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

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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.