Report Dims 99 Cents Outlook

Analyst Meredith Adler of Lehman Bros. says in the report that the sales figures were a surprise and calls them disappointing, as does 99 Cents CEO Eric Schiffer. Lehman Bros. had projected an increase of 1.5% in comparable store sales for the quarter, but Adler's new report lowers the Lehman Bros. estimate to predict flat same store sales for the chain and to lower its earnings estimates by four cents per share and six cents per share, respectively, for fiscal 2005 and fiscal 2006. That results in an earnings forecast of 54 cents per share for fiscal 2005 and 60 cents in 2006.

Adler's analysis of 99 Cents performance is that in its core California markets, the chain "has built a successful large-store format that offers solid consumer values on consumables merchandise, including perishables, and great excitement on treasure hunt product." However, this concept "has not yet been well-accepted in new Texas markets, and the company has slowed growth in Texas as a result of the weak performance there." In addition, Adler's report says that the company "is struggling to manage growth in its core markets and has many substantial tasks ahead of it before results can be normalized." Adler expects that the chain will improve slowly and steadily. The family-run firm is committed to strengthening its management team and adding more sophisticated infrastructure, Adler observes, but the analyst adds that for such an entrepreneurial, family-owned company, "the process of change is proving to be challenging, with setbacks occurring regularly along the way." The Lehman Bros. report anticipates that the stock price of 99 Cents Only "will be down sharply as investors grapple with declining sales performance, reduced growth outlook and continuing operational challenges."

According to 99 Cents CEO Schiffer, although the company's stores in Texas average about half of the companywide average sales, the stores in Texas "do generate positive cash flow for the company" and 99 Cents believes that "in Texas, we will steadily increase customer awareness" that will improve results. Schiffer, in commenting on the first quarter same store sales, pointed out that 99 Cents Only "remains profitable, with a strong balance sheet and no debt." Schiffer's comments on the first quarter's drop in same store sales focused on a number of factors, ranging from the extra sales day due to the leap year in 2004 to what he called "other external factors negatively affecting first quarter 2005 same-store-sales." Schiffer cited "severe inclement weather in California, the ending of the Southern California grocery strike in late February 2004 and the effects of higher gasoline prices." Rainfall in Southern California this year has already totaled more than twice the yearly average and is within a few inches of setting an all-time record for the region. This record rainfall throughout the first quarter "severely affected customer traffic," Schiffer said.

Executives at 99 Cents Only have not set a specific date to release first quarter earnings. However, Schiffer indicated that the company will have more to say about its first quarter results, commenting that, "We look forward to discussing the results of our operations, as well as merchandising and systems initiatives, after we release our earnings." The timing of 99 Cents Only's first quarter earnings release will depend on when it releases earnings for the fourth quarter and full year 2004, which it has yet to file. When it released sales figures last week, 99 Cents said it expected to release fourth quarter and full year 2004 earnings by April 29, but it may require additional time because it is reviewing lease accounting practices, as virtually all other retailers are lately as a result of new guidance from the SEC.

The 99 Cents Only chain operates 223 retail stores in California, Texas, Arizona and Nevada and a wholesale division called Bargain Wholesale.During the first quarter of 2005, the chain opened two stores in California and three in Texas, and closed one smaller California store. Approximately 10 additional new stores, seven in California and three in Arizona, are planned for the remainder of 2005.