DAYTON, OH—Rex Stores Corp. saw its retail operation flattened in Fiscal Year 2006, but company officials are hoping an infusion of plasma will hasten a speedy recovery.

Providing a cautionary tale on the fickleness of technology, Rex was battered by anemic demand for tube and projection televisions as flat-panel LCD and plasma alternatives overwhelmingly captured consumer hearts in 2006.

“We expected a drop-off, but nowhere near the decline that we had,” Rex CEO Stuart Rose relayed in a conference call held Monday to unveil year-end results and strategies to provide needed cash, including the sale/leaseback of nearly 100 stores.

Revenue sank from $374.5 million in FY 2005 to $347.3 million last year, while net income plummeted from $28.3 million to $11.4 million. Tube and projection televisions suffered an 11.2% drop in same-store sales compared to FY 2005, with big-screen TV sales alone tumbling from $13.0 million in FY 2005 to just $3.5 million this year. Ipod’s sound trouncing of other audio systems led to a 2.6% decline in same-store sales in that category.

“We don’t sell iPods, and so we suffered a little there,” Rose said. Same-store sales of video technology were down 2.6%, a trend Rose blamed on cheaper DVDs and fading interest for camcorders in favor of digital cameras.

In response, the retailer is embracing the latest high-tech gadgets shoppers now covet. While acceding that insufficient product may have hurt velocity in the fourth quarter, Rose said officials purposely kept the supply in check. “Our feeling was that it was better to stay a little lean and be cautious than to get caught with big inventories in a market declining very fast,” he said, whereas now, “we are working to bring our inventory back up” with fresher merchandise. Rose cited $19.4 million in LCD TV sales in the fourth quarter compared to $9.4 million in the fourth quarter of FY 2005 as one sign of the potential, and said plasma TV sales ballooned from $12.9 million in the final stretch of FY 2005 to $18.3 million this year.

Rex is also overhauling its real estate lineup, headlined by a plan to divest 94 properties via an $84 million sale/leaseback to Coventry Real Estate Investments LLC. Unveiled last month in a Securities and Exchange Commission filing, the deal proved a popular conference call topic, with Rose explaining that certain locations have leases that can be extended 15 years out, whereas a portion are on a six-month term with the option of indefinitely re-leasing every month.

“One of the beauties of this transaction is that it gives us that flexibility,” said Rose, reporting that a “day-to-day” analysis of the weaker operations will decide their fate. “It’s gut-wrenching, but we have to look at returns, and they just are not there in some of these stores,” he said. Entities involved in the Coventry package include Kelly & Cohen Appliances; Rex Radio and Television; and Stereo Town. Slated to be finalized in late April, the sale/leaseback will not impact the remaining 113 stores, of which about 40 are owned outright by the company. Rose did say that sale/leaseback or similar alternatives enabling Rex to harvest cash from the remaining owned stores are still possible strategies.

As of year-end 2006, Rex operated 193 stores nationally, but closed 29 units during the first quarter of FY 2007, including several in the sale/leaseback agreement. Proceeds from that pact would pay down property mortgages and fund investments in the synthetic fuel and ethanol industries, two sectors Rex is aggressively pursuing. The reduced empire will also allow the company to lease excess distribution space in its three warehouses, said Rose, a cash generator the firm did previously at its plant in Pensacola, FL.

While acknowledging the need to react to the recent financial woes, Rose voiced general optimism for Rex retail going forward. “I expect everything to get better,” he offered. “With (stronger) comps, we can turn things around very quickly—we’ve done it lots of times.”

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