Five finger discount: A profit heist at 99 Cents Only Stores

Somebody stole away 99 Cents Only Stores Inc.’s quarterly profit -- literally.

The City of Commerce discount retailer said Wednesday that it lost $4.4 million, or 6 cents a share, in the fiscal fourth quarter ended March 29 because of an unexpected jump in thefts at some of its stores.

So-called shrink expenses -- losses tied to an unplanned drop in product inventories -- were $5.5 million greater than the company had expected for the quarter, Chief Executive Eric Schiffer said in a conference call with analysts and investors.

He said the firm believed that "unexpected theft-related shrink is largely responsible" for the jump in overall shrink costs, which also can stem from spoiled or scrapped goods.

Analysts had expected a modest profit in the latest quarter, betting that the company’s bargain-priced food and general merchandise would attract more consumers who are struggling to cope with the surge in gasoline prices this year.

The surprise loss triggered a sell-off in the retailer’s shares in after-hours trading: The stock fell to $7.20, after rising 27 cents to $7.89 in regular trading.

99 Cents Only Stores, founded in 1982 by David Gold, pioneered the single-price retail concept. Everything in the now 265-store chain is priced at 99 cents or less.

If you’ve been in a store, or even driven by one, you know what the merchandise mix looks like. It’s a lot of day-to-day stuff you may need -- and a lot of stuff that fits some people's definition of junk.

Sales totaled $1.2 billion in the last fiscal year, $290 million of it in the last quarter. But the company’s earnings picture has dimmed since 2003, and management has struggled with accounting troubles that have strained its credibility with Wall Street.

With the sudden surge in theft losses, "It’s a management credibility issue again," said Joan Storms, who follows the company for Wedbush Morgan Securities in L.A.

Schiffer said on the conference call that the company believed that the theft troubles were "fixable." He and other executives said the losses were concentrated in 29 stores, and that "a lot of them, not all, but a lot of them are in one geographic area."

Where? Schiffer wouldn’t say, except that "it’s not Los Angeles." The company has stores across California and in Arizona, Nevada and Texas.

As for the culprits, the company wasn’t specific in the conference call about whether the thefts were believed to be primarily by customers or by employees. But it sounded like an inside job. At one point during the call, Schiffer appeared to provide a motive for insiders.

"It’s well known throughout the company that we are in the process of taking our existing management and putting them through training, upgrading the staff out there," he said.

"And we always say that we hope all of them are able to make the transition. I don’t know the effect on people who think that they may not be able to make the transition during these current economic times."

That conjures visions of pallets stacked with shampoo, candy and tchotchkes heading out the back door.

Schiffer and other executives tried to put the best face on the quarter’s results, noting that sales at stores open at least one year were up 1.5% -- the 10th consecutive quarterly increase -- even as some retailers have reported lower sales.

In theory, 99 Cents Only ought to be packing in the customers as consumers' incomes are squeezed in a tough economy.

Now if they could only control what’s being packed out of the stores.

Photo: Patrons shop for fresh produce at a 99 Cents Only store in Los Angeles in March. Stefano Paltera/Los Angeles Times

Comments

[Raul Garcia]

I bet it is there store on Charleston and Maryland Parkway in Las Vegas. I have never seen so much riff raff at one place in my life.

After my heart attack I hardly shop at the 99 Cent Stores anymore.

[Bill]

I love the 99 store and especially the penny-a-minute internet phone cards. When management expands the company too quickly and hires the cheapest labor it can find, you can expect these low-paid people to steal the necessities of life for themselves and their friends. A statement such as: is self-evident ! Mr. Schiffer needs to FedEx a brain to insert between his dream-world and the words he speaks.

[Bill]

Mr. Schiffer's self-evident comment reads as follows. Quote-Unexpected theft-related shrink is largely responsible for the jump in overall shrink expenses.
DUH !

[william rice]

Tom, I have been frequently buying at the El Toro(Lake Forest) 99 cents store for the last 6 yaears. I have observed internal thefts over that period of various kinds by many employees and this obervation has been observed by other customers at the El Toro location and Santa Ana locations which in-store customers have told me while I shopped. Some other customers have telephoned the corporate offices to inform on their sightings. This internal theft appeared to me and other customers to be organized by employees to include local supervision and management. Grocery items delivered to the store of high value such as a gallon of Tropicana Orange Juice which sells as retail for up to $5.99 were being completely taken by store employees and not displayed for customer purchase. The thefts and diversions of delivered food items were being done on a regular basis; thereby the customers were never being aware that the items were delivered and therefore available for sale. The excuse to stop the problem appears to be to move around suspected or known theft employees to other locations and possibly dump these employees from employment by using various tactics. I and other shoppers have observed mass employees movements at various times of the year. Internal thefts will not go away but, it can be margainized if the company is willing to tighten security and therefore, show shareholders that improvements are being made, otherwise, the company will suffer more creditibiliy problems in the business community and suffer more in "stock market" acceptance as a vital and caring company. It appears to me that the company does not or will not be willing to engage in solving the problem from a financial venture because possibly it affects a bottom line profit. The shareholders as well as upper management will suffer will less value in market value and stock options worth. It is a solvable problem if management wants it to be, the next shareholder meeting should be interesting. William Rice