Operational Improvements Postioned 99 Cents Only for Recessionary Success

(MoneyWatch)  Recently, 99 Cents Only Stores has enjoyed some real success but don't think that's just the recession driving bargain hunters its way. The retailer has made changes over the past few years that positioned it to succeed in the soft economy.

For one thing, it significantly expanded its food presentation, with perishables being prominent and fortunate, says Joan Storms, who covers the chain for Wedbush Morgan Securities. The company added then expanded refrigerated displays of frozen food and perishables ?€" including salad items, fruit, vegetables, deli and dairy ?€" with everything selling for a maximum of 99.99 cents. Yep, 99 Cents Only has kept to the premise of everything under a buck even if it had to use gas station tactics to do it. Today food is about 52 percent of the product mix, said Storms, and around half of that perishables. In many of the markets it serves in California, Arizona, Nevada and Texas, consumer have taken to visiting 99 Cents Only before the supermarket to see what they can pick up cheap. The assortment does change somewhat with availability, but has become more consistent, which has made 99 Cents Only more of must shop for the cost conscious.

Storms estimated that two thirds of the company's recent improvement in comparable store sales could be attributed to the economy and about a third to the shift in product assortment toward food.

Another factor in 99 Cents Only success -- defined this time by the better operating margins it has seen -- is store-level improvements. Today the company offers cleaner stores, better customer service and more products in stock, Storms said.

The store-level improvements derive from a third important element in 99 Cents Only's recent run of luck, the hiring of experienced executives. A publicly traded company still dominated by the founding family, 99 Cents Only has won a reputation for occasionally eccentric management. Storms noted that the "hiring of seasoned outside executives who know what it's like to work for a professional retail operation" had been key to cleaning up the stores, and she commended two in particular, Jim Parros, senior vp of logistics, and Mike Gerety, senior vp stores. Parros had many years experience with Toys R Us and Gerety earned his stripes at Kids R Us and Petco.

Not everything is perfect at 99 Cents Only. After all, it did miss its earnings estimate by a penny in the latest quarter, but that doesn't necessarily say that much about how the company is doing. On the other hand, the company's decision not to honor a board promise to get out of Texas, where it expanded a few years ago and where its stores significantly under perform the rest of the chain, does suggest that the company is having another eccentric moment. That might be worrisome, as more good money may follow bad to the Lone Star State. That being said, though, 99 Cents Only has done enough right things recently to find itself in the right place when things went wrong.