99 CENTS ONLY STORES (NDN)

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99 Cent Only Stores is an extreme value retailer with stores in 4 US states, selling a variety of brand-name items from groceries to housewares, all of which cost only $0.99. From fiscal year 2006 to fiscal year 2008, net sales from all business segments have increased 17.2%, from $1.02 billion in 2006 to $1.2 billion in fiscal year 2008.^[1] Over the same period, net income has decreased 75%, from $11.4 million in 2006 to $2.9 million in 2008, due a general decrease in gross profit margin as compared to fiscal year 2007.^[2]

Since 2005 and 2006, inflation and general increases in manufacturing and transportation costs have resulted in according increased costs to the company.^[3] The company's efforts to expand the chain have met with difficulty in Texas, where net sales per store in 2008 were about half of net sales in stores elsewhere.^[4] The company has benefited, however, from growth in the deep discount industry as a whole--from fiscal year 2006 to fiscal year 2008, retail sales have grown 18%.^[5]

[edit] Company Overview

99 Cent Only is the nation's oldest chain of single-priced general retailers, founded in 1982.^[6] 99 Cents Only has 277 locations nationwide; 70% of active stores (193) are located in California, 17% in Texas (48 stores), 9% in Arizona (24 stores), and 4% in Nevada (12 stores.) ^[6]. Like other single-priced general retailers in the market, all items in store locations cost only $0.99, regardless of the product type or item being purchased.^[6] Retailers which operate under this $0.99 price point are often commonly referred to as "dollar stores."

Despite an "extreme value" approach to pricing merchandise, 99 Cents Only has cultivated a vendor relationship with many familiar companies, including Hershey's, Dole, Heinz, Johnson & Johnson, Arm & Hammer, and Coca-Cola, among others.^[1] By buying in bulk quantities and taking advantage of closeout and newly discontinued merchandise, the company is able to offer customers brand-name products for the same stated price of $0.99.^[1]

[edit] Business and Financial Metrics

99 Cents Only Net Sales^[1]

Since 2006, net sales from all business segments of the company have increased 17.2% from $1.02 billion in fiscal year 2006 to $1.2 billion in fiscal year 2008. ^[1]. Over the same period, net income has dropped 75%, from $11.4 million in 2006 to $2.9 million in 2008. ^[1]. Between fiscal year 2007 and fiscal year 2008, net income decreased from $9.8 million to $2.9 million, primarily due to a decrease in gross profit margin in comparison to fiscal year 2007--in fiscal year 2008, gross profit stood at $460.9 million, up from $432.6 million in 2007.^[7] Average net sales per square foot of retail store locations in 2008 was $263, an increase from $254 in 2007.^[8]

99 Cents Only Net Income^[1]

In fiscal year 2008, the 39 retail locations in Texas averaged $2.6 million of sales per store compared to non-Texas locations, which averaged $4.9 million of sales per store. ^[4] In fiscal year 2007, the company's 36 open locations in Texas performed similarly in comparison to the average of locations outside Texas--Texas stores averaged $2.4 million in sales, while other locations averaged $4.8 million. ^[4]

2008 total sales by product type^[1]

In the 2008 fiscal year, a considerable majority of sales came from grocery and food products, with 52% of total sales by product type.^[1] General household and housewares comprise the next largest category of total sales at 15%. ^[1]Product categories which each comprise less than 10% of total sales each include health and beauty care, stationery and party merchandise, seasonal and holiday wares, and hardware. ^[1]The "other" category, a catch-all for any products which do not fall into the other delineated categories, comprised 12% of all total sales across all active locations.^[1]

[edit] Business Segments

Net sales by segment^[1]

• Retail stores (96.6% of net sales in FY 2008): The bulk of the company's net sales come from 99 Cents Only stores, totaling $1.15 billion of net sales in fiscal year 2008.^[5] In fiscal year 2008, retail net sales increased 8.9% from fiscal year 2007, an increase of about $94.4 million. The jump in net sales from fiscal year 2007 to fiscal year 2008 is attributed to both an increase in net sales across the board, as well as the full impact of stores which opened in 2007 and concluded their first full year of operations in 2008. ^[5]

• Wholesale (3.4% of net sales in FY 2008): A small percentage of total sales are made through the company's Bargain Wholesale division, which offers merchandise for resale to retailers, distributors, and exporters. Bargain Wholesale sales earned $40.5 million in fiscal year 2008, a 0.9% increase from fiscal year 2007, largely due to new customers. ^[5]

[edit] Trends and Forces

[edit] The "deep discount" market is a quickly growing one, particularly in rough economic climates.

The deep discount industry is, across the board, seeing a greater level of activity from consumers of varying incomes. As of September 2008, retail stores had made $307.4 million in net sales, an increase from the $280.6 million in net sales made in September of 2007, the fiscal year prior. ^[9]In August and September of 2008, when most retailers reported a drop in sales, many deep discount industry companies reported modest gains--Family Dollar Stores, Inc., a very similar company to 99 Cents Only, saw an increase in same-store sales of 2.0% between August and September 2008.^[10] From fiscal year 2006 to fiscal year 2008, 99 Cents Only has seen net sales in retail stores grow by 18%. ^[5]

[edit] Regional variance in sales has proven an impediment to geographic expansion.

99 Cents Only's stated goal of eventually expanding nationwide has already hit a regional roadblock. In fiscal years 2007 and 2008, net sales in the company's Texas stores were about half of net sales in stores located in other states.^[4] In 2008, two stores in Houston were closed for underperformance.^[4] 99 Cents Only's experience in Texas shows that the company's retail stores will not necessarily succeed in all areas of the nation, which has already affected 99 Cents Only's expansion plans.

[edit] Inflation results in difficulty sticking to dollar price point.

In 2008, vendor prices, labor, energy, and fuel costs all increased as a result of inflation and other market forces, resulting in higher costs to retail stores and the company at large. ^[3]The company's business model did not permit the increased costs to be passed along to the customer because 99 Cents Only retail stores cannot raise prices above 99 cents, regardless of company costs. 99 Cents Only have previously had to pull certain items from stock due to vendor price increases; 2008 was the first year the company attributed such increases to inflation. ^[11]

[edit] Competition

99 Cents Only's major price-point competitors are two other public companies--Dollar Tree Stores and Family Dollar Stores. In addition, the company competes with Big Lots and Walmart, two other national discount chains.

• Dollar Tree Stores is a similarly branded deep discount store with locations in the 48 contiguous U.S. states.^[12] In 2007, the last fully reported fiscal year, Dollar Tree Inc. had an operating income of $330.3 million, a 6% increase from 2006's operating income of $310.8 million. 2007 net income was $201.3 million, a 4.8% increase from 2006 net income of $192 million.^[13]

• Family Dollar Stores is a deep discount retailer with more than 6,500 locations in 44 states.^[14] In fiscal year 2007, Family Dollar saw an operating income of $388.6 million, up from $317.3 million in 2006, for a total 22% increase. Net income in 2007 was $242.8 million, up from $195.1 million in 2006, a 24% increase.^[15]

• Walmart is a discount retailer with 4,141 locations across the United States and 3,121 international locations. ^[16] Though the company's business model also relies on discounting merchandise, Walmart does not have a specific price point in the way the dollar stores do.^[17]In fiscal year 2008, the company made $374,526 million in net sales, an 8.6% increase from 2007 fiscal year net sales of $344,992 million.^[18] Net income in 2008 was $12,731 million, up from $11,284 million in 2007.^[18]

• Big Lots is a national closeout retailer, offering shoppers brand-name discontinued and test market merchandise at a lower price than other mainstream retail stores. Like Walmart, Big Lots does not have a specific price point. ^[19] Big Lots has 1,353 retail locations in 47 U.S. states. ^[20] In fiscal year 2007, net sales were $4,656.3 million, a 1.8% decrease from 2006's net sales of $4,743 million. ^[21].

[edit] References

1. ↑ ^{1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12} 99 Cent Only Inc. 2008 Annual Report to Shareholders pg. 5  
2. ↑ 99 Cent Only Inc. 2008 10-K pg. 29  
3. ↑ ^{3.0 3.1} 99 Cent Only Inc. 2008 10-K "Effects of Inflation" pg. 32  
4. ↑ ^{4.0 4.1 4.2 4.3 4.4} 99 Cent Only Inc. 2008 10-K pg. 24  
5. ↑ ^{5.0 5.1 5.2 5.3 5.4} 99 Cent Only Inc. 2008 10-K pg. 5  
6. ↑ ^{6.0 6.1 6.2} 99 Cent Only Stores. About Us.
7. ↑ 99 Cent Only Inc. 2008 10-K pg. 23  
8. ↑ 99 Cent Only Inc. 2008 10-K pg. 25  
9. ↑ 99 Cent Only Inc. Second Quarter 2008 10-Q pg. 5  
10. ↑ Retail Traffic. Dollar Stores See Dollar Signs.
11. ↑ 99 Cent Only Inc. 2008 10-K "Inflation may affect..." pg. 11  
12. ↑ Dollar Tree Inc.. Dollar Tree Inc. Company Overview.
13. ↑ ^{13.0 13.1} Dollar Tree Inc. 2007 10-K pg. 17  
14. ↑ Family Dollar Inc.. Family Dollar Stores.
15. ↑ Family Dollar Inc. 2008 Annual Report to Shareholders Financial Summary pg. 5  
16. ↑ Wal-Mart 2008 10-K pg. 4  
17. ↑ Wal-Mart About Us.
18. ↑ ^{18.0 18.1} Wal-Mart 2008 10-K pg. 27  
19. ↑ BigLots About Us.
20. ↑ BigLots Corporate 2008 10-K pg. 4  
21. ↑ BigLots Corporate 2008 10-K pg. 18  
22. ↑ 99 Cent Only Inc. 2008 10-K pg. 23  
23. ↑ [ Family Dollar Inc. 2007 10-K] pg. 17  
24. ↑ Dollar Tree Inc. 2007 10-K pg. 17  
25. ↑ BigLots Corporate 2008 10-K pg. 18