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STOCK SPOTLIGHT

For Bargain Hunters, 99 Cents Only Shares Suddenly Got a Lot Cheaper

Analysts say investors overreacted, causing discount chain's stock to plunge when the company fell short of some second-quarter forecasts.

July 09, 1999|JAMES F. PELTZ | TIMES STAFF WRITER

Talk about a sudden markdown.

Investors sent the highflying stock of 99 Cents Only Stores plunging 13% Thursday after the deep-discount chain posted second-quarter sales that, to some analysts, were a bit shy of expectations.

The stock skidded $6.56 a share to $44.25 in New York Stock Exchange composite trading, with more than 1 million shares changing hands.

But the analysts also argued that the selling was exaggerated and they continued recommending the stock. They said 99 Cents Only, based in Commerce, remains a standout operation whose "value" concept and execution are sound.

"Investors are massively overreacting," said Brent Rystrom, an analyst with U.S. Bancorp Piper Jaffray in Minneapolis. "We view this as an exceptional company." Merrill Lynch analyst Daniel Barry likewise reiterated his "buy" rating on the shares.

99 Cents Only runs 71 stores of that name, all in Southern California, along with 67 discount stores in other states under the names Only Deals and Odd's-N-End's. The company--founded in 1982 by its chief executive, David Gold, the son of a Russian peddler--also runs a wholesale merchandise division.

The chain specializes in selling food, household supplies and personal-care items that are close-out or "special-situation" merchandise. They become available to 99 Cents Only because they're being discontinued, were overproduced or simply didn't sell through regular retail channels, among other reasons.

99 Cents Only said its overall second-quarter sales surged 39% from a year earlier, to $99.5 million, during which it opened four new stores.

The company also said "same-store" sales for the 99 Cents Only outlets alone--those stores open at least 15 months, and the retail industry's main gauge of growth--climbed 2.4% from a year earlier.

The same-store results trailed 99 Cents Only's typical 4%-to-5% growth because the Easter shopping season fell in March this year and in April last year, but they were at or near analysts' expectations. Indeed, the chain's same-store sales for the first half of 1999 still rose 5.4% from a year earlier.

But overall sales came up a tad short of forecasts, Rystrom said, mainly because 99 Cents Only's new-store openings came later in the period than expected. That helped spark the stock's sell-off, he said.

Eric Schiffer, the chain's senior vice president for finance, also blamed the later store openings for the shortfall.

"The stores' concept is just as good as it ever was," he said. "We feel the company is fine."

Yet selling pressure on the stock intensified after another discount retailer, Consolidated Stores Corp., predicted a second-quarter loss, even though Consolidated cited problems at its chain of K-B Toy stores, not at its deep-discount stores such as Odd Lots and Pic 'N' Save.

Consolidated tumbled $6.88 a share, to $16.50, on the Big Board.

Regardless, 99 Cents Only's stock was vulnerable to any doubts about the outlook for the company or the deep-discount industry because the stock had become richly priced in response to the chain's prosperity.

99 Cents Only's stock has more than quintupled over the last three years, compared with a doubling in price by the benchmark Standard & Poor's 500 index.

And before Thursday, the stock was trading for a lofty 39 times the company's expected 1999 earnings per share.

"There was a lot of room for the stock to fall off," Rystrom said.

Investors also have come to expect rapid growth from 99 Cents Only. Last year, the company's profit soared 41% to a record $26.7 million on a 40% surge in sales to $323 million.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

99 Minus 13%

Shares of 99 Cents Only Stores plunged Thursday, interrupting a long rally, after the discount chain reported its second-quarter sales. But analysts say the company's business remains sound. Monthly closes and latest:

Thursday: $44.25, down $6.56

Source: Bridge Information Systems

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