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DVD Up, CD Down as Trans World Sputters

24 May, 2007 By: Erik Gruenwedel

A 21% drop in same-store (open at least a year) sales of music CDs contributed to Trans World Entertainment posting a first-quarter (ended May 5) loss of $9.1 million, compared to a loss of $7.1 million during the same period last year.

Revenue for the Albany, N.Y.-based parent of the f.y.e. and Suncoast retail stores dropped 1% to $286.3 million, compared to $288.5 million last year.

Company officials cited the ongoing decline of physical CD product and the lack of new releases for the 32% drop in same-store music sales among Trans World's top 50 stores.

Music sales represented 44% of Trans World's revenue down from 52% last year.

By comparison, DVD sales increased 6% despite a weakness in new releases. The lack of new releases caused a 16% decline in same-store DVD sales among Trans World's top 50 retail locations.

“The strength in DVD catalog continues to drive this business as the studios recognize our ability to differentiate ourselves from the competition,” said James Litwak, president and COO in an analyst call. “DVD now represents 38% of our business, compared to 31% last year.

Growing catalog DVD sales helped the company increase gross margins to 36.5% from 34.8% last year. Executives said music's decline would result in expanded shelf space for DVD, electronics and boutique items.

Electronics, which includes MP3 players, mobile phones and accessories, and boutique sales increased 11% on a combined basis and represented 11% of quarterly business, compared to 9% last year.

Litwak said video hardware and software was the most disappointing performing category with same-store comps dropping 12%, compared to last year.

“This is a category we plan on growing and should be further along in growth,” he said.

Robert Higgins, chairman and CEO of Trans World, said the company's small market share in the game business essentially directed available product to other major game retailers.

“From our perspective, we have to become more important in this category and it is a problem we will fix,” Higgins said.

Trans World, which by the end of the quarter, with the exception of Suncoast stores, will transition all retail locations to the f.y.e. brand, has launched a 25-store prototype to better showcase its entertainment products, including DVD.

Higgins said the company would continue to evaluate its Mix and Burn music CD program testing in 32 stores, the results thus far he described as “inconclusive.”

“We want the stores to increase their burns by about 25% to 30%,” he said.

Trans World operated 972 stores in the quarter, down 10% from 1,107 the company operated following the Musicland acquisition.

During the financial call, several investors decried millions in compensation and related perks (stock options, corporate jet) awarded Higgins, his executive team and board members.

“It does seem out of whack for a company that has had negative to flat [same-store] comps for six plus years to have a corporate jet,” said one investor.

Higgins countered that no bonuses had been given this year or last year. The CEO said he took Southwest Airlines on a recent flight to Las Vegas.

Higgins, who founded Trans World and owns more than 16 millions shares of stock (53.6%), said he was done buying company stock.

“I've got more to lose than anybody,” he said.

Trans World will hold its annual shareholder meeting June 5.

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