99 Cents Only Stores (NDN) - Description of business

Company Description
  99¢ Only Stores (the “Company”) is a deep-discount retailer of consumable general merchandise with an emphasis on name-brand products. The Company’s stores offer a wide assortment of regularly available consumer goods as well as a broad variety of first-quality, closeout merchandise. Approximately one-half of the Company’s retail sales in 2004 were from closeout merchandise versus regularly available goods. As of August 31, 2005, the Company operated 225 retail stores with 159 in California, 36 in Texas, 19 in Arizona, and 11 in Nevada. These stores averaged approximately 22,200 gross square feet. In 2004, the Company’s stores open for the full year generated average net sales per estimated saleable square foot of $270, which the Company believes is among the highest in the deep discount retail industry, and average net sales per store of $4.6 million. The Company entered the Texas market in June 2003. In 2004, non-Texas stores open for the full year averaged net sales of $4.8 million per store and $293 per estimated saleable square foot and the 17 Texas stores open for the full year averaged net sales of $2.2 million per store and $101 per estimated saleable square foot.  The Company competes in the deep-discount retail industry, which it believes is one of the fastest growing retail sectors in the United States. The Company opened its first 99¢ Only Stores in 1982 and believes that it operates the nation’s oldest existing single-price-point general merchandise chain. The Company has expanded its chain of 99¢ Only Stores from 78 stores and 1.1 million estimated saleable square feet at December 31, 1999 to 219 stores and 3.8 million estimated saleable square feet at December 31, 2004, representing compound annual growth rates (“CAGR”) of 23% and 28%, respectively. Through August 31, 2005, the Company has opened 8 new stores, including three in Texas, relocated one smaller California store and moved/expanded one California store within the same shopping center. The Company intends to continue to expand in California and Arizona in 2005 with approximately 4 to 6 additional stores planned. For 2005 and 2006, the Company has slowed its planned new store growth rate to focus on the improvement of its systems infrastructure, business processes, and internal controls to better enable the Company to support its existing stores and establish a foundation for accelerated growth in 2007 and beyond. Improving its Texas operation is also a top priority for the Company in 2005 and 2006.  The Company also sells merchandise through its Bargain Wholesale division at prices generally below normal wholesale levels to retailers, distributors and exporters. Bargain Wholesale complements the Company’s retail operations by allowing the Company to be exposed to a broader selection of opportunistic buys and to generate additional sales with relatively small incremental operating expenses. Bargain Wholesale represented 4.3% of the Company’s net sales in 2004.  Industry  The Company participates primarily in the deep-discount retail industry with its 99¢ Only Stores. Deep-discount retail is distinguished from other retail formats in that a substantial portion of purchases is typically acquired at closeouts and other special-situation merchandise is acquired at prices substantially below original wholesale cost. In addition, re-orderable merchandise is purchased below normal wholesale cost. Deep-discount retail is also distinguished by offering this merchandise to customers at prices significantly below regular retail. As a result, a substantial portion of the product mix is comprised of a frequently changing selection of specific brands and products.  The Company considers closeout merchandise as any item that is not re-orderable on a regular basis. The purchase of closeout or special-situation merchandise develops in response to the need of manufacturers, wholesalers, and others to distribute merchandise outside their normal channels. Closeout or special-situation merchandise becomes available for a variety of reasons, including a manufacturer’s over-production, discontinuance due to a change in style, color, size, formulation or packaging, changes in nutritional label guidelines, the inability to move merchandise effectively through regular channels, reduction of excess seasonal inventory, discontinuation of test-marketed items, products close to their “best if used by” date, and the financial needs of the manufacturer.  Many deep-discount retailers also sell merchandise that can be purchased from a manufacturer or wholesaler on a regular basis. Although this merchandise can usually be purchased at less than original wholesale and sold below normal retail, the discount, if any, is generally less than with closeout merchandise. Deep-discount retailers sell regularly available merchandise to provide a degree of consistency in their product offerings and to establish themselves as a reliable source of basic goods.  Business Strategy  The Company strives to continue to provide significant value to its customers on a wide variety of consumable merchandise in an exciting store environment. The Company’s strategies to achieve this goal include the following:  Focus on “Name-Brand” Consumables . The Company strives to exceed its customers’ expectations of the range and quality of name-brand consumable merchandise that can be purchased for 99 cents. During 2004, the Company purchased merchandise from more than 999 suppliers, including 3M, American Greetings, Colgate-Palmolive, Con Agra, Dole, Eveready Battery, General Mills, Georgia Pacific, Heinz, Hershey Foods, Johnson & Johnson, Kellogg’s, Kraft, Mattel, Nestle, Procter & Gamble, Revlon, and Unilever.  Broad Selection of Regularly Available Merchandise. The Company offers consumer items in each of the following staple product categories: food (including frozen, refrigerated, and produce items), beverages, health and beauty care, household products (including cleaning supplies, paper goods, etc.), house-wares (including glassware, kitchen items, etc.), hardware, stationery and party goods, seasonal goods, baby products and toys, giftware, pet products, plants, and clothing. The Company carries name-brand merchandise, off-brands and its own private-label items. While the Company does not analyze revenues by the above categories, it believes that by consistently offering a wide selection of basic household consumable items, the Company encourages customers to shop at the stores for their everyday household needs, which the Company believes leads to an increased frequency of customer visits.  Attractively Merchandised and Well-Maintained Stores. The Company strives to provide its customers an exciting shopping experience in customer-service-friendly stores that are attractively merchandised, brightly lit and well maintained. The Company’s stores are laid out with items in the same category grouped together. The shelves are restocked throughout the day. The Company believes that offering merchandise in an attractive, convenient and familiar environment creates stores appealing to a wide demographic of customers.  Strong Long-Term Supplier Relationships. The Company believes that it has developed a reputation as a leading purchaser of name-brand, re-orderable, and closeout merchandise at discounted prices by its willingness to take on large volume purchases and take possession of merchandise immediately, its ability to pay cash or accept abbreviated credit terms, its commitment to honor all issued purchase orders, and its willingness to purchase goods close to a target season or out of season. The Company’s experienced buying staff, with the ability to make immediate buying decisions, also enhances its strong supplier relationships. The Company’s relationships with its suppliers is further enhanced by its ability to minimize channel conflict for the manufacturer by quickly selling name-brand merchandise without, if requested by the supplier, advertising or wholesaling the item. Additionally, the Company believes it has well-maintained, attractively merchandised stores that have contributed to a reputation among suppliers for protecting their brand image.  Complementary Bargain Wholesale Operation. Bargain Wholesale complements the Company’s retail operations by allowing the Company to be exposed to a broader selection of opportunistic buys and to generate additional sales with relatively small incremental operating expense. Bargain Wholesale sells to local, regional, national, and international accounts. The Company maintains showrooms in Los Angeles, where it is based, as well as Houston, New York City, and Chicago.  Savvy Purchasing. The Company purchases merchandise at substantially discounted prices as a result of its buyers’ knowledge, experience, negotiating ability and its established reputation among its suppliers. The Company applies this same approach to its relationships with all vendors and strives to maintain a lean operating environment focused on increasing net income.  Store Locations . The Company’s 99¢ Only Stores are conveniently located in freestanding buildings, neighborhood shopping centers, regional shopping centers or downtown central business districts, all of which are locations where the Company believes consumers are likely to do their regular household shopping. As of August 31, 2005, the Company’s 225 existing 99¢ Only Stores average approximately 22,200 gross square feet. From January 1, 2000 through December 31, 2004, the Company opened 145 new stores with an average of approximately 24,100 gross square feet and currently targets new store locations between 15,000 and 24,000 gross square feet. The Company believes its larger store size versus that of other typical “dollar store” chains allows it to more effectively display a wider assortment of merchandise, carry deeper stock positions, and provide customers with a more inviting environment that the Company believes encourages customers to shop longer and buy more. In the past, as part of its strategy to expand retail operations, the Company has at times opened larger new stores in close proximity to existing stores where the Company determined that the trade area could support a larger store. In some of these situations, the Company retained its existing store. While this strategy was designed to increase revenues and operating income, it has had a negative impact on comparable store net sales as some customers migrated from the existing store to the larger new store. The Company believes that this strategy has impacted its historical comparable sales growth.  Experienced Management Team and Depth of Employee Option Grants. 99¢ Only Stores’ management team has many years of retail experience. The Company’s management believes that employee ownership of the Company has helped build employee pride in its stores. Accordingly, all members of the Company’s management, board of directors (other than David Gold, Eric Schiffer, Jeff Gold, and Howard Gold), and almost all employees with tenure of more than six months with the Company receive an annual grant of stock options. As of December 31, 2004, the Company’s employees held options to purchase an aggregate of 5,179,170 shares of Common Stock, or 7.5% of the outstanding shares of Common Stock.  Growth Strategy  Management believes that future growth, at least in the near term, will primarily result from new store openings in its existing territories.  Growth in Existing Territories. By continuing to develop store growth in its current markets, the Company believes it can leverage its brand awareness in these regions and take advantage of its existing warehouse and distribution facilities, regional advertising and other management and operating efficiencies.  Expansion in Texas. The Company opened its first Texas stores in June 2003. Its 741,000 square foot Houston-area distribution center facility, acquired in early 2003 for $23 million in cash, came with warehouse racking, including an automated pick-to-belt conveyor system, and refrigerated and frozen storage space. The Company later installed the “High Jump” warehouse management system in this facility. As of August 31, 2005, the Company had opened a total of 25 stores in the Houston area and 11 in the Dallas Fort Worth Metroplex. The Texas stores average 20,425 saleable square feet, which is larger than the Company average of 17,334 saleable square feet for 2004. The three Texas stores opened in 2005 were committed to in the second half of 2004. For the balance of 2005, the Company does not anticipate opening any additional stores in Texas. The Company currently believes that there is potential for additional growth in Texas, but is evaluating its Texas strategy before commencing any material expansion.  Portable Format Facilitates Geographic Expansion.   Although the Company does not have any current plan to expand in areas outside its existing markets, the Company believes that its strategy of consistently offering a broad selection of name-brand consumables, at value pricing, in a convenient store format is portable to other densely populated areas of the country. In 1999, the Company opened its first 99¢ Only Stores outside the state of California in Las Vegas, Nevada and now has stores in California, Nevada, Arizona, and Texas.  Real Estate Acquisitions . The Company considers both real estate lease and purchase opportunities and may make acquisitions of a chain, or chains, of retail stores in existing markets or other regions, primarily for the purpose of acquiring favorable locations.  Retail Operations  The Company’s stores offer customers a wide assortment of regularly available consumer goods, as well as a broad variety of first-quality, closeout merchandise, generally at a significant discount from standard retail prices. All merchandise sold in the Company’s 99¢ Only Stores sells for 99 cents per item or 99 cents for two or more items, except in Texas where items can sell from 9 cents up to 99 cents.  The following table sets forth certain relevant information with respect to the operations of the Company’s 99¢ Only Stores (dollar amounts in thousands, except sales per square foot):     Year Ended December 31,       2000   2001   2002   2003   2004   99¢ Only Stores net retail sales   $ 402,071   $ 522,019   $ 663,983   $ 816,348   $ 929,896   99¢ Only Stores annual net sales growth rate     28.7 %   29.8 %   27.2 %   22.9 %   13.9 % 99¢ Only Stores store count at beginning of year     78     98     123     151     189   New stores     20     26     28     38     33   Stores closed     -     1     -     -     3 (a ) Total store count at year-end     98     123     151     189     219   Average 99¢ Only Stores’ net sales per store open the full year (b)   $ 4,487   $ 4,647   $ 4,750   $ 4,957   $ 4,603   Estimated saleable square footage at year-end for 99¢ Only Stores     1,424,280     1,892,949     2,428,681     3,190,528     3,796,153   Average net sales per estimated saleable square foot (b)