Monday, March 31, 1997
Trans World Entertainment Corp.
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Phone: 518-452-1242
Website: http://www.viacom.com
Price (3/27/97): $11 1/4
HOW DID IT DOUBLE?
Trans World Entertainment Corp. has been something of a disco duck, waddling through the massive overexpansion that's left many retailers of music and video products struggling to keep their heads above water. The company took a $21 million restructuring charge in 1994 to close 179 stores. In January of 1996, it took an additional charge of $35 million to close another 163 stores. The stock was decimated, dropping from an early 1994 high around $14 to just $3 a share a year ago.
Lately, though, investors have been playing that funky music all the way to the bank. The stock has hustled from around $6 in January to a recent high of $13 1/8. The quarterly losses started getting smaller with the first quarter of 1996, and the fourth quarter earnings announced February 27th proved that the Trans World turnaround is now paying off.
While total revenues were down due to store closings, the company turned in fourth quarter net income of $14.7 million, good for $1.51 per share. That was up from $13 million or $1.34 per share for the fourth quarter of 1995, excluding restructuring charges. The huge fourth quarter made up for three quarterly losses and allowed the company to show net income for the year of $7.1 million, or $0.73 a share, up from a loss of $2.3 million or $0.23 per share in 1995, excluding charges.
Trans World turned in a 4% increase in same-store sales for 1996. Gross profits were up, expenses as a percentage of sales dropped, and the company reduced its long-term debt by 20%. In short, the turnaround looks complete.
BUSINESS DESCRIPTION
Based in Albany, New York, Trans World Entertainment is a leading specialty retailer of music and video products, operating roughly 450 retail stores in 34 states. About 40% of these outlets are full-line mall stores operating under the Record Town name. Trans World also operates specialty mall stores such as Music World and Tape World, video-for-sale stores under the name Saturday Matinee, combination stores mixing music and video, and freestanding stores called Coconuts. The majority of these stores are located in the eastern U.S.
Nearly half of the company's sales come from compact disks with another quarter coming from prerecorded audiotapes. While the music industry has shown flat sales, Trans World may be benefiting from its competitors' own store closings and from the general consolidation within this competitive business.
FINANCIAL FACTS
Income Statement 12-month sales: $481.7 million 12-month income: $7.1 million 12-month EPS: $0.73 Profit Margin: 1.5% Market Cap: $109.9 million Balance Sheet* Cash: $8.3 million Current Assets: $248 million Current Liabilities: $178 million Long-term Debt: $44.9 million (*As of the end of the third quarter.) Ratios Price-to-earnings: 15.5 Price-to-sales: 0.23
HOW COULD YOU HAVE FOUND THIS DOUBLE?
An investor accustomed to looking for turnarounds probably could have seen Trans World was making progress as early as the first quarter of 1996. Overall sales were down, but same-store sales were up 6.1%. Gross profits were also down, but only slightly. The next two quarters showed gross profits rising and the rest of the financial picture improving. Since the fourth quarter usually accounts for nearly 40% of annual revenue and all of the company's profits, Trans World shares probably could have looked like an attractive speculation in January at around $6 a share.
WHERE TO FROM HERE?
The recent buying frenzy suggests that a new analyst recommendation may be lurking out there somewhere. First Call, though, has posted only one analyst estimate for the next fiscal year, and that was boosted to $0.90 per share over two months ago, long before the stellar fourth quarter results. Even so, that would mean these shares are only trading at 13.1 times next year's earnings.
The recent losses plus Trans World's spotty track record and slim profit margins all make PEGing out of the question. Plus, our lone analyst hasn't speculated on the company's long-term growth prospects, if any.
Still, one has to figure that with music retailers generally on the skids, a revitalized Trans World stands a chance of picking up market share even in a mature market. In its best year, the company made $1.40 per share. If the company could turn in $1.15 per share in earnings this year, splitting the difference between the analyst's estimate and the company's best annual performance of the 1990s, then the shares would trade at an awfully cheap forward PE ratio of just 10.
But this is just talk. With so much riding on the fourth quarter results, another poor year for the music industry could hurt Trans World's earnings even if the company's operations continue to improve. The fact that MUSICLAND <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MLG)") else Response.Write("(NYSE: MLG)") end if %> is flirting with bankruptcy might create some opportunities for Trans World. Yet, in a mature music retail market, growth will be hard to come by. Now that the turnaround is in these shares, growth is what's needed to move Trans World up to the next double.
-Louis Corrigan (RgeSeymour)