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Trans World Transforming

26 Feb, 2005 By: Holly J. Wagner

Trans World Entertainment is increasingly looking to DVD and games to make up for lackluster music sales and is transforming itself with the opening of movie-only and games-only stores.

“We opened three FYE movie stores in 2004 devoted totally to DVD and related home entertainment products,” said chairman and CEO Robert J. Higgins in a call with analysts. “We are testing and refining the selection to maximize offerings to the customer.”

The movie-only stores are in Fairfax, Va., Bakersfield, Calif., and Waterbury, Conn.

In November, the company opened a video game-only test store, also in Waterbury, “to capture the expanding video games market,” Higgins said. “We are very pleased with the results so far, and it probably is a format that we will be expanding.”

The company plans to open 35 new stores and “reposition” 25 more this year, Higgins said. CFO John Sullivan said some of the new and repositioned stores will be movie- or game-only stores. He would not disclose which markets will get the new format.

The changes come after Trans World pared its store count by 10 percent, from 916 to 831 stores, last year. That led to a 5 percent decline in overall sales for the fourth quarter.

Improved DVD and game sales helped stores to a 1 percent increase in comp-store sales for the fourth quarter and full-year 2004, despite declines in music sales.

“We are pleased with our results for the fourth quarter and for the year,” Higgins said. “Our solid performance in DVD and video games, which grew 15 percent and 11 percent, respectively, during the quarter on a comparable store basis, reflects our increasing concentration in these categories.”

Music lagged, he said, in part due to postponed new releases.

Titles that performed well included Shrek 2, Spider-Man 2 and Harry Potter and the Prisoner of Azkaban, and Grand Theft Auto: San Andreas and Halo 2 led game sales, he said.

The video category accounted for 33 percent of the company's fourth-quarter revenue, compared to 50 percent for music and 8 percent for games.

The used-disc trade has also been a boon for the company.

“We have experienced solid growth in the used business,” Higgins noted. “With the addition of The Wherehouse stores in 2003, we have established this category as a competitive advantage in all of our stores by furthering our value statement to our customers.”

The chain will introduce new listening and viewing stations, dubbed LVS 3, in the second half of the year, Higgins said.“It will be a destination within a destination,” he said. “We are building a new system for the needs of today and laying the foundation for the needs of tomorrow.”

He also noted that the company is pleased with the performance of its new FYE Download Zones, which let consumers download more than a million songs for $14.95 per month.

Overall, 2004 sales increased 3 percent to $1.365 billion, and comp-store sales were up 1 percent, although profits were down 6 percent.

Net income was $41.8 million, or $1.15 per share, compared to $23.1 million, or 60 cents per share last year. Net income for 2004 includes a $10.5 million income tax benefit resulting from the closing of a federal income tax examination, and an extraordinary gain of $3.2 million related to the Wherehouse acquisition. The aggregate effect increased net income $13.7 million. Excluding those items, income for fiscal 2004 was $28.1 million, or 77 cents per diluted share.

Management expects earnings in the range of 85 cents to 90 cents per share for fiscal year 2005 on sales of $1.4 billion, assuming a gain in comp-store sales of 1 percent to 3 percent; gross margin between 36 percent and 36.5 percent; and selling, general and administrative expense between 29.5 percent and 30 percent.

Trans World operates more than 800 stores under the names FYE, Coconuts Music and Movies, Strawberries Music, Wherehouse, CD World, Spec's, Second Spin and Planet Music in 47 states, the District of Columbia, the U.S. Virgin Islands, Puerto Rico and several Web sites.

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