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DVD Up, Music Down for Trans World

17 Aug, 2006 By: Erik Gruenwedel

A 62% surge in DVD sales was not enough to offset an overall 5% decline in music sales as Trans World Entertainment posted a second quarter (ended July 29) loss of $7.7 million compared to a loss of $7 million during the same period last year.

Key DVD title drivers included Buena Vista Home Entertainment's High School Musical, and Sony Pictures Home Entertainment's Underworld: Evolution and Final Fantasy VII: Advent Children.

Total revenue from more than 1,000 retail locations, including Wherehouse and Sam Goody, surged 18% to $298.3 million, from $253.1 million last year, due in large part to the successful assimilation of recently acquired Musicland brands Suncoast and f.y.e. Comparable same-store sales dropped 7%.

The Albany, N.Y.-based retailer said it would continue to reshuffle its product mix by increasing DVD product, which represented 35% of quarterly revenue, compared to 27% last year. Music sales represented 47% of revenue, down 11% from 58% last year. Video game business increased 1% for the quarter and represented 11% of revenue, from 9% last year.

“DVD looks very exceptional as we continue to outpace the industry for the first half of the year, despite a release schedule that hasn't been that good,” said Robert Higgins, chairman and CEO of Trans World in an investor call. “That gives us a very good feeling for the second half of the year. We have a very strong market share in TV DVD, which helps us stabilize our prices.”

The Trans World executive said the company would begin testing in-store freestanding digital downloading of music by the third quarter with plans to launch a video download service in 2007.

When asked if the company was pursuing financially troubled Tower Records, Higgins intimated Trans World might be interested for the right price.

“It is widespread [in the news] that Tower has some major financial difficulties right now,” Higgins said. “We never talk about [possible] acquisitions and what our plans are. We look at most things when they're available and if the situation makes sense to us we would pursue it.”

Analyst Edward Yruma with J.P. Morgan in New York said Trans World has the fiscal wherewithal to offer Tower pennies on the dollar.

“You are looking at the lowest of lowball offers,” said Yruma. “They are in the best position to acquire anything. They got the capital to do it. They would be looking to keep the best of the best stores and get rid of everything else.”

Yruma said that when Trans World bought Musicland it paid 62 cents on the inventory dollar, which meant that excluding packaged media all physical fixtures and trademarks were essentially free. He said the Tower brand is as strong as any Trans World retail brand.

“Who would be a potential acquirer of Tower? There's nobody,” Yruma said. “Trans World is really the only viable specialty entertainment retailer of any size left. There is always going to be a demand for [packaged media].”

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