Friday, January 04, 2008

Large 99 Cents Only Stores (NDN) Holder Akre Capital Suggests Reorganization and Buybacks

In a 13D filing on 99 Cents Only Stores (NYSE: NDN), Akre Capital disclosed a 13.4% stake (9,392,329 shares) in the company and disclosed a letter suggesting the company consider alternatives to improve shareholder value including: discontinuing certain business operations, repurchasing stock, and refocusing the business on maximizing profitability versus expansion.
Akre Capital changed their filing status from 13G 'passive' to 13D due to their activist stance.

Akre Capital said they've been shareholder of the company for approximately three years.

A Copy of the Letter:

Dear Director:

We are contacting you in your capacity as a Director of 99 Cents Only Stores,Inc. Akre Capital Management, LLC and certain of its affiliates, own more than13% of the company's outstanding shares. We urge you to consider the contents of this letter carefully.

Akre Capital has been a shareholder of the company for approximately three years. We are well informed, having followed the company closely and visited more than 50 stores in four states. We see significant potential for operating and capital improvements, but we are increasingly concerned about the ability of the current management team to deliver on that potential.

We believe that management is charged with two primary responsibilities: 1)restoring the company to a healthy level of profitability, and 2) making prudent capital investment decisions with the company's existing asset base, operating cash flow, and balance sheet reserves. So far, after nearly three years of tenure, management's record is poor on both of these accounts.

1) Operating profits have declined each year, and the company is now near break even with no evidence of a rebound. Further, despite repeated requests from investors, management is unable or unwilling to produce a plan to increase margin and profit. They have not quantified key margin opportunities, provided a timetable with major milestones, or identified long term financial goals.

2) Management has made several important strategic and capital investment decisions for the company, including staying in Texas, accelerating store growth, and retaining excess cash. To us, these decisions appear misguided.

Management has made decisions that complicate an already difficult turnaround by growing sales volume over a stressed distribution, information, and management infrastructure. To achieve this growth, management is foregoing low risk investment in deeply discounted share repurchases in favor of investment in stores and markets with unknown economics.

In contrast, a conventional turnaround plan prescribes halting all growth, exiting unprofitable products and divisions, and focusing full attention on restoring profitability to the remaining business. Balance sheet liquidity is deployed by repurchasing depressed stock, and growth resumes when it can be funded out of restored operating cash flow.

This time-tested conventional plan seems ideal for the company, so management should have a compelling argument for why they have chosen an alternative and more speculative plan. Despite repeated requests from investors, management is unable or unwilling to explain its reasoning in quantifiable terms. Management's responses point to anecdotal evidence instead of rigorous financial analysis, leaving the impression that analysis was minimal, and that other viable courses of action have never been seriously considered.

We are not alone in making these observations. Listening to recent quarterly conference calls reveals similar concerns from other investors. In addition,the company's stock is trading near book value implying that investors expect value will be destroyed. This is effectively a "no confidence" vote in management and their strategy.

It is essential that confidence in management be restored. Shareholder concerns are well founded, and need to be addressed promptly. The company has too much potential to be allowed to languish any longer. If this management team is up to the challenge, they need to begin executing and communicating clear and logical thinking about creating shareholder value. As such, we have four specific requests:

1) We request that management and the Board formally re-evaluate their key decisions - to stay in Texas, open new stores, and retain excess cash - with thorough financial analysis and the goal of maximizing intrinsic value per share. Management has been unable to explain these decisions to shareholders which leads us to question the rigor of the oversight provided by the Board. Further, these decisions should be re-evaluated given the lack of operating progress to date, and the increased attractiveness of repurchasing stock at the current price. In fact, it is hard for us to envision any scenario where investing in unproven new stores is a better use of resources than repurchasing company stock priced near book value.

2) We request that the company provide the investment community with adequate explanation and financial disclosure to legitimize their key strategic and capital investment decisions noted above.

3) We request that the company provide the investment community with its turnaround plan, including specific operational and financial objectives, clear benchmarks, and a defined timetable.

4) We request that management (i) commit to being held accountable to this turnaround plan and (ii) clarify what alternative course(s) of action will be pursued to create value if the plan stalls.

We believe that these requests are reasonable, and that this is information that any business owner should expect from the individuals appointed to oversee that business. We assume that management can fulfill our requests at a special event held soon after the December quarter results are released.

We await your response.


Charles T. Akre

Brian E. Macauley

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