Trans World CEO Discusses Q2 2010 Results - Earnings Call Transcript

Aug.19.10 | About: Trans World (TWMC)

Trans World Entertainment Corporation (NASDAQ:TWMC)

Q2 2010 Earnings Call Transcript

August 19, 2010 10:00 am ET

Executives

Bob Higgins – Chairman and CEO

John Sullivan – EVP, CFO and Secretary

Analysts

William Myers – Miller Asset Management

Mark Kaufman – Rafferty Capital Market

Tom Spiro – Spiro Capital Management

Operator

Good day ladies and gentlemen, and welcome to the second quarter Trans World Entertainment conference call. At this time, all participants are in a listen-only mode. Later we will have a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded.

(Operator instructions) I would now like to introduce your host for today’s conference, Mr Bob Higgins, Chairman & CEO. Mr Higgins, you may begin.

Bob Higgins

Thank you Nicky. Good morning everyone. On the call with me today are Mike Honeyman, our president & chief operating officer; and John Sullivan, our chief financial officer. Thank you for joining us today as we discuss our second quarter results. We will take questions following our comments.

Total sales in the second quarter decreased 18% to $135.8 million. Comp store sales decreased 2%. Our net loss for the second quarter was $15.8 million or $0.50 per share compared to $17.8 million or $0.57 per share last year. As I mentioned, overall quarter two comp sales declined 2%. Comp sales in music were down 3% for the quarter. US physical TV sales were down 22%. The music category represented 38% of our business, the same as last year.

Video sales increased 3% on a comp basis in quarter two, and for the quarter, the industry was down 9%. The comp increase was driven by the performance of Blue Ray as we are starting to see broad acceptance of the format. Video now represents 42% of our business, up from 41% last year.

Comparable store sales in our game category decreased 37%, and represented 5% of our business as compared to 7% last year. The negative comp sales in video games were due to a reduction in the number of stores carrying games. During physical 2009, the company eliminated the game category in over 200 stores. At the end of the second quarter, 135 of our stores carried games compared to 347 a year ago.

Video game comp sales in our 135 stores carrying games going forward were down 21%. Comp store sales for electronics accessory and trend increased 7% on a combined basis, and represented 15% of our business in the quarter as compared to 14% last year.

John will now take you through the financial results for the second quarter. John?

John Sullivan

Thank you Bob, good morning. Our net loss for the quarter was $15.6 million or $0.50 per share. Last year, our net loss was $17.8 million or $0.57 per share. Our gross margin rate for the quarter decreased 180 basis points to 33.7% from 35.5% last year. The decrease in margin rate was due to our pricing strategies, lower vendor allowances, and higher clearance markdowns.

SG&A expenses were $57.8 million, a reduction of 20% on the sales decline of 18%, lowering the percent of sales 100 basis points to 42.5% from last year’s 43.5%. EBITDA was a loss of $12 million in the quarter versus $13.3 million last year. Net interest expense was $800,000 in the quarter compared to $700,000 last year.

We ended the quarter with cash of $10.5 million and zero borrowings on our line of credit as compared to cash of $7.1 million and borrowings of $28 million. Year over year we have lowered our inventory by $83 million. At quarter end, the inventory position was $237 million versus last year’s $320 million. On a square foot basis, this was $67 a foot versus $72 a foot last year.

We are very focused on managing our working capital needs in relation to the business trends, and continue to maintain a strong financial position. During the quarter, we closed 10 stores and did not open any new stores. We ended the quarter with 534 stores in operation and square feet totalling $3.6 million versus last year’s 697 stores in square feet totalling $4.5 million.

I will now turn it back to Bob to complete our comments.

Bob Higgins

Thank you John. We made progress in the first half of the year. The video category, which represents 44% of our business, had a 2% comp increase for the first half of the year. The music category, which represents 37% of our business, was down 2% for the first half. With our strategies we are implementing during the third quarter, the comp trend in music should continue to improve. The initiative we implemented for these two categories have helped stabilize our sales and increase our market share despite operating 18% pure stores than last year.

In addition, our electronics accessories and trend categories, which represent 14% of our business, had a 3% comp increase in the first half of the year. When excluding games, combined our top three categories representing 95% of the business had a 1% comp increase for the first half of the year. Our number one goal for 2010 is to deliver positive comps. As we move into the second half of the year, especially the fourth quarter, we expect to achieve our goal.

We continue to leverage our SG&A expenses, which helped us reduce our EBITDA loss by $3.5 million in the first half of this year versus first half of last year. As John mentioned, we ended the quarter with cash of $10.5 million and zero borrowings on our line of credit as compared to cash of $7.1 million and borrowings of $28 million last year. We are moving in the right direction and look forward to the remainder of 2010.

I would now like to open up the call for any questions anyone has. Nicky?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from William Myers from Miller Asset Management. Your line is open.

William Myers – Miller Asset Management

Thank you. Yes I appreciate the good work with the very slight decline in same-store sales. I am wondering if you could discuss seasonality a little bit. You do an inventory build for the holiday sales season, does that come in the quarter we ended or does that actually come in the same quarter as the sales?

Bob Higgins

No that will start in the third quarter. We start some minor build in September, we have a little more in October, and quite a bit more than September, and then we get to our peak level in the November period. So it actually is a stage process, which allows us to manage our inventory properly.

William Myers – Miller Asset Management

Okay and then you said that Blue Ray high definition-type video was a bright spot. So are you planning to build more inventory in that category or how are you seeing the various categories as you go into the second half of the year?

Bob Higgins

As we see from a retail point of view in the categories, if you look at music, the average price continues to come down; the same thing is true in DVD. So we do not expect to have excess inventory or more inventory than a year ago on a store for store basis than those, and we improved our inventory management. So the key thing there is to look at how many units we are carrying, and that is what we will be focusing on.

As far as Blue Ray, there will be some build up in that category because the studios have been aggressive at building that category, and also taking down the retail price, so they make it more affordable. So we think it is going to be a good category for the holiday season.

William Myers – Miller Asset Management

Okay and just one last follow-up then, so with prices, you said all these categories CD, DVD, Blue Ray the prices are coming down. So when you mentioned an inventory amount, you actually have more units than you would say a year ago for the same $1 million worth of inventory, is that correct?

Bob Higgins

Yes, that is true.

William Myers – Miller Asset Management

Okay, thank you, that is all from me.

Bob Higgins

Okay, thank you very much.

Operator

Our next question comes from Mark Kaufman from Rafferty Capital Market.

Mark Kaufman – Rafferty Capital Market

Good morning. Did the movie gallery liquidations, do you think they had some impact on your business, and I believe that they are pretty much done with winding down and are you seeing any improvement as that plays out? Any thoughts, if we are going to see continuation of well excess product coming to the market, I think in all likelihood we are going to see blockbuster close stores and some fashion in the near term.

Bob Higgins

Yes, we always feel we get a benefit from competitors closing at first [ph] or liquidating their store and then they are gone. But sometimes with something like a video rental store, they did probably about 10% of their business in sell-through and more in rental, it is sort of hard for us to tell yet, but I think we will have a better feel as we go through the rest of the year.

Mark Kaufman – Rafferty Capital Market

I suppose it would be nice once they are done ultimately.

Bob Higgins

Yes, I mean, you always get more benefit no matter who it is when they are not around, and we sort of read the market similar to what you do I think.

Mark Kaufman – Rafferty Capital Market

Thank you.

Bob Higgins

Thank you.

Operator

(Operator instructions) Our next question comes from Tom Spiro from Spiro Capital Management. Your line is open.

Tom Spiro – Spiro Capital Management

Good morning.

Bob Higgins

Good morning.

Tom Spiro – Spiro Capital Management

Bob, I think in your opening comments you said, if I am paraphrasing correctly, that you expected Q3 comps in the music category to be up for the company and to the strategies that you would be employing, I wondered if you could elaborate on exactly what those strategies are.

Bob Higgins

We have got some various tests and we have done that test for about 100 stores in the start of last year, and we are offering better prices to the consumer, and that test was successful, and that is why you will see with much less stores we are having a positive comp versus the industry, which is off considerably 22%, we are off 3%. And so our strategies for the third quarter, we are doing a little different change to that strategy, and it just started, it started Sunday actually and it is 250 stores instead of 100 stores. So we would expect that to have an impact on it.

Not that we have given the information but there is pretty accurate information in one of Ed Christman’s article from Billboard, which was read I think about a month ago. He got his information from – well he got it definitely from people other than us and probably from vendors.

Tom Spiro – Spiro Capital Management

And what are your thoughts with respect to further store closings?

Bob Higgins

We always feel that we have to – we have got a great deal of our leases that do expire at the end of the year, and it is something that we are always looking at carefully, and we believe if we have got a non-productive store and we cannot make the right rent deal to keep it open, we are better off closing it.

Tom Spiro – Spiro Capital Management

Sure but in past years there had been rather sizeable closings as we ended the year, is that on the radar screen again or is that unlikely?

Bob Higgins

We really never know until we get right down to the end of the year and because there is our fourth quarter it is such a contributor to sales, it is very difficult for us to tell at this time of the year what the closings will be.

Tom Spiro – Spiro Capital Management

Has the Carson closed the distribution facility?

Bob Higgins

It is not closed; it is operating with a skeleton crew of about 30 people. It was operating with how many before that John?

John Sullivan

138.

Bob Higgins

Yes we had 138 up till about 10 days ago, two weeks ago.

John Sullivan

Yes.

Bob Higgins

And we are now down to 32. And so we will run a skeleton crew there until – even a smaller crew than that probably or that size crew through the end of the year, and then we will close it totally.

Tom Spiro – Spiro Capital Management

Were there any costs, any significant costs associated with that in the second quarter results?

Bob Higgins

There was about $350,000 in cost that we were allowed to take, and we were not allowed to take any other costs at this time. There will be some minor costs at the end of the year.

Tom Spiro – Spiro Capital Management

Thank you.

Bob Higgins

Thank you.

Operator

I am showing no further questions at this time.

Bob Higgins

Okay, I would like to thank everybody for their time this morning, and we look forward to talking to you when we have the result of our third quarter. Thank you very much and thank you Nicky.

Operator

You are welcome. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the conference and you may now disconnect. Everyone have a wonderful day.

Bob Higgins

Thank you.

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