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| TWMC > SEC Filings for TWMC > Form 10-Q on 6-Dec-2012 | All Recent SEC Filings |
6-Dec-2012
Quarterly Report
Overview
Management's Discussion and Analysis of Financial Condition and Results of
Operations provides information that the Company's management believes necessary
to achieve an understanding of its financial statements and results of
operations. To the extent that such analysis contains statements which are not
of a historical nature, such statements are forward-looking statements, which
involve risks and uncertainties. These risks include, but are not limited to,
changes in the competitive environment for the Company's merchandise, including
the entry or exit of non-traditional retailers of the Company's merchandise to
or from its markets; releases by the video, music and video games industries of
an increased or decreased number of "hit releases"; general economic factors in
markets where the Company's merchandise is sold; and other factors discussed in
the Company's filings with the Securities and Exchange Commission. The following
discussion and analysis of the Company's financial condition and results of
operations should be read in conjunction with the unaudited condensed
consolidated financial statements and related notes included elsewhere in this
report and the audited financial statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended January 28, 2012.
At October 27, 2012, the Company operated 376 stores totaling approximately 2.3 million square feet in the United States, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. The Company's stores offer predominantly entertainment products, including video and music. In total, these two categories represented 77% of the Company's sales for the thirty-nine weeks ended October 27, 2012. The balance of categories, including electronics, trend, video games and related products represented 23% of the Company's sales for the thirty-nine weeks ended October 27, 2012.
The Company's results have been, and will continue to be, contingent upon management's ability to understand industry trends and to manage the business in response to those trends and general economic trends. Management monitors a number of key performance indicators to evaluate its performance, including:
Sales and comparable store sales: The Company measures and reports the rate of comparable store sales change. A store is included in comparable store sales calculations at the beginning of its thirteenth full month of operation. Stores relocated/expanded or downsized are excluded from comparable store sales if the change in square footage is greater than 20%. Closed stores that were open for at least thirteen months are included in comparable store sales through the month immediately preceding the month of closing. The Company further analyzes sales by store format and by product category.
Cost of Sales and Gross Profit: Gross profit is impacted primarily by sales volume, the mix of products sold, by discounts negotiated with vendors and discounts offered to customers. The Company records its distribution and product shrink expenses in cost of sales. Distribution expenses include those costs associated with receiving, shipping, inspecting and warehousing product and costs associated with product returns to vendors. Cost of sales further includes obsolescence costs and is reduced by the benefit of vendor allowances, net of direct reimbursement of expenses.
Balance Sheet and Ratios: The Company views cash, net inventory investment (merchandise inventory less accounts payable) and working capital (current assets less current liabilities) as relevant indicators of its financial position. See Liquidity and Capital Resources for further discussion of these items.
RESULTS OF OPERATIONS
Thirteen and Thirty-nine Weeks Ended October 27, 2012
Compared to the Thirteen and Thirty-nine Weeks Ended October 29, 2011
The following table sets forth a period over period comparison of the Company's
net sales by category:
Thirteen weeks ended Thirty-nine weeks ended
-------------------------------------------------------------- -------------------------------------------------------------------
Comp
October 27, October 29, Store October 27, October Comp
2012 2011 Change % Sales 2012 29, 2011 Change % Store Sales
------------- ------------- --------- - ------- -- ------- ------------- - --------- --------- -- ------- --- -------------
(in thousands, except store count) (in thousands, except store count)
Net sales $ 91,769 $ 109,996 $ (18,227 ) (16.6 %) (2 %) $ 295,094 $ 349,483 $ (54,389 ) (15.6 %) 0 %
As a % of sales
Home Video 45.4 % 42.5 % 6 % 44.1 % 41.9 % 6 %
Music 30.9 % 34.6 % (14 %) 32.6 % 36.2 % (12 %)
Electronics 9.6 % 9.2 % 2 % 10.2 % 9.1 % 10 %
Trend 9.8 % 8.8 % 10 % 8.8 % 7.9 % 13 %
Video Games 4.3 % 4.9 % (20 %) 4.3 % 4.9 % (14 %)
Store Count: 376 440 (64 ) (14.5 %)
Total Square Footage 2,310 2,908 (598 ) (20.6 %)
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Net sales. Net sales decreased 16.6% and 15.6% during the thirteen and thirty-nine weeks ended October 27, 2012, respectively, as compared to the same periods last year. The decline in sales for the thirteen and thirty-nine week periods resulted primarily from a decrease in ending store count of 14.5% and a decrease in square footage of 20.6%, as the Company has closed or relocated larger less productive stores. While the Company believes a meaningful amount of sales was transferred to ongoing stores, there was a reduction of sales resulting from store closings.
Video:
Comparable store net sales in the video category increased 6% during the
thirteen and thirty-nine weeks ended October 27, 2012. The increase for the
quarter was driven by strong performance in our catalog business in both DVD and
Blu-ray and strong new releases, including The Avengers and Hunger Games. The
video category represented 45.4% of total net sales for the thirteen weeks ended
October 27, 2012 compared to 42.5% in the comparable quarter last year.
According to Warner Brothers Home Video, industry sales were down 5% during the period corresponding to the Company's third fiscal quarter.
According to Soundscan, total physical CD unit sales industry-wide were down 16% during the period corresponding to the Company's third fiscal quarter.
Electronics:
Comparable store sales in the electronics category increased 2% and 10% during
the thirteen and thirty-nine weeks ended October 27, 2012, respectively. The
increase was driven by expanded product lines and improved selection.
Electronics sales represented 9.6% of total net sales for the thirteen weeks
ended October 27, 2012 compared to 9.2% in the comparable quarter last year.
Trend:
Comparable store sales in the trend category increased 10% and 13% during the
thirteen and thirty-nine weeks ended October 27, 2012, respectively. The
increase was driven by expanded product lines and improved selection. Trend
product represented 9.8% of total net sales for the thirteen weeks ended October
27, 2012 compared to 8.8% in the comparable quarter last year.
Video Games:
Comparable store sales for video games decreased 20% and 14% during the thirteen
and thirty-nine weeks ended October 27, 2012, respectively. Currently, 106
stores, or 28% of the company's stores carry games. Games sales represent 4.3%
of total net sales for the thirteen weeks ended October 27, 2012 compared to
4.9% in the comparable quarter last year.
According to NPD Group, industry sales were down 24% during the period corresponding to the Company's third fiscal quarter.
Gross Profit. The following table sets forth a period over period comparison of the Company's gross profit:
Thirteen weeks ended Thirty-nine weeks ended
(in thousands) Change (in thousands) Change
----------------------------- ------------------- ------------------------------ - --------------------
October 27, October 29, October 27, October 29,
2012 2011 $ % 2012 2011 $ %
------------ ------------- -------- - -------- - ------------- -- ------------- - --------- - --------
Gross Profit $ 34,737 $ 40,652 $ (5,915 ) (14.6% ) $ 112,370 $ 128,933 $ (16,563 ) (12.8% )
As a % of sales 37.9 % 37.0 % 38.1 % 36.9 %
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Gross profit decreased 14.6% and 12.8% for the thirteen and thirty-nine weeks ended October 27, 2012 as compared to the comparable periods last year. The decline in gross profit is due to the decline in net sales. The decline in net sales was partially offset by a 90 and 120 basis point increase in the gross profit as a percentage of net sales due to higher margin rates in a majority of product categories in the thirteen and thirty-nine weeks ended October 27, 2012, respectively.
Thirteen weeks ended Thirty-nine weeks ended
(in thousands) Change (in thousands) Change
----------------------------- - ------------------- - ------------------------------ - --------------------
October 27, October 29, October 27, October 29,
2012 2011 $ % 2012 2011 $ %
------------ ------------- -------- - -------- - ------------- -- ------------- - --------- - --------
SG&A $ 36,365 $ 44,394 $ (8,029 ) (18.1% ) $ 111,702 $ 140,778 $ (29,076 ) (20.7% )
As a % of sales 39.6 % 40.4 % 37.9 % 40.3 %
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For the thirteen weeks ended October 27, 2012, SG&A expenses decreased $8.0 million, or 18.1% on the net sales decline of 16.6% resulting in an 80 basis point improvement in SG&A expenses as a percentage of net sales. The decrease is primarily due to lower overhead expenses associated with the decrease in store count, lower occupancy expenses in ongoing stores and effective expense management.
For the thirty-nine weeks ended October 27, 2012, SG&A expenses decreased $29.1 million, or 20.7% on the net sales decline of 15.6% resulting in a 240 basis point improvement in SG&A expenses as a percentage of net sales. The decrease is primarily due to lower overhead expenses associated with the decrease in store count, lower occupancy expenses in ongoing stores and effective expense management.
Interest Expense, Net. Net interest expense was $513,000 and $1.8 million during the thirteen and thirty-nine weeks ended October 27, 2012, respectively, compared to $774,000 and $2.4 million during the thirteen and thirty-nine weeks ended October 29, 2011. The reduction in interest expense was due to the impact of the Second Amended Credit Facility signed in May.
Income Tax Expense (Benefit). As of January 28, 2012 and January 30, 2011, the Company had incurred cumulative three-year losses. Based on these cumulative three-year losses and other available objective evidence, management concluded that a full valuation allowance should be recorded against the Company's deferred tax assets. The Company has significant net operating losses carry forwards and other tax attributes that are available to offset projected taxable income and current taxes payable for the year ending February 2, 2013. The deferred tax impact resulting from the utilization of the net operating loss carry forwards and other tax attributes will be offset by a reduction in the valuation allowance. As of January 28, 2012, the Company had a net operating loss carry forward of $174.9 million for federal income tax purposes and approximately $310 million for state income tax purposes that expire at various times through 2030 and are subject to certain limitations and statutory expiration periods.
For the thirteen and thirty-nine weeks ended October 27, 2012 and October 29, 2011, the Company's tax expense was associated with quarter-specific items attributable to interest accruals on related uncertain tax positions and state taxes based on modified gross receipts incurred for this thirteen week period.
For the thirteen weeks ended October 29, 2011 the tax benefit associated with the quarter-specific items is primarily attributed to the net impact of the interest accrual related to uncertain tax positions and state taxes based on modified gross receipts incurred during this period.
Thirteen weeks ended Thirty-nine weeks ended
-------------------------------------------- -- --------------------------------------------
(in October 27, October 29, October 27, October 29,
thousands) 2012 2011 Change 2012 2011 Change
------------- ------------- -- ---------- -- ------------- ------------- -- ----------
Loss before
income tax $ (2,141 ) $ (4,516 ) $ 2,375 $ (1,137 ) $ (14,244 ) $ 13,107
Income tax
expense
(benefit) 47 (5 ) (52 ) 141 90 51
-- ---------- -- ---------- -- - -------- -- -- ---------- -- ---------- -- - --------
Net loss $ (2,188 ) $ (4,511 ) $ 2,323 $ (1,278 ) $ (14,334 ) $ 13,056
-- ---------- -- ---------- -- - -------- -- -- ---------- -- ---------- -- - --------
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For the thirteen weeks ended October 27, 2012, the Company's net loss decreased $2.3 million to $2.2 million from a net loss of $4.5 million for the thirteen weeks ended October 29, 2011. The improvement in the net loss year over year was due to a higher gross margin percentage and a reduction in SG&A expenses partially offset by the decline in gross profit from lower sales.
For the thirty-nine weeks ended October 27, 2012, the Company's net loss decreased $13.1 million to $1.3 million from a net loss of $14.3 million for the thirty-nine weeks ended October 29, 2011. The increase was due to a higher gross margin percentage and a reduction in SG&A expenses partially offset by the decline in gross profit from lower sales.
LIQUIDITY
Liquidity and Cash Flows: The Company's primary sources of working capital are cash provided by operations and borrowing capacity under its revolving credit facility (See Note 6 for further details). The Company's cash flows fluctuate from quarter to quarter due to various items, including seasonality of sales and earnings, merchandise inventory purchases and returns and the related terms on purchases and capital expenditures. Management believes it will have adequate resources to fund its cash needs for the next twelve months and beyond, including its capital spending, its seasonal increase in merchandise inventory and other operating cash requirements and commitments. During Fiscal 2011, management carried out certain strategic initiatives in its efforts to reduce operating costs such as the elimination or curtailment of certain general and administrative expenses. Also, during the fourth quarter of Fiscal 2011, management closed 50 stores. Management has continued many of the initiatives begun in 2011, as part of the execution of its operating plan for 2012; including a focus on the operation of a core base of stores, improved product selection based on customer preferences and industry changes, as well as further streamlining of its operations. An additional 15 stores closed in the thirty-nine weeks ended October 27, 2012. The Company will continue to evaluate its store base in consideration of lease terms, conditions and expirations, including considering new and relocated stores. The Company anticipates closing 50% fewer stores during the fourth quarter of 2012 than closed during the fourth quarter of 2011.
The Company does not expect any material changes in the mix (between equity and debt) or the relative cost of capital resources.
On November 27, 2012, Record Town, Inc., a New York corporation and wholly-owned subsidiary of Trans World Entertainment Corporation completed the sale of real property owned by Record Town, Inc. in Miami, Florida to 501 Collins Owner, LLC. Record Town, Inc. received approximately $30.0 million in cash at closing as consideration. The Company expects to recognize a gain of over $20 million before taxes on the sale of the property.
On November 27, 2012, Trans World Entertainment Corporation, Wells Fargo Bank, National Association (the "Administrative Agent") and certain other parties to the Amended and Restated Credit Agreement, dated April 15, 2010, entered into a consent pursuant to which the Administrative Agent and certain required lenders agreed to consent to the use of a portion of the proceeds received from the sale of real property owned by Record Town, Inc. to pay a special cash dividend.
On November 27, 2012, our board of directors declared a special cash dividend of $0.47 per common share, payable Wednesday, December 26, 2012, to shareholders of record at the close of business on Monday, December 10, 2012. The ex-dividend date will be the close of business on December 6, 2012. The total special dividend payout is estimated to be $15 million.
Thirty-nine weeks ended Change
------------------------------ ---------
October 27, October 29,
(in thousands) 2012 2011 $
------------------------- ------------- ------------- ---------
Operating Cash Flows $ (24,386 ) $ (53,547 ) $ 29,161
Investing Cash Flows (1,965 ) (1,638 ) (327 )
Financing Cash Flows (2,232 ) (1,010 ) (1,222 )
Cash and Cash Equivalents 59,932 19,017 40,915
Merchandise Inventory 178,332 223,528 (45,196 )
Working Capital 162,565 146,816 15,749
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The Company had cash and cash equivalents of $59.9 million at October 27, 2012, compared to $88.5 million at January 28, 2012 and $19.0 million at October 29, 2011. Merchandise inventory was $77 per square foot at October 27, 2012, the same level as October 29, 2011.
Cash used by operating activities was $24.4 million for the thirty-nine weeks ended October 27, 2012. The primary use of cash was a $28.1 million seasonal reduction of accounts payable, partially offset by a $13.0 million reduction in inventory. The Company's merchandise inventory and accounts payable are influenced by the seasonality of its business. A significant reduction of accounts payable occurs annually in the fiscal first half, reflecting payments for merchandise inventory sold during the prior year's holiday season.
Cash used by investing activities, which consisted entirely of capital expenditures, was $2.0 million for the thirty-nine weeks ended October 27, 2012.
Cash used by financing activities was $2.2 million for the thirty-nine weeks ended October 27, 2012 for payments on long term debt and capital lease obligations. The Company paid off the remaining obligation of $1.7 million related to a mortgage loan on real estate during the thirty-nine weeks ended October 27, 2012.
In May 2012, the Company entered into a $75 million credit facility ("Second Amended Credit Facility") which amended its previous $100 million credit facility ("Amended Credit Facility"). The principal amount of all outstanding loans under the Second Amended Credit Facility together with any accrued but unpaid interest, are due and payable in May 2017, unless otherwise paid earlier pursuant to the terms of the Second Amended Credit Facility. Payments of amounts due under the Second Amended Credit Facility are secured by the assets of the Company.
The Second Amended Credit Facility includes customary provisions, including affirmative and negative covenants, which include representations, warranties and restrictions on additional indebtedness and acquisitions. The Second Amended Credit Facility also includes customary events of default, including, among other things, material adverse effect, bankruptcy, and certain changes of control. The Second Amended Credit Facility also contains other terms and conditions, including covenants around the number of store closings and allows for the payment of dividends with certain restrictions. It also changed the formula for interest rates. The Company is compliant with all covenants.
The availability under the Second Amended Credit Facility is subject to limitations based on sufficient inventory levels. Based on inventory levels at the end of the quarter, the availability under the Second Amended Credit Facility was $64.4 million as of October 27, 2012. As of October 27, 2012, the Company didn't have any borrowings outstanding under the Second Amended Credit Facility and had $645,000 in outstanding letter of credit obligations. The Company did not have any borrowings during the thirty-nine weeks ended October 27, 2012.
As of October 29, 2011, the Company didn't have any borrowings under the Amended Credit Facility and had $1.2 million in outstanding letter of credit obligations. The Company did not have any borrowings during Fiscal 2011.
Capital Expenditures.During the thirty-nine weeks ended October 27, 2012, the Company made capital expenditures of $2.0 million. The Company plans to spend under $4.0 million for capital expenditures in fiscal 2012.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financial statements. Management continually evaluates its estimates and judgments including those related to merchandise inventory and return costs, valuation of long-lived assets, income taxes and accounting for gift card liability. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations included in the Form 10-K for the year ended January 28, 2012
includes a summary of the critical accounting policies and methods used by the
Company in the preparation of its condensed consolidated financial statements.
There have been no material changes or modifications to the policies since
January 28, 2012.
Recently Issued Accounting Pronouncements:
There are no recently issued accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows.
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