Trans World Entertainment Corporation (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

Presentation

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.

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