Trans World Entertainment CEO Discusses Q4 2010 Results - Earnings Call Transcript

Trans World Entertainment Corporation ( TWMC)

Q4 2010 Earnings Call

March 3, 2011 10:00 AM ET

Executives

Bob Higgins – Chairman and CEO

John Sullivan – EVP, CFO and Secretary

Analysts

William Myers – Miller Asset Management

Presentation

Operator

Good day ladies and gentlemen, and welcome to Trans World Entertainment Fourth Quarter 2010 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 follow at that time. (Operator instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host today, Bob Higgins, Chairman and CEO of Trans World Entertainment. Please begin.

Bob Higgins

Thank you, Sean. Good morning everyone. On the call with me today are Mike Honeyman, our President and Chief Operating Officer; and John Sullivan, our Chief Financial Officer. Thank you for joining us today as we share our 2010 results.

Our January business had a little impact on the comp sales, results we reported in our holiday sales press release. Fourth quarter comp store sales were down 6%. By category, our fourth quarter comp sales were flat in video and down 5% in music. However, I would like to point out that both categories outperformed the industry. The video game comp sales decreased 38% during the fourth quarter. As of year-end, a 127 of our stores carried games.

During last year’s fourth quarter, we were liquidating games in over 200 stores. Our other categories which include electronic, accessories, and trend were down 6% for the quarter. Positive comp sales in electronics were offset by declines in accessories and trend. For the fiscal year of 2010, total sales were $652 million and comp store sales decreased 4%. For the year, our comp sales in the video category were up 1% and represented 44% of our total business versus 42% in 2009.

Comp sales in music were down 4% and represented 36% of our total business compared to 35% in 2009. Comp sales in video games were down 38%. Games represented 6% of our total business compared to 9% in 2009. As I mentioned before, we carried games in 200 fewer stores this year than last year. Our other categories electronics, accessories and trend were flat for the year and represented 15% of our total business, the same percentage as 2009.

Now John will review our fourth quarter and annual results in more detail.

John Sullivan

Thank you Bob. Good morning. I will first address our quarterly results and then discuss our annual results. For the fourth quarter of 2010, the company recorded net income of $12.4 million or $0.38 per share. This compares to net income of $11.4 million or $0.36 per share in the fourth quarter of 2009 which included a one-time tax benefit of $12.6 million. For the quarter, income from operations improved $13.9 million to $13.3 million compared to a loss from operations of $600,000 in the fourth quarter of 2009.

Included in this year’s fourth quarter results is a non-cash charge of $2 million which is the result of recording an impairment charge against certain long lived assets. Included in last year’s fourth quarter results is an impairment charge of $3.6 million.

After adjusting for the impairment charge, our EBITDA for the quarter improved a 159% to $17.9 million this year, compared to $6.9 million last year. Our gross margin rate for the fourth quarter was 33.8% compared to 27.9% last year, an improvement of 590 basis points.

This resulted from better management in our gross margin in each category. In addition, this year we closed 60 fewer stores than last year, 73 stores versus a 133, and received broader vendor participation in funding markdowns related to liquidating inventory. We also had fewer markdowns in our game business than last year, when we exited the business in 200 stores. SG&A for the quarter was 26.1% of sales compared to 25.6% of sales last year.

Interest expense was $900,000 in the quarter versus $600,000 last year. The increase is primarily due to the amortization of loan origination fees related to the three year extension we signed in April. In addition, interest expense also increased due to a 55 basis point increase in our unused commitment fee. For the full fiscal year 2010, our net loss improved 27% to $31 million or $0.99 per share, compared to a net loss of $42.4 million or a $1.35 per share in 2009.

For fiscal year 2010, the loss from operations improved $25.4 million to $27.3 million, compared to a loss from operations of $52.7 million in 2009. Annual gross margin was 33.6% compared to last year’s 32.1%. SG&A dollars were $233.6 million that was 35.8% of sales, compared to $295.6 million or 36.3% to sales last year.

EBITDA for the year improved 58% to a loss of $14.2 million, compared to last year’s loss of $33.9 million. Interest expense was $3.4 million compared to $2.7 million last year. Looking at our year-end balance sheet for 2010, we finished the year with cash of $75 million, compared to $72 million last year. Our year-end inventory position was $234 million, a 12% decrease than last year’s $267 million.

During the fourth quarter, we closed 73 stores ending the year with 460 stores occupying 3.1 million square feet. This compares to 557 stores and 3.8 million square feet at the end of 2009.

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