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Trans World Entertainment Corporation (NASDAQ:TWMC)

Q3 2011 Earnings Call

November 17, 2011 10:00 AM ET

Executives

Bob Higgins – Chief Executive Officer

Mike Honeyman – President and COO

John Sullivan – Chief Financial Officer

Analysts

William Myers – Miller Asset Management

Operator

Good day, ladies and gentlemen. And welcome to Trans World Entertainment Third Quarter 2011 Results Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

As a reminder, today’s conference is being recorded. I would now like to turn the conference over to your host today, Mr. Bob Higgins, Chairman and CEO. Please begin.

Bob Higgins

Thank you, Sean. Good morning. On the call with me today is Mike Honeyman, our President and Chief Operating Officer, and John Sullivan, our Chief Financial Officer. Thank you for joining us as we discuss our third quarter results.

I’m pleased to announce that for the seventh consecutive quarter, we’ve driven improvement in our operating results. Our net loss for the third quarter improved $11.6 million to $4.5 million, a 72% improvement over last year. This followed a $17.4 million year-over-year improvement in the net loss for the first half. Year-to-date, we’ve improved our net loss by $29 million or 67%.

Total sales in the third quarter decreased 15% to $110 million as our average stores and operations declined 18%. I am very pleased to say that our comp store sales for the quarter were flat to last year.

Now let me touch on our performance by category. Video comp sales decreased 2%, Comps sales in our top 50 increase 25% during the quarter. Top 50 sales were driven by new releases including X-Men, Thor, Bridesmaids and blue release of Star Wars. Video represented 42% of our business during the quarter versus 44% last year.

Music comp sales declined 7%, comp sales in our top 50 increased 6% during the quarter. The top 50 performance was driven by the sales of the latest releases from Little Wayne and Jay Z, Kanye West, and the continued momentum from the first quarter release by Adele. The music category represented 35% of our business for the quarter compared to 36% last year.

Electronic comp store sales increased 16%, and electronic sales represent 9% of our total business for the quarter compared to 8% last year.

Trend comp store sales increased 27%. Trend sales represented a 9% of our total business in the quarter compared to 7% last year.

Video games comps store sales were down 4%, game sales represent 5% of our business, the same as rate of last year. We have games in 121 stores which represents 28% of our chain.

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

John Sullivan

Thank you, Bob. Good morning. As Bob mentioned, our net loss for the quarter improved $11.6 million to $4.5 million or $0.14 per share and a 72% improvement over last year’s net loss of $16.1 million or $0.51 per share.

Our EBITDA loss improved $10 million for the quarter to $2.4 million, an 81% improvement over last year’s EBITDA loss of $12.4 million.

Our gross margin rate for the quarter increased 290-basis points to 37% of sales from 34.1% last year. The increase in gross profit as a percentage of sales was due to higher margin rates across all of our product categories and the leveraging of distribution and freight expenses.

SG&A expenses were $43 million, a reduction of 24% on a total sales decline of 15%, resulting in a 460-basis point decrease as a percentage of sales to 39.1% this year from 43.7% last year. The decrease in SG&A was driven by the closing of underperforming stores and the continued focus on effective expense management.

Net interest expense was $774,000 in the quarter versus $927,000 last year.

The company has not required any borrowings under its line of credit during the first nine months of this year, and therefore we ended the quarter without any borrowings outstanding under the line of credit. Last year we ended the quarter with $8.6 million in borrowings outstanding in the credit facility.

In addition, the company more than tripled its cash balance from the prior year. We ended the quarter with cash of $19 million, compared to $6.1 million last year.

Year-over-year, we have lowered our inventory by $47 million. Our quarter-end inventory position was $224 million, 17% below last year’s $271 million.

On a per-square-foot basis, this is $77 of foot compared to a $76 last year.

We ended the quarter with 17% fewer stores at 440 and 2.9 million square feet in operation, versus last year’s 533 stores and 3.6 million square feet.

Now I’ll turn it back to Bob.

Bob Higgins

Thank you, John. We are very encouraged by our third quarter performance. Our flat comp demonstrates our ability to offset declines in our largest categories, video music with strong comp increases and our emerging categories of electronic and trend. Our electronics and trend categories, which combined represented 18% of our business, had a 22% comp increase in the quarter as we continue to strengthen assortment in these categories.

We continued to improve our operating results during the third quarter. Year-to-date, we’ve reduced our net loss by $29 million or 67%. In addition, the year-to-date EBITDA loss improved $25 million or 78%. In fact, on a trailing 12-month basis, we generated a positive EBITDA of $8.7 million.

The improvement in operating results has been driven by continued higher gross margin rate and reductions in operating expenses. The improvement in gross margin as a percentage of sales reflects improved margin rates across all merchandise categories and the leveraging of our distribution and freight expenses.

We’ve been able to reduce operating expenses by challenging each and every component of our business to improve and become more efficient, while at the same time investing in people, technology and merchandise to support our future. We continue to streamline operations, improve processes and reduce expenses, as demonstrated by the continued leveraging of our SG&A expenses.

As John mentioned, we ended the quarter with cash of $19 million and without any borrowings on our line of credit. In fact, we have not had any borrowings outstanding on our line of credit for the entire year and will not have any for the remainder of this fiscal year.

While working to improve our results, we continue to focus on the management of inventory and cash. We made significant progress this year and our results reflect our accomplishments, but we still have a lot more to accomplish.

As we head into the all-important fourth quarter, our strategy is to focus on continued improvement in our performance through delivering better value and an exceptional shopping experience to our customers, improving performance in each of our product categories, controlling expenses and driving additional bottom line contribution. We’re moving in the right direction and we look forward to the fourth quarter.

Now I’d like to open up the call to questions. Shawn?

Question-and-Answer Session

Operator

Thank you. (Operator instructions). I do have a question from Will Myers with Miller Asset Management. Please go ahead.

William Myers – Miller Asset Management

Hi. Congratulations. Yes. Do you believe that this quarter represents somewhat of a new run rate for non-holiday quarters? Can we begin to think of it that way? How are you thinking about it?

Bob Higgins

Well, we’re definitely thinking about it that way and we feel – it’s hard to predict the third quarter next year, but we would expect improvement.

William Myers – Miller Asset Management

Okay. And can you talk a little bit more about how you see holiday sales and what kind of expectations you might have for the fourth quarter?

Bob Higgins

Yes. This is going to be one of the strangest holidays that I’ve ever seen with Gap opening all of their stores on Thanksgiving and with Wal-Mart starting their specials at 10:00 on Thursday evening and a bunch of stores opening at midnight. So it’s hard to predict, but we expect us to have a very good fourth quarter where we’re ready for it product wise. We’ve got value for the customer. We think it will be a value season and so we are ready for the fourth quarter. But to say – and we’ve got a fairly inexpensive item and so we think our item will be very well received this fourth quarter.

William Myers – Miller Asset Management

Okay. And do you think that the improvement in the third quarter and your hopes for the fourth quarter, how much of that is related to how consumers are perceiving the economy and how much of it is just you feel you’ve gotten the right mix of merchandise in your stores?

Bob Higgins

Well, I think – we don’t know because we’ve been improving quite a bit. We don’t know really the effect of the economy on us, but I know it’s got to be having some effect on us. We’ll see that at the end of the month, how things will slow down and when people get their pay on the first of the month. It really picks up more than it’s ever done. And so the economy definitely is affecting us. We just don’t know how much, but we don’t think – in the fourth quarter we think we’ll be someone that does benefit even with the economy being in very difficult shape.

William Myers – Miller Asset Management

Okay. Well thank you for taking my questions.

Operator

I’m not showing any further questions in the queue.

Bob Higgins

Okay. Well I’d like to just thank everybody – thank everyone for their dedication to our company, all our Trans World associates, customers, vendors and of course you our shareholders and I’d like to wish everybody a very happy holiday season and also a very happy Thanksgiving. Thank you very much for your time today, Shawn, and everyone out there.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the conference. You may now disconnect. Good day.

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