Tower Finding a Crutch in DVD, But Is It Enough?12 Dec, 2003 By: Erik Gruenwedel
The fortunes of financially troubled Tower Records and Video appear to be on the rebound thanks in part to burgeoning sales of DVD product and the company's probable sale early next year, according to sources familiar with the privately held West Sacramento, Calif.-based retail chain.
Tower, like many music retailers, is pushing DVD music and video product, and in 2004 the chain plans for the format to exceed its current 26 percent of total sales, according to Rick Timmermans, director of video merchandising at Tower.
But can DVD truly change Tower's fortunes?
Until Tower stopped releasing financial information, it didn't take an accountant to see that Tower was in trouble.
In June, Tower restated two quarters of financial results in its fiscal year and in the process eliminated the first profitable quarter in three years. The news came on the heels of a third quarter loss of $13.8 million.
In a filing with the Securities & Exchange Commission, Tower stated it would be unable to make a $5.2 million interest payment on $110 million in bond debentures, which expire and are due in May 2005.
Earlier this year, Tower hired Los Angeles investment banker Greif & Co. to gauge the interest of possible suitors, which according to sources, has attracted several bidders.
“The only question is whether the bidding process will bring in enough money to make everybody [debtholders] whole,” said the source.
A Tower spokesperson was unavailable for comment.
Is DVD Enough?
Tower's decision to amp DVD sales in relation to music seems prudent but it remains to be seen whether the company's financial ills and ongoing dependence on a languid music industry represent too formidable a challenge.
Analyst Dennis McAlpine with New York-based McAlpine Associates said Tower's decision to diversify its portfolio with DVD is similar to Blockbuster's decision a few years ago to jettison its music interests to Wherehouse in favor of video games.
Absent traditional revenue growth strategies to expand retail operations to attract more customers while gaining market share, like those Blockbuster and Hollywood Video have employed, alternative options include expanding the store-within-a-store concept. But McAlpine questions whether Tower, with 91 retail outlets, has the internal real estate necessary to expand into video games.
“I don't know if what works for Blockbuster will work any better [for Tower],” said McAlpine. “The retail music business has been dreadful for some time. And it's probably not going to get better for a long time.”
Under a Bond of Debt
Even if Tower can generate enough DVD sales to offset lagging music sales, it remains burdened by substantial debt, including about $80 million borrowed from a consortium of banks, $25 million from a revolving credit facility and $110 million in bonds. Bondholders would probably convert in a debt-to-equity arrangement of about $40 million in a refinanced Tower, experts said.
Observers said the company needs about $125 million to eliminate its debt in order to make the sale possible.
“While their operations and doings to enhance their company [are] important, I think the future of the company lies with whether or not they are sold,” said the source. “Someone needs to step up to the plate. I think we will find out real soon.”