DVD slightly up, but Trans World still in red ink

Retailer continues changes for stronger second half

By Jennifer Netherby -- Video Business, 8/21/2008

AUG. 21 | DVD’s stable performance at Trans World Entertainment wasn’t enough to compensate for declines in music and videogames that widened company losses and led to a 7% slide in same-store sales in the second quarter.

Trans World, which operates F.Y.E. stores, reported a net loss of $19.2 million in the quarter ended Aug. 2, nearly double its $10.1 million loss the previous year. The company realized an income tax benefit of $8.5 million last year, versus a $400,000 benefit this year.

Before income taxes, Trans World's loss grew 5% to $19.6 million in the quarter.

Revenue slid 19% to $215.2 million.

For the first half of the year, the company narrowed its net loss before income taxes by 8.7% to $31.4 million. Revenue dropped 19% to $447.8 million.

Trans World closed 173 stores in the last year and now operates 789 stores.

In DVD, new-release sales were weak, but strong catalog sales pushed movie sales up 1% during the quarter, CEO Robert Higgins said in a Thursday morning conference call with analysts.

DVD now represents 39% of Trans World’s business, up from 36% last year. The segment is now equal in size to the retailer’s music business.

DVD’s slight increase wasn’t enough to offset the 17% drop in music sales in the quarter. A better assortment of catalog helped the retailer to reduce the loss from 23% in the first quarter.

Trans World made changes to its assortment of DVDs and CDs in the quarter to better meet local and regional demand and is starting to see improvements, Higgins said.

Meanwhile, videogame sales dropped 10%. Trans World cut the number of stores with videogame departments to 400 stores over the last year to concentrate videogame product in those stores given tight supply of game consoles. Higgins said allocation of hardware has continued to hurt sales, but he said the retailer “remains committed to improving the business.”

Trans World is continuing to reduce costs and change its offerings to turn around its business. The retailer has begun making changes to its staffing model, which it expects will save $2 million over a 12-month period.

Trans World also has begun rolling out music kiosks that allow customers to download songs and albums to iPods and other devices, with plans to have kiosks in 40 stores this fall.

The company embarked on an expensive branding campaign with TV commercials in Albany, N.Y., and Harrisburg, Penn.

Higgins said the company is optimistic about the second half of the year, based on a stronger music slate and upcoming DVD releases.

He said the third-quarter slate of movie releases looks stronger than last year, but he was less sure of the fourth-quarter lineup.

“The number [of good titles] looks to be a little bit bigger than last year in terms of titles, but the titles themselves may not resonate as high. But understand something, we thought the titles last year were going to be fantastic, we thought we were going to have a great DVD Q4, and it was our weakest quarter,” he said. “Frankly, we feel pretty good about where new releases are this year, but we feel even better about what we’re going to be able to do with catalog.”

In videogames, Trans World expects better allocation of game consoles and is hopeful about upcoming Guitar Hero and Rock Band games.

For the year, the retailer expects same-store sales to decline in the mid-single digits. Overall revenue is expected to drop 17% with earnings before taxes between $5 million and $10 million.