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4-Traders Homepage  >  Equities  >  Nasdaq  >  Trans World Entertainment Corporation    TWMC

Delayed Quote. Delayed  - 06/29 09:52:22 pm
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05/19 TRANS WORLD ENT : posts 1Q profit
05/19 Trans World Entertainment Announces First Quarter Results
05/13 Trans World Entertainment to Host First Quarter 2016 Results Conf..
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TRANS WORLD ENTERTAINMENT : Management's Discussion and Analysis of Financial Condition and (form 10-Q)

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06/09/2016 | 08:30pm CEST
Results of Operations

                         April 30, 2016 and May 2, 2015



Overview

Management's Discussion and Analysis of Financial Condition and Results of Operations provides information that the Company's management believes necessary to achieve an understanding of its financial statements and results of operations. To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment for the Company's merchandise, including the entry or exit of non-traditional retailers of the Company's merchandise to or from its markets; releases by the music, video and video games industries of an increased or decreased number of "hit releases", general economic factors in markets where the Company's merchandise is sold; and other factors discussed in the Company's filings with the Securities and Exchange Commission. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this report and the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 2016.

At April 30, 2016, the Company operated 290 stores totaling approximately 1.7 million square feet in the United States, the District of Columbia and the Commonwealth of Puerto Rico. The Company's stores offer predominantly entertainment products, including video and music. In total, these two categories represented 64% of the Company's net sales for the thirteen weeks ended April 30, 2016. The balance of categories, including trend, electronics, video games and related products represented 36% of the Company's net sales for the thirteen weeks ended April 30, 2016.

The Company's results have been, and will continue to be, contingent upon management's ability to understand industry trends and to manage the business in response to those trends and general economic trends. Management monitors a number of key performance indicators to evaluate its performance, including:

Net sales and comparable store net sales: The Company measures and reports the rate of comparable store net sales change. A store is included in comparable store net sales calculations at the beginning of its thirteenth full month of operation. Stores relocated/expanded or downsized are excluded from comparable store net sales if the change in square footage is greater than 20%. Closed stores that were open for at least thirteen months are included in comparable store net sales through the month immediately preceding the month of closing. The Company further analyzes net sales by store format and by product category.

Cost of Sales and Gross Profit: Gross profit is impacted primarily by the mix of products sold, by discounts negotiated with vendors and discounts offered to customers. The Company records its distribution and product shrink expenses in cost of sales. Distribution expenses include those costs associated with receiving, shipping, inspecting and warehousing product and costs associated with product returns to vendors. Cost of sales further includes obsolescence costs and is reduced by the benefit of vendor allowances, net of direct reimbursements of expense.

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Selling, General and Administrative ("SG&A") Expenses: Included in SG&A expenses are payroll and related costs, occupancy charges, general operating and overhead expenses and depreciation charges (excluding those related to distribution operations, as disclosed in Note 8 to the condensed consolidated financial statements). Selling, general and administrative expenses also include fixed asset write offs associated with store closures, if any.

Balance Sheet and Ratios: The Company views cash, net inventory investment (merchandise inventory less accounts payable) and working capital (current assets less current liabilities) as relevant indicators of its financial position. See Liquidity and Capital Resources for further discussion of these items.



                             RESULTS OF OPERATIONS



                      Thirteen Weeks Ended April 30, 2016

                Compared to the Thirteen Weeks Ended May 2, 2015



The following table sets forth a period over period comparison of the Company's
net sales by category:




                                                 Thirteen Weeks Ended
                                  April 30,       May 2
                                    2016           2015        Change            %
                                         (in thousands, except store data)

           Net sales             $    74,768     $ 77,963     $ (3,195 )      (4.1 %)
           Other revenue                 962        1,200         (238 )     (19.8 %)
           Total revenue         $    75,730       79,163     $ (3,433 )      (4.3 %)

           As a % of net sales
           Video                        39.7 %       46.1 %
           Trend                        25.5 %       14.3 %
           Music                        24.6 %       27.3 %
           Electronics                   9.0 %        9.0 %
           Video Games                   1.2 %        3.3 %

           Store Count:                  290          310          (20 )      (6.5 %)



Net sales. Comparable sales decreased 0.4% for the first quarter due to negative comparable sales in the video and music categories. Net sales decreased 4.1% during the thirteen weeks ended April 30, 2016, as compared to the same period last year. The decline in net sales for the thirteen week period resulted primarily from a decrease in store count of 6.5%.

Video:

Comparable store net sales in the video category decreased 13.0% during the thirteen weeks ended April 30, 2016. The video category represented 39.7% of total net sales for the thirteen weeks ended April 30, 2016 compared to 46.1% in the comparable quarter last year, as the Company is shifting its product mix to growing categories of entertainment and pop culture related merchandise.

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According to statistics obtained from Warner Brothers Home Entertainment, overall video industry retail sales as of April 30, 2016 were down 7.9% during the period corresponding to the Company's first fiscal quarter.

Music:

Comparable store net sales in the music category decreased 10.9% during the thirteen weeks ended April 30, 2016. The music category represented 24.6% of total net sales for the thirteen weeks ended April 30, 2016 compared to 27.3% in the comparable quarter last year.

According to Soundscan, total physical unit sales of albums industry-wide were down 9.0% during the period corresponding to the Company's first fiscal quarter.

Trend:

Comparable store net sales in the trend category increased 64.8% during the thirteen weeks ended April 30, 2016. Trend product represented 25.5% of total net sales for the thirteen weeks ended April 30, 2016 compared to 14.3% in the comparable quarter last year. The Company continues to take advantage of opportunities to strengthen product selection and shift product mix to growing categories of entertainment and pop culture related merchandise.

Electronics:

Comparable store net sales in the electronics category decreased 0.2% during the thirteen weeks ended April 30, 2016. Electronics net sales represented 9.0% of total net sales for the thirteen weeks ended April 30, 2016, same percentage as the comparable quarter last year.

Video Games:

Comparable store net sales for video games decreased 55.0% during the thirteen weeks ended April 30, 2016. The Company continues to shift its inventory investment and space allocation away from games to higher margin growth categories. Video games net sales represented 1.2% of total net sales for the thirteen weeks ended April 30, 2016 compared to 3.3% in the comparable quarter last year.

Other Revenue. Other revenue, which was primarily related to commissions and fees earned from third parties, was approximately $1.0 million and $1.2 million for the thirteen weeks ended April 30, 2016 and May 2, 2015, respectively.

Gross Profit. The following table sets forth a period over period comparison of the Company's gross profit:



                            Thirteen weeks ended
                               (in thousands)                 Change
                           April 30,        May 2,
                             2016            2015          $           %
Gross Profit              $    30,826      $ 32,003     $ (1,177 )     (3.7 %)
As a % of total revenue          40.7 %        40.4 %



Gross profit decreased 3.7% for the thirteen weeks ended April 30, 2016 as compared to the comparable period last year due to fewer stores in operation. However, the increase in gross profit as a percentage of revenue was driven by increases in all of our merchandise categories through the increased sales contribution from the higher margin trend category and increased margin across all of our merchandise categories.

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SG&A Expenses. The following table sets forth a period over period comparison of the Company's SG&A expenses:



                            Thirteen weeks ended
                               (in thousands)               Change
                           April 30,        May 2,
                             2016            2015         $         %
SG&A                      $    31,511      $ 31,327     $ 184       0.6 %
As a % of total revenue          41.6 %        39.6 %



For the thirteen weeks ended April 30, 2016, SG&A expenses increased $184 thousand, or 0.6% on the total revenue decline of 4.3% resulting in a 200 basis point increase in SG&A expenses as a percentage of total revenue. The increase in SG&A as a percentage of total revenue is primarily due to the decrease in revenue, increase in health care costs and higher capital expenditures.

Interest Expense. Interest expense was approximately $173 thousand during the thirteen weeks ended April 30, 2016. Interest expense consisted primarily of unused commitment fees and the amortization of fees related to the Company's credit facility. Interest expense during the thirteen weeks ended May 2, 2015 was $465 thousand and, in addition to items listed above, included interest payments on a capital lease which expired in December of 2015.

Other Income. Other income was $932 thousand dollars compared to $27 thousand dollars last year. Other income included a gain of $800 thousand from the sale of an investment. The remaining balance consisted of interest income.

Income Tax Expense (Benefit). In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income. Management considers the scheduled reversal of taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment. Based on available objective evidence, management concluded that a full valuation allowance should be recorded against the Company's deferred tax assets. Management will continue to assess the need for and amount of the valuation allowance against the deferred tax assets by giving consideration to all available evidence to the Company's ability to generate future taxable income in its conclusion of the need for a full valuation allowance. Any reversal of the Company's valuation allowance will favorably impact its results of operations in the period of reversal. The Company is currently unable to determine whether or when that reversal might occur, but it will continue to assess the realizability of its deferred tax assets and will adjust the valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will become realizable in the future. The Company has significant net operating loss carry forwards and other tax attributes that are available to offset projected taxable income and current taxes payable, if any, for the year ending January 30, 2016. The deferred tax impact resulting from the utilization of the net operating loss carry forwards and other tax attributes will be offset by a reduction in the valuation allowance. As of January 30, 2016, the Company had a net operating loss carry forward of $158.2 million for federal income tax purposes and approximately $236 million for state income tax purposes that expire at various times through 2035 and are subject to certain limitations and statutory expiration periods.

For the thirteen week periods ended April 30, 2016 and May 2, 2015, the Company's current tax expense was associated with quarter-specific items attributable to interest accruals on related uncertain tax positions and state taxes based on modified gross receipts incurred for these thirteen week periods.

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Net Income. The following table sets forth a period over period comparison of the Company's net income:



                                    Thirteen weeks ended
                            April 30,         May 2,
                              2016             2015       Change

Income before income tax   $        74       $    238     $  (164 )
Income tax expense                  47             44           3
Net income                 $        27       $    194     $  (167 )



For the thirteen weeks ended April 30, 2016, the Company's net income decreased $167 thousand to a profit of $27 thousand from a profit of $194 thousand for the thirteen weeks ended May 2, 2015.



LIQUIDITY


Liquidity and Cash Flows: The Company's primary sources of working capital are cash and cash equivalents on hand, cash provided by operations and borrowing capacity under its revolving credit facility (See Note 6 to the condensed consolidated financial statements for further details). The Company's cash flows fluctuate from quarter to quarter due to various items, including seasonality of net sales and earnings, merchandise inventory purchases and returns and the related terms on the purchases and capital expenditures. Management believes it will have adequate resources to fund its cash needs for the next twelve months and beyond, including its capital spending, its seasonal increase in merchandise inventory and other operating cash requirements and commitments.

Management anticipates that any future cash requirements due to a shortfall in cash from operations would be funded by the Company's cash and cash equivalents on hand and its revolving credit facility, discussed hereafter. The Company does not expect any material changes in the mix (between equity and debt) or the relative cost of capital resources.




The following table sets forth a summary of key components of cash flow and
working capital for each of the thirteen weeks ended April 30, 2016 and May 2,
2015, or at those dates:





                                  As of or for the
                                Thirteen weeks ended         Change
                              April 30,        May 2,
     (in thousands)              2016           2015            $
     Operating Cash Flows         (8,284 )     (12,009 )       3,725
     Investing Cash Flows         (2,565 )      (3,379 )         814
     Financing Cash Flows         (2,606 )        (609 )      (1,987 )
     Capital Expenditures         (4,165 )      (3,379 )        (786 )

Cash and Cash Equivalents         90,856       102,540       (11,684 )
    Merchandise Inventory        116,648       121,577        (4,929 )
          Working Capital        157,104       171,248       (14,144 )


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The Company had cash and cash equivalents of $90.9 million at April 30, 2016, compared to $102.5 million at May 2, 2015. Merchandise inventory was $70 per square foot at April 30, 2016 compared to $68 per square foot as of May 2, 2015.

Cash used by operating activities was $8.3 million for the thirteen weeks ended April 30, 2016. The primary use of cash was a $10.8 million seasonal reduction of accounts payable, partially offset by a $3.4 million reduction in inventory. The Company's merchandise inventory and accounts payable are influenced by the seasonality of its business. A significant reduction of accounts payable occurs annually in the fiscal first quarter, reflecting payments for merchandise inventory purchased during the prior year's holiday season.

Cash used by investing activities was $2.6 million for the thirteen weeks ended April 30, 2016, which consisted of $4.2 million in capital expenditures, offset by $1.6 million related to proceeds from the sale of an investment.

Cash used by financing activities was $2.6 million for the thirteen weeks ended April 30, 2016, comprised of stock repurchases.

During the first quarter, the Company repurchased 676,437 shares of common stock at an average price of $3.85 per share. Since the inception of the program, the Company has repurchased approximately 2.5 million shares of common stock at an average price of $3.82 per share. The Company has approximately $12.2 million dollars available for purchase under its repurchase program.

In May 2012, the Company entered into a $75 million credit facility ("Credit Facility") which amended the previous credit facility. The principal amount of all outstanding loans under the Credit Facility together with any accrued but unpaid interest, are due and payable in May 2017, unless otherwise paid earlier pursuant to the terms of the Credit Facility. Payments of amounts due under the Credit Facility are secured by the assets of the Company.

The Credit Facility includes customary provisions, including affirmative and negative covenants, which include representations, warranties and restrictions on additional indebtedness and acquisitions. The Credit Facility also includes customary events of default, including, among other things, material adverse effect, bankruptcy, and certain changes of control. The Credit Facility also contains other terms and conditions, including limitations on the payment of dividends and covenants around the number of store closings. The Company is compliant with all covenants.

Interest under the Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of availability, with the Applicable Margin for LIBO Rate loans ranging from 2.25% to 2.75% and the Applicable Margin for Prime Rate loans ranging from 0.75% to 1.25%. In addition, a commitment fee ranging from 0.375% to 0.50% is also payable on unused commitments.

The availability under the Credit Facility is subject to limitations based on sufficient inventory levels.

During the first quarters of Fiscal 2016 and 2015, the Company did not have any borrowings under the Credit Facility. The Company did not have any borrowings under its Credit Facility during Fiscal 2015, Fiscal 2014 and Fiscal 2013. As of April 30, 2016 and May 2, 2015, the Company had no outstanding letter of credit obligations under the Credit Facility. The Company had $37million and $38 million available for borrowing as of April 30, 2016 and May 2, 2015, respectively.

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Capital Expenditures. During the thirteen weeks ended April 30, 2016, the Company made capital expenditures of $4.2 million. The Company currently plans to spend approximately $17.0 million for capital expenditures in fiscal 2016.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financial statements. Management continually evaluates its estimates and judgments including those related to merchandise inventory and return costs and income taxes. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Form 10-K for the year ended January 30, 2016 includes a summary of the critical accounting policies and methods used by the Company in the preparation of its condensed consolidated financial statements. There have been no material changes or modifications to the policies since January 30, 2016.

Recently Issued Accounting Pronouncements:

In 2014, the FASB issued Accounting Standard Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company's fiscal year beginning January 28, 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In August 2014, the FASB issued ASU No. 2014-15, Disclosures of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires the Company to assess their ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of Company's plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The new standard is effective for reporting periods beginning after December 15, 2016. Early application is permitted. The Company does not expect the adoption of this update to have a significant effect on our financial statements.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. The amendments, which apply to inventory that is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and should be applied on a prospective basis. We are currently

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assessing the potential impact of adopting this ASU, but do not, at this time, anticipate a material impact to our consolidated results of operations, financial positions or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which will replace most existing lease accounting guidance in U.S. GAAP. The core principle of the ASU is that an entity should recognize the rights and obligations resulting from leases as assets and liabilities. ASU 2016-02 requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity's leasing activities, including significant judgments and changes in judgments. ASU 2016-02 will be effective for the Company beginning in fiscal 2019, and requires the modified retrospective method of adoption. Early adoption is permitted. The Company is in the process of determining the method and timing of adoption and assessing the impact of ASU 2016-02 on its consolidated financial statements.

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             TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES



                         PART I - FINANCIAL INFORMATION

© Edgar Online, source Glimpses

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