99 Cents Only Merchandise Is Cheap, but Its Stock Isn't.

A decision by City of Commerce-based 99 Cents Only Stores Inc. to sell off an under-performing division has paid big dividends on Wall Street.

The chain's stock has been climbing sharply, more than doubling from its 12-month low of $24.40 on March 1 to a Sept. 12 high of $50.68 a share.

Analysts believe the catalyst is the company's decision to sell its Universal division, which is made up of 65 closeout stores under the names Only Deals and Odds-N-Ends in the Midwest, Texas and upstate New York, to concentrate on the 99 Cents Only formula.

"Brokers celebrated after the news," said Daniel Barry, an analyst at Merrill Lynch Global Securities. "It (the stock) has still been on an upward trajectory."

David Gold, CEO of 99 Cents Only Stores, said the company is still assessing the terms of the Universal division sale, with no public announcement yet. But last spring the company hired Houlihan, Lokey, Howard & Zukin to help it find a buyer for the division.

Gold declined to speculate on the planned divestiture's impact on 99 Cents Only stock, saying he rarely tracks the stock price.

"I want to really focus on making the business better, but where the stock is is not where the business is," he said.

Currently, 99 Cents Only Stores is growing at a rate of 25 percent a year in terms of store openings and is expected to end 2000 with 98 outlets. It currently has 78 locations, not including the Universal division. The chain employs more than 3,000 people.

The company was founded by Gold, son of a Russian peddler, in 1982 in Los Angeles. The primary focus is on food, household supplies and personal care items, which are all priced at 99 cents. The goods can be sold so cheaply either because they were overproduced, were phased out or did not sell well through regular retail outlets.

The company went public in May 1996 with an initial offering price of $14.50 a share. Since then, the stock has undergone several splits. Gold owns about 45 percent of the company.

For the second quarter ended June 30, the company reported net income of $9.08 million (26 cents per diluted share), compared with net income of $7.02 million (21 cents) for the year-earlier period. Revenues jumped to $107.95 million compared to $80.85 million, thanks largely to the opening of 12 new stores.

Barry has a "buy" recommendation on 99 Cents Only stock and is generally recommending all the "dollar" stores -- other closeout stores around the country that also sell goods for a dollar or less, such as Dollar Tree on the East Coast.

"You shop there in good times and bad times," he said. "You shop there all the time for your basic consumables."

99 Cents Only stores tend to do better in more upscale areas, with the chain's best performer located adjacent to Beverly Hills on Wilshire Boulevard -- that store does more than $9 million a year in sales. In fact, Gold said the company has been looking on and off for a site on glitzy Rodeo Drive.

"We do good in wealthy areas, and we know that rich people got rich because they like bargains," Gold said.

Indeed, despite the fact that some locals have expressed dismay at the thought of a 99 Cents Only store on Rodeo Drive, the chain is stronger financially than some of the outlets currently located in the tony shopping district. Tommy Hilfiger, for example, has a market capitalization of $974.1 million, well below 99 Cents Only Stores' market cap of $1.69 billion.

While analysts tend to have nothing but positive things to say about the company, not all of them are recommending that investors buy its stock. Among some, there is the impression that the recent run-up may have left the company a bit overvalued.

Mark Mandel, a senior retail analyst at Robinson Humphrey Co., is rating the stock at "outperform," the firm's average rating -- and hardly a call to snap up shares. Mandel believes the stock has benefited from news of a possible divestiture.

Still, like most analysts, Mandel said the company has strong long-term potential, and has made good moves into markets like Las Vegas where the concept is performing well. "Investors like the dollar-store concept, especially with the economy slowing," he said.

The company's balance sheet remains solid with almost no debt and shareholders' equity of $221 million. Cash and short-term investments total almost $62 million.