While not a terrifying predator in its operating space, consumer electronics retailer REX Stores Corp. (NYSE: RSC) is proving that it is not exactly a dinosaur either. Today, the small- and medium-sized market retailer turned in fiscal Q1 EPS of $0.42, up strongly from last year's $0.27 and comfortably ahead of the First Call mean estimate of $0.38. While a decent chunk of the year-over-year EPS gain was fueled by items below the operating income line, operating profits still rose by a respectable 11.7% during the period. That outpaced net sales growth of 8%, which was driven in large part by strong customer demand for T-Rex-sized large-screen TVs.
Despite the upside EPS surprise, REX's shares traded down slightly this morning as the market digested the news. One reason for the slide may have been the company's quarterly comparable-store sales results, or comps, which rose a less-than-earth-shaking 4% after a stellar 12% gain in the same period a year ago. That's not an altogether horrible performance, but it's also not compelling enough to generate a great deal of investor enthusiasm.
Like so many other smaller retailing stocks out there, REX's stock price has been largely dictated by the ups and downs of its comps over the past year or so, as the following chart illustrates:
If this relationship continues to hold in the coming months, then investors shouldn't expect too much in the short-run from REX's shares. The company is rubbing up against a tough comparison in its current fiscal Q2 quarter. Last year's 14% jump in Q2 comps owed a great deal to the weather, when an early summer heat wave led to higher sales of air conditioners. Who knows whether a similar course of meteorological events will befall the company this summer.
REX may be able to eke out slight improvements in its comps during the remaining quarters of the year, but expecting anything close to a double-digit performance is pretty far-fetched. The current fiscal 2001 situation is reversed from fiscal 2000, when the previous-year comparison periods were weak. Still, the U.S. economy is bright, with recent gauges indicating that consumer confidence remained near an all-time high in May and spending in Q1 rose at the fastest rate in nearly 15 years. However, it's shaky at best to build an investment thesis solely around current economic conditions, especially if you are dealing with a retailer.
Besides the whims of the U.S. economy, REX's future value creation will largely boil down to how well it stays out of the way of larger rivals such as Wal-Mart(NYSE: WMT) , Best Buy(NYSE: BBY) , and Circuit City(NYSE: CC) while building a name for itself as a high-end TV specialist. The company has already done well in the second department, with Robertson-Humphrey analyst David Shick estimating that the firm sells between 3% and 4% of the large-screen TVs sold in the U.S. If that large-screen strength can be parlayed into the emerging area of high-definition television (HDTV) as well, then REX shareholders may really have something.
With its high-comps days behind it and its growth moderating from last year's levels, REX's multiple has come down substantially and the stock now trades at about 10x its trailing earnings. That may seem cheap compared to the situation just a year ago, but the company needs a lot of things to go right in the months ahead for its multiple to re-expand. With so much of the firm's growth story riding on the state of the economy and the acceptance of new technologies such as HDTV, constructing a variant expectation for what is already built into Rex's stock is a monster of a challenge for an individual investor.
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