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REX Says Earnings Up 166 Percent

Posted on: Friday, 2 September 2005, 21:00 CDT

Sep. 1--Electronics retailer REX Stores Corp. said Wednesday its second-quarter earnings soared 166 percent, boosted by income from its synthetic fuel investments.

Net income for the period ended July 31 rose to $8.7 million, or 70 cents a share, from $3.3 million, or 26 cents, for the same time last year. The gain includes $10.4 million in pre-tax income from investments in synthetic fuel plants.

Net sales for the retail side of the business, however, fell 1 percent to $84.7 million from $85.8 million in the second quarter last year. Same-store sales, considered the best measure of a retailer's performance, also declined 1 percent. The drop would have been greater if air conditioner sales hadn't been so strong, said Stuart Rose, REX chairman and chief executive officer, in the company's conference call with investors and analysts. Without the air conditioner sales boost, same-store sales would have fallen 5 percent.

But while summer heat drove sales of air conditioners, analysts and company managers expressed concern that rising oil prices may lower profits next year.

REX receives monthly installment payments from plants that produce synthetic fuel from coal as part of a series of investments dating back to 1998. In its arrangements with synfuel plants, REX gets payments on each ton of synthetic fuel produced at the facilities that reap federal tax credits meant to reduce dependence on foreign oil.

While sales from the core electronics side of the business routinely slip, REX has been able to consistently boost its bottom line with the payments.

But the payments are set to expire in 2007, and rising oil prices threaten the complicated tax credit structure underlying the synfuel industry.

"While REX has substantial assets today and thanks to synfuel has done a good job building shareholder value, we continue to believe REX needs to consider strategic options for the business," said Richard Weinhart, a research analyst with Harris Nesbitt, in a report about the company. He was one of three analysts and investors who questioned Rose on REX's synfuel future.

That future is "up in the air," Rose said. While the company could face a phase-out of the tax credits if oil stays at current levels, "there are too many uncertainties going to make any forecasts for next year," Rose said. A federal review of the tax credits will take place in the spring.

Meanwhile, analysts and management are in a "wait-and-see" mode heading into fall, when the company expects sales of high-end televisions to start picking up.

Sales of LCD and plasma TVs are up 50 percent over last year, Rose said.

"The retail side's performance has ranged from spotty to negative, so this quarter wasn't a surprise," Weinhart said. "It was sort of a neutral quarter."

But the short-term benefits of air conditioner and TV sales are temporary measures, Weinhart said, and are outweighed by his concern over oil prices affecting REX's main source of profit.

REX executives also announced Wednesday the company's board authorized the buy back of an additional 1 million shares of stock.

Shares for REX (NYSE:RSC) closed at $15.41, up 31 cents.

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Source: Dayton Daily News

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