August 15, 2009 - 99 Cents Only Stores (NDN-NYSE) sells consumer products through its retail stores primarily at price points of 99.99¢ or less in the United States. Its stores offer consumer goods and closeout merchandise. The company also sells merchandise through its Bargain Wholesale division to retailers, distributors, and exporters.

While operating margins and profit margins (3.26% and 1.47% respectively) may be thin, volume is what makes this company go. Sales have gone from $1.104 billion in 2006 to this year's estimate of $1.36 billion. Next year, analsyts predict $1.44 billion. In this economy, foot traffic is increasing as consumers need to stretch every dollar further.

Profits are growing faster than sales. While they dipped in 2007 to 4 cents a share from 14 cents in 2006, last year they rebounded to 28 cents. This year, the consensus from 11 analysts is that earnings will be 57 cents, then 69 cents in 2010. Over the next 5 years, they expect average annual earnings growth of 12%, up from the average annual increase of 8.3% over the last 5.

Part of the restriction on growth has been inventory shrinkage. Management is addressing that problem with weekly reporting checks on inventory and improved supply chain logistics. It's also added some labor-saving machinery in stores and distribution centers. That should help margins expand over the next few quarters. In addition, there have been some modest price hikes.

Growth is definitely on management's mind. While it closed 10 underperforming stores in Texas in the last year, new openings offset those. Expect a 5% to 7% bump in total stores for each of the next 3 years. While most of the new stores have been in California, the company may start expanding its presence in Nevada and Arizona or enter new markets. With strong cash flow (about $70 million a year), the company can pay for the new stores as well as continue its stock repurchase program.

This stock was an investor favorite up until 2003 when it peaked. The stock price hit $36.20 (reflects stock splits) and faltered all the way down to $5.40 last year. Now it looks much stronger, both from the price chart and earnings. If it delivers on the earnings and growth analysts expect, it has a good chance of continued success, even with an economic recession. Or maybe because of the economic recession. As more consumers find the value at these stores, it will be harder for them to return to old habits. There's a good chance that a number of the new clients will continue shopping after there is a recovery. It's hard to go back to spending more than you have to.

More numbers: Market cap is $887.4 million. Forward P/E is 18.8. Price to sales is .71. Price to book is 1.74. Total cash is $131.86 million. Cash per share is $1.93. Total debt is $568,000. Current ratio is 2.66. Book Value per share is $7.86. There are 68.48 million shares outstanding with a float of 39.35 million. Insiders own 34.05% of the stock. There is no dividend.

Check into NDN if you're looking for a company that thrives in difficult economic times.

- Company Web site: www.99only.com

- Ted Allrich