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

Delayed Quote. Delayed  - 09/28 10:00:00 pm
3.45 USD   -0.86%
08/17 TRANS WORLD ENT : posts 2Q loss
08/17 Trans World Entertainment Announces Second Quarter Results
08/17 TRANS WORLD ENT : Investor Calendar Invites You to the Trans World E..
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TRANS WORLD ENTERTAINMENT : Management's Discussion and Analysis of Financial Condition and (form 10-Q)

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09/08/2016 | 10:11pm CEST
Results of Operations

                        July 30, 2016 and August 1, 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.


As of July 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 63% of the Company's net sales for the twenty-six weeks
ended July 30, 2016. The balance of categories, including trend, electronics,
video games and related products represented 37% of the Company's net sales for
the twenty-six weeks ended July 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
stores net sales through the month immediately preceding the month of closing.
Stores that are temporarily closed are excluded from the calculation of
comparable stores sales for the applicable periods in the year of closure and
the subsequent year. 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.



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 and change in square footage, if
any, as well as gift card breakage.

12



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 and Twenty-six Weeks Ended July 30, 2016

       Compared to the Thirteen and Twenty-six Weeks Ended August 1, 2015



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



                                              Thirteen Weeks Ended                                                        Twenty-six Weeks Ended
                                                                                   Comp                                                                         Comp
                        July 30,          August 1                               Store Net         July 30,        August 1                                   Store Net
                          2016              2015         Change        %           Sales             2016            2015           Change          %           Sales
                      (in thousands, except store data)                                           (in thousands, except store data)

Net sales             $     63,320       $   67,451     $ (4,131 )     -6.1 %          -0.4 %     $   138,088     $   145,415     $   (7,327 )      -5.0 %          -0.4 %
Other revenue         $      1,028       $    1,088          (60 )     -5.5 %                     $     1,990     $     2,288           (298 )     -13.0 %
Total revenue         $     64,348       $   68,539     $ (4,191 )     -6.1 %                     $   140,078     $   147,703     $   (7,625 )      -5.2 %

As a % of net sales
Video                         36.4 %           41.2 %                                 -11.2 %            38.2 %          43.7 %                                    -13.6 %
Trend                         28.8 %           19.6 %                                  39.9 %            27.0 %          17.0 %                                     51.6 %
Music                         24.7 %           26.5 %                                  -9.4 %            24.7 %          26.8 %                                    -10.2 %
Electronics                    9.3 %           10.3 %                                  -4.4 %             9.1 %           9.7 %                                     -2.2 %
Video Games                    0.8 %            2.4 %                                 -59.1 %             1.0 %           2.8 %                                    -56.5 %

Store Count:                                                                                              290             308            (18 )      -5.8 %

Total Square footage                                                       
                        1,672,085       1,793,207       (121,122 )      -6.8 %




Net sales: Comparable sales decreased 0.4% for both, thirteen and twenty-six
weeks ended July 30, 2016. Net sales decreased 6.1% and 5.0% during the thirteen
weeks and twenty-six weeks ended July 30, 2016 as compared to the same period
last year. The decline in net sales resulted from a decrease in store count of
5.8% from August 1, 2015 to July 30, 2016.



Other Revenue. Other revenue, which was primarily related to commissions and
fees earned from third parties, decreased $60 thousand and $298 thousand during
the thirteen weeks and twenty-six weeks ended July 30, 2016 as compared to
the
same period last year.

13



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



                            Thirteen weeks ended                               Twenty-six weeks ended
                                                 Change                                              Change
               July 30,      August 1                              July 30,      August 1
                 2016          2015           $           %          2016          2015           $           %
                   (in thousands)                                      (in

thousands)

Gross Profit   $  26,701     $  28,246     ($ 1,545 )     -5.5 %   $  57,527     $  60,249     ($ 2,722 )     -4.5 %

As a % of
total
revenue             41.5 %        41.2 %                                41.1 %        40.8 %




The increase in gross profit as a percentage of sales during the thirteen and
twenty-six weeks ended July 30, 2016, respectively, was due to a shift in mix to
the higher margin trend category as well as improved margins in the trend and
electronics categories through improved inventory control and better price
management.



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




                           Thirteen weeks ended                             Twenty-six weeks ended
                                                Change                                            Change
               July 30,      August 1                            July 30,      August 1
                 2016          2015          $          %          2016          2015          $          %
                   (in thousands)                                    (in
thousands)
SG&A           $  31,223     $  30,806     $  417        1.4 %   $  62,734     $  62,132     $  602        1.0 %

As a % of
total
revenue             48.5 %        44.9 %                              44.8 %        42.1 %




For the thirteen and twenty-six weeks ended July 30, 2016, SG&A expenses
increased $417 thousand and $602 thousand, or 1.4% and 1.0%, respectively. The
change in SG&A as a percentage of revenue in fiscal 2016 is primarily due to a
reimbursement of expenses in the second quarter of fiscal 2015 related to a
legal settlement of $1.4 million. In addition, higher health insurance costs for
the twenty-six weeks of 2016 contributed to a 50 basis point increase in SG&A as
a percentage of net sales.



Interest Expense. Interest expense was $172 thousand and $345 thousand during
the thirteen and twenty-six weeks ended July 30, 2016, respectively, compared to
$455 thousand and $920 thousand during the thirteen and twenty-six weeks ended
August 1, 2015. Interest expense consisted primarily of unused commitment fees
and the amortization of fees related to the Company's credit facility. Fiscal
2015 interest expense also included interest expense on a capital lease which
expired in December of 2015.



Other Income. Other income was $86 thousand and $1,017 thousand dollars during
the thirteen and twenty-six weeks ended July 30, 2016, respectively, compared to
$14 thousand and $41 thousand during the thirteen and twenty-six weeks ended
August 1, 2015. Other income for the twenty-six weeks ended July 30, 2016
included a gain of $800 thousand from the sale of an investment. The remaining
balance consisted of interest income.



Income Tax Expense.  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
14




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 and twenty-six week periods ended July 30, 2016 and August 1,
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 and
twenty-six week periods.



Net Loss: The following table sets forth a period over period comparison of the
Company's net loss:



                                 Thirteen weeks ended                    Twenty-six weeks ended
                                                      Change                                   Change
                         July 30,      August 1                   July 30,      August 1
                           2016          2015           $           2016          2015           $
                             (in thousands)                           (in thousands)

Loss before income tax $ (4,608 ) $ (3,001 ) $ (1,607 ) $ (4,535 ) $ (2,762 ) $ (1,773 )

Income tax expense              48            44            4            95
           89            6
Net loss                 $  (4,656 )   $  (3,045 )   $ (1,611 )   $  (4,630 )   $  (2,851 )   $ (1,779 )




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.

15



The following table sets forth a summary of key components of cash flow and working capital for each of the Twenty-six weeks ended July 30, 2016 and August 1, 2015, or at those dates:



                                  As of or for the
                               Twenty-six weeks ended         Change
                              July 30,        August 1,
     (in thousands)             2016             2015            $
Operating Cash Flows             (16,965 )       (18,063 )       1,098
Investing Cash Flows              (6,093 )        (8,073 )       1,980
Financing Cash Flows              (2,609 )        (1,001 )      (1,608 )
Capital Expenditures              (7,693 )        (8,073 )         380

Cash and Cash Equivalents         78,644          91,400       (12,756 )
Merchandise Inventory            120,268         124,469        (4,201 )
Working Capital                  150,627         165,305       (14,678 )




The Company had cash and cash equivalents of $78.6 million at July 30, 2016,
compared to $91.4 million at August 1, 2015. Merchandise inventory was $72 per
square foot at July 30, 2016 compared to $69 per square foot as of August 1,
2015.



Cash used by operating activities was $17.0 million for the twenty-six weeks
ended July 30, 2016. The primary uses of cash were a net loss of $4.6 million, a
$9.1 million seasonal reduction of accounts payable, and a $3.4 million payout
of expenses accrued in prior year.



Cash used by investing activities was $6.1 million for the twenty-six weeks ended July 30, 2016, which consisted of $7.7 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 twenty-six weeks ended July 30, 2016, primarily comprised of stock repurchases




During the twenty-six weeks ended July 30, 2016, the Company repurchased 686,137
shares of common stock at an average price of $3.87 per share. Since the
inception of the program, the Company has repurchased 2,558,180 shares of common
stock at an average price of $3.83 per share. The Company has approximately
$12.2 million available for future purchases 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.



Refer to footnote 6 in the condensed consolidated financial statements for further information regarding the Company's credit facility.

Capital Expenditures. During the twenty-six weeks ended July 30, 2016, the
Company made capital expenditures of $7.7 million. The Company currently plans
to spend approximately $17.0 million in total for capital expenditures in fiscal
2016.

16



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
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 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 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. The new standard 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. The new standard will be effective for the Company's fiscal year
beginning January 28, 2018, 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.

17




             TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                         PART I - FINANCIAL INFORMATION

© Edgar Online, source Glimpses

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Managers
NameTitle
Michael Feurer Chief Executive Officer & Director
Robert J. Higgins Chairman
John Anderson Chief Financial Officer & Communications Contact
Joseph G. Morone Independent Director & Head-Investor Relations
Michael B. Solow Independent Director
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