe for success in today's world. High unemployment has created a much more frugal consumer in the U.S. Those who lost jobs have no choice but frugality. For others, the decline in housing brought about a sudden decline in family savings. However, that has not meant instant success for 99 Cents.
As the name implies, everything in the store sells for under a buck. That's a great marketing pitch to consumers, but it can hurt the business if its costs aren't kept in check. If you continually keep the price of your goods stagnant, then any increases in costs not met by sales volume can lead to problems. With great items like milk, food and other household products selling for 99 cents, the company has to keep its costs under as much control as possible. (For more, see Save Without Sacrifice.)
So even though the past couple of years have been tough on consumers, rival discount retailers like Big Lots (NYSE: BIG), Family Dollar (NYSE: FDO), TJX (NYSE: TJX) and Dollar Tree (Nasdaq: DLTR) have seen greater bottom line improvements than 99 Cents. While these companies also sell deep discounted items, they can price them at levels that can better ensure quality margins.
So for 99 Cents, sales volume is important, and the 2010 figures prove why. In 2010 sales increased by $53 million while the cost of sales increased by $6 million. Total selling expenses declined by $34 million. As a result, net income leaped from $8.5 million to $60 million.
Wait And See
If 99 Cents can maintain the efficiencies of its turnaround plan, the company has a great future ahead. However, the 99-cent ceiling set on its prices means the company will always have to remain incredibly lean to maximize profits. (For more, see The Bottom Line On Margins.)
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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