DAYTON, Ohio -- With a shoestring operation crammed into the corner of a giant warehouse, Rex Stores Corp. is challenging the basic principles of electronics retailing.
Its 228 stores in 35 states don't always sell the newest and niftiest gadgets. Rex's top executives don't use e-mail or even personal computers. And to cut the company's tax rate, they made an improbable investment: in coal processing.
Yet this remote, low-key business has been one of the most consistently profitable electronics sellers in the nation. And in the nascent world of selling electronic goods online, Rex is taking 50 to 100 orders a day, making it one of the largest retail players. With a lean corporate structure, Rex quickly put together a Web site this year that offers as many as several hundred products, from a $39.99 Whistler radar detector to a $269.99 Sharp TV. Coming soon: Big-screen TVs, the fastest-growing item in the television business.
The Web market is about to get much tougher. In the next few weeks, Best Buy Co. and Tandy Corp., owner of Radio Shack, plan to begin selling products on their Web sites, joining Circuit City Stores Inc. and Amazon.com, the Web giant, which both began selling electronic goods online this month.
To the coming onslaught, Stuart Rose, Rex's 44-year-old chairman and chief executive officer, says, "We're making money on our site right now, which not everyone can say."
Rex's strategy: cherry-picking overstocks and returned products, buying them from manufacturers sometimes for dirt-cheap prices. "That's the secret in this business," says Rex President Larry Tomchin, 72. "It's not the selling. It's the buying."
When Aiwa produced 10,000 more units of a five-speaker set than it had orders for, Mr. Tomchin snapped up half of them for $40 each; Rex sells them for $89.99. At the no-frills Rex stores, managers and clerks know every product on the floor, and even unload freight trucks and load customers' cars.
No product is sacred, and Rex will pull the plug if costs rise above the formula. When profit margins on computers became too slim three years ago, for instance, it stopped selling them chainwide. The following year Rex's revenue fell 4%, but its gross profit margin grew two percentage points.
Mr. Rose has repeatedly focused on profit ahead of growth since he acquired the four-store chain in Dayton two decades ago. After the investment-banking firm he worked for was hired to sell Rex in 1980, Mr. Rose, then 24, decided he wanted to buy Rex himself and inflated his age, telling the owner he was 28 to keep from being dismissed as too youthful a prospect. He also asked Mr. Tomchin to stay, keeping the 20-year Rex veteran on board.
Despite the alluring growth of the suburbs, Mr. Rose stuck to cities with populations of 50,000 to 100,000, much as Wal-Mart Stores Inc. did early on. Now only 80 Rex stores are within a 30-minute drive of superstore rivals. More typical are locations in Bay City, Mich.; Ithaca, N.Y.; and Tupelo, Miss.
Rex's fortunes could reverse if the economy begins to sour; when pinching pennies, consumers quickly forgo new TVs and other electronic toys. Also, Best Buy and Circuit City have experimented with smaller stores in cities with populations under 200,000, although they have made no commitment to expand into them.
But lately investors, excited by strong sales gains and new digital products, have bought up shares in electronics retailers. Rex's stock price has more than tripled since mid-April, closing at $34.0625, up $1.5625, in New York Stock Exchange composite trading Tuesday.
Rex started carrying higher-end Sony and Maytag brands earlier this year, hired a new advertising agency to update its image and plans to soon sell digital wireless phones. That's a high-growth staple at Rex rivals, but it's just now becoming useful in Rex's markets. Ten store openings are planned this year, and 30 in 2000.
In its first quarter, ended April 30, Rex's profit doubled to $2 million, as sales rose 12.6%, to $99.1 million. Benefiting from this month's heat wave in the East, Rex had to keep its Dayton distribution warehouse open through the July Fourth holiday to ship air conditioners.
Rex is also getting a boost from a $3 million investment made last year in a Kentucky firm that developed a process to convert previously unusable coal into fuel for electric-generation plants. "We were nervous," says Mr. Rose, who toured the coal plants before investing in them.
But the investment, which gives Rex a tax break under a federal program designed to reduce the nation's dependence on oil, cut Rex's tax rate to 25% from 39.5% for eight years, producing $5 million in annual savings. Royalties will produce another $3 million a year for Rex.
In time, Rex may need the extra funds to develop its Internet business. Early this year, the company's 29-year-old internal auditor, John Daugherty, learned Web programming and put together a site. Today, he administers rexstores.com with help from two other staffers, including the corporate phone receptionist. Each afternoon, one of them walks the day's order list to the warehouse, where shipments are prepared for the evening's UPS pickup.
In April, the company started offering products on popular auction sites, including eBay, Yahoo! and Amazon, for 10% to 15% less than on its own site. Mr. Daugherty puts more than 100 products up for auction each day.
This market is still in its infancy. Big manufacturers like Sony and Pioneer don't even allow their products to be sold online. And Circuit City and Best Buy may quickly overrun Rex in volume on the Web, but possibly with greater risk to their conventional sales. Since computer usage is heavier in urban areas than in small towns, Mr. Rose says he believes the Web will boost Rex's sales overall rather than cannibalize them.
"They have less to risk to have an Internet business than any national electronics chain," says Lewis Alton, managing partner of L.H. Alton & Co., a San Francisco investment-research firm. "They can appeal to the urban market and still serve their base in smaller communities with the stores."