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TRANS WORLD ENTERTAINMENT : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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04/13/2017 | 11:28pm CEST

Overview

Management's Discussion and Analysis of Financial Condition and Results of
Operations provide information that the Company's management believes necessary
to achieve an understanding of its financial condition 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 game 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 including,
but not limited to: cost of goods, consumer disposable income, consumer debt
levels and buying patterns, consumer credit availability, interest rates,
customer preferences, unemployment, labor costs, inflation, fuel and energy
prices, weather patterns, climate change, catastrophic events, competitive
pressures and insurance costs. 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 "Item 6: Selected Consolidated Financial Data" and the
Consolidated Financial Statements and related notes included elsewhere in this
report.


During October 2016, the Company acquired all of the issued and outstanding
capital stock of etailz, Inc. , an innovative and leading digital marketplace
retail expert. See Note 7 to the Consolidated Financial Statements for
additional information. Subsequent to this acquisition, reportable segments
consist of fye and etailz. The etailz acquisition represents a significant step
forward in the Company's reinvention. The Company believes the rapid growth of
marketplace sales will continue and is clear evidence of the explosive long-term
trends underway in retailing. fye's progress onboarding digital and marketing
talent, accelerated through the etailz acquisition, will enable the Company to
continue to build upon its credibility with fans of entertainment and pop
culture. As of January 28, 2017, the Company operated 284 stores totaling
approximately 1.6 million square feet in the United States, the District of
Columbia and the U.S. Virgin Islands.



fye Segment


The U.S. entertainment retailing industry is a mature industry and continues to
experience declines. Physical Video and Music represent approximately 50% of
sales and both categories have been impacted by new distribution channels,
including digital distribution and internet fulfillment. As a result, the
Company has had negative comparable store sales for the past five years. To
mitigate or lessen the impact these changes have had, the Company has focused on
the following areas in an effort to improve its business:



Evolve the fye Brand Customer Experience.




The Company is evolving the fye brand experience by diversifying its merchandise
assortment and enhancing its merchandise presentation as it continues its
strategy towards becoming the most compelling entertainment and pop culture
centric engagement in the marketplace. In addition, the Company offers
personalized customer service in its stores guided by a commitment to approach
every customer with gratitude, humility and respect.



Store Portfolio Evaluation



The Company's real estate strategy is to maintain a core group of profitable
locations, while evaluating opportunities for new locations in new and existing
malls. During fiscal 2016, the Company opened 14 new and remodeled 10 existing
fye stores under a new format which expands the merchandise selection and
enhances the presentation of the trend and electronics categories while
maintaining a strong presence in the media categories. As of January 28, 2017,
the Company operated 34 stores under the new format.

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During fiscal 2016 and fiscal 2015, the Company closed 29 and 19 stores,
respectively. The Company closes stores when minimum operating thresholds are
not achieved or upon lease expiration when either renewal is not available or
management determines that renewal is not in the Company's best interest. The
Company has signed short-term lease agreements for desirable locations, which
enables us to negotiate rents that are responsive to the then-current sales
environment. We will continue to close stores that do not meet our profitability
goals, a process which could result in asset impairments and store closure
costs. Continued reduction in the number of stores would lower total sales.



The Company believes that there is near-term opportunity for improving the
productivity of existing stores. The environment in which our stores operate is
intensely competitive and includes Internet-based retailers and mass merchants.
We believe a specialty retailer that can differentiate itself by offering a
distinctive assortment and customer experience, and that can operate
efficiently, will be better positioned to maintain or grow market share.
Therefore, we remain dedicated to enhancing our merchandise assortment through
introducing additional product lines, improving the operational efficiency of
our stores and offering our customers a rewarding shopping experience guided by
an approach to engage every customer with gratitude, humility and respect.


Expanding Customer Base


To strengthen customer loyalty, the Company offers its customers the option of
signing up for a Backstage Pass card which provides an additional 10% discount
off of everyday selling prices on nearly all products in addition to other value
added benefits members receive through the program in exchange for a membership
fee.  The Company also co-sponsors events in many of its stores to provide
various segments of its customers an opportunity to experience entertainment and
shop for unique and exclusive products based on their particular interests.

etailz Segment

On October 17, 2016, the Company acquired all of the issued and outstanding
capital stock of etailz, Inc., an innovative and leading digital marketplace
retail expert. etailz uses a data driven approach to digital marketplace
retailing utilizing proprietary software and ecommerce insight coupled with a
direct customer relationship engagement to identify new distributors and
wholesalers, isolate emerging product trends, and optimize price positioning and
inventory purchase decisions. The etailz acquisition represents a significant
step forward in Company's reinvention. The Company believes the rapid growth of
marketplace sales will continue and is clear evidence of the explosive long-term
trends underway in retailing. fye's progress onboarding digital and marketing
talent, accelerated through the etailz acquisition, will enable the Company to
continue to build upon its credibility with fans of entertainment and pop
culture.



Key Performance Indicators


Management monitors a number of key performance indicators to evaluate its performance, including:

Net Sales and Comparable Store Net Sales: The Company measures 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 sales
if the change in square footage is greater than 20% until the thirteenth full
month following relocation, expansion or downsizing. Closed stores that were
open for at least thirteen months are included in comparable store 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 calculated based on the cost of
product in relation to its retail selling value. Changes in gross profit are
impacted primarily by net sales levels, mix of products sold, vendor discounts
and allowances, shrinkage, obsolescence and distribution costs. Distribution
expenses include those costs associated with receiving, inspecting and
warehousing merchandise and costs associated with product returns to vendors.



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

22




distribution operations, as discussed in Note 1 of Notes to the Consolidated
Financial Statements in this report). SG&A expenses also include fixed assets
write-offs associated with store closures, if any, and miscellaneous income and
expense items, other than interest. The Company recorded miscellaneous income
items for fiscal 2016, 2015, and 2014 in the amount of $0.4 million, $3.6
million, and $1.6 million, respectively. Included in fiscal 2015 miscellaneous
income items was a one-time reimbursement of expenses incurred in prior years,
related to a legal settlement of $1.4 million.



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 key indicators of its financial position. See Liquidity and Capital Resources for further discussion of these items.



               Fiscal Year Ended January 28, 2017 ("fiscal 2016")

         Compared to Fiscal Year Ended January 30, 2016 ("fiscal 2015")


Segment Highlights:


etailz results included in the tables below are for the period starting from the
date of acquisition.



                                    Fiscal Year             Fiscal Year
                                       Ended                   Ended
(in thousands)                    January 28, 2017        January 30, 2016

Total Revenue
fye                             $           313,211     $           339,504
etailz                                       40,259                       -
Total Company                   $           353,470     $           339,504

Gross Profit
fye                             $           124,735     $           135,415
etailz                                        9,924                       -
Total Company                   $           134,659     $           135,415

Income (Loss) From Operations
fye                             $            (1,932 )   $             4,570
etailz                                          677                       -
Acquisition related costs                    (2,613 )                     -
Total Company                   $            (3,868 )   $             4,570




Total Revenue. The following table sets forth a year-over-year comparison of the
Company's total revenue:



                                                   2016 vs 2015
                     2016          2015            $           %
(in thousands)
fye net sales      $ 308,413     $ 334,661     $ (26,248 )     (7.8 %)
etailz net sales      40,259             -        40,259        n/a
Other revenue          4,798         4,843           (45 )     (0.9 %)
Total revenue      $ 353,470     $ 339,504     $  13,966        4.1 %




Total revenue increased 4.1% to $353.5 million compared to $339.5 million in
fiscal 2015, driven by $40.3 million in revenue from etailz from the date of
acquisition.

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fye Segment

The 7.8% net sales decline from the prior year is due to a 5% decline in total
stores in operation and a 3.6% decline in comparable store net sales. Stores
closed in fiscal 2016 and fiscal 2015 recorded sales of $21.6 million and $45.2
million, respectively. Total product units sold for fiscal 2016 decreased 7.5%
and the average retail price for units sold decreased 1.8%.



Net fye sales by merchandise category for fiscal 2016 and fiscal 2015 were as
follows:



                                                                              Total $         Total %         Comparable
                      2016           %             2015            %         Net Sales       Net Sales        Store % Net
($ in thousands)   Net Sales        Total        Net Sales       Total     
   Change         Change         Sales Change

Video              $  105,169         34.1 %   $    132,191         39.5 %   $  (27,022 )         (20.4 %)           (15.5 %)
Trend                  98,692         32.0 %         74,295         22.2 %       24,397            32.8 %             30.9 %
Music                  67,542         21.9 %         84,000         25.1 %      (16,458 )         (19.6 %)           (15.7 %)
Electronics            34,542         11.2 %         36,143         10.8 %       (1,601 )          (4.4 %)             0.8 %
Video games             2,468          0.8 %          8,032          2.4 %       (5,564 )         (69.3 %)           (54.2 %)
Total              $  308,413        100.0 %   $    334,661        100.0 %   $  (26,248 )          (7.8 %)            (3.6 %)




Video

fye stores offer a wide range of new and used DVDs, Blu-rays, and 4Ks in a majority of its stores. Total net sales for the video category declined 15.5% on a comparable store sales basis in fiscal 2016. Video sales were negatively impacted by industry wide declines in physical video due to non-physical options.

According to Warner Home Video, total video sales in the United States declined 11% during the period corresponding with the Company's fiscal 2016.

Music


fye stores offer a wide range of new and used CDs, music DVDs and vinyl across
most music genres, including new releases from current artists as well as an
extensive catalog of music from past periods and artists. Total net sales in the
music category declined 15.7% on a comparable store sale basis in fiscal 2016.
The Company has offset declines in CD sales by adding vinyl to its stores.

According to SoundScan, total CD unit sales in the United States declined 14.0% during the period corresponding with the Company's fiscal 2016.

Trend


fye stores offer a selection of trend products that primarily relate to
theatrical releases, music, and gaming. The trend category increased 30.9% on a
comparable store sales basis in fiscal 2016. The trend represented 32.0% of the
Company's total net sales in fiscal 2016 versus 22.2% in fiscal 2015. The
Company continues to take advantage of opportunities to strengthen its selection
and shift product mix to growing categories of entertainment-related
merchandise. The Company grew sales by strengthening its assortment and
improving the product presentation and value proposition.



Electronics

fye stores offer a selection of complementary portable electronics and accessories to support our entertainment products. The electronics category increased 0.8% on a comparable store sales basis. Electronics represented 11.2% of the Company's total net sales in fiscal 2016 versus 10.8% in fiscal 2015.

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Video games

Comparable net sales in the games category decreased 54.2%. The Company continues to shift its inventory investment and space allocation away from games to higher margin growth categories.

etailz Segment

etailz recorded sales of $40.2 million from the date of acquisition. etailz generates revenue across a broad array of product lines primarily through the Amazon Marketplace.




Gross Profit. The following table sets forth a year-over-year comparison of the
Company's Gross Profit:



                                                                           2016 vs 2015
                                       2016            2015             $               %
         (in thousands)
fye gross profit                    $  124,735      $  135,415      $  (10,680 )          -7.9 %
etailz gross profit                      9,924               -           9,924             n/a
Total gross profit                  $  134,659      $  135,415      $     (756 )          -0.6 %
fye gross profit as a % of fye
revenue                                   39.8 %          39.9 %
etailz gross profit as a % of
etailz revenue                            24.7 %             -
Total gross profit as a % of
total revenue                             38.1 %          39.9 %



Gross profit decreased 0.6% to $134.7 million compared to $135.4 million in fiscal 2015 as incremental gross profit from etailz did not offset lower gross profit from fye.




fye Segment

The decline in gross margin as a percentage of revenue was due to lower sales
and higher inventory markdowns to sell off seasonal merchandise. Gross profit as
a percentage of sales was 39.8% in fiscal 2016 as compared to 39.9% in fiscal
2015.



etailz Segment

etailz reported gross profit of $9.9 million from the date of acquisition. etailz gross profit as a percentage of sales was 24.7%.

Selling, General and Administrative Expenses.


The following table sets forth a year-over-year comparison of the Company's SG&A
expenses:



                                                                           2016 vs. 2015
                                       2016            2015              $               %
                                          (in thousands)
fye SG&A excluding depreciation
and acquisition related expenses    $  120,201      $  126,177      ($    5,976 )          -4.7 %
As a % of total fye revenue               38.4 %          37.2 %                            1.2 %

Depreciation and amortization            7,631           4,668            2,963            63.5 %
etailz acquisition related
expenses                                 2,613               -            2,613             n/a
etailz SG&A                              9,246               -            9,246             n/a

Total SG&A                          $  139,691      $  130,845      $     8,846             6.8 %

As a % of total revenue                   39.5 %          38.5 %



SG&A expenses increased $8.8 million primarily due to expenses for etailz, acquisition related expenses and higher depreciation and amortization expenses.

25




fye Segment

SG&A excluding depreciation and acquisition expenses decreased $7.1 million, or
5.7%, due to lower performance-based compensation and lower expenses due to
fewer stores in operation. Included in fiscal 2015 miscellaneous income items
was a one-time reimbursement of expenses incurred in prior years, related to a
legal settlement of $1.4 million.



Depreciation and amortization expense increased $2.9 million due to investments
in technology enhancements, new and remodeled stores and the chain wide rollout
of new marketplace fixtures to support the shift in merchandising assortment.



etailz Segment

etailz reported SG&A of $9.2 million from the date of acquisition, which primarily includes commission fees, payroll costs, and amortization expense of intangible assets

Gain on Sale of Asset. The gain on sale of asset of $1.2 million represented the sale of property located in St. Louis, Missouri. The gain represents cash proceeds of $2.8 million less carrying value of $1.6 million.




Interest Expense. Interest expense in fiscal 2016 was $0.8 million, compared to
$1.9 million in fiscal 2015, as the Company's capital lease obligation ended
last year.


Other Income. Other income was $1.1 million in fiscal 2016 compared to $160 thousand in fiscal 2015. Other income for fiscal 2016 consisted primarily of a gain on the sale of an investment of $800 thousand.

Income Tax Expense. The following table sets forth a year-over-year comparison of the Company's income tax expense:



      ($ in thousands)                                  2016 vs. 2015
                                 2016        2015             $

Income tax expense (benefit)   $ (6,773 )   $  181     $        (6,954 )

Effective tax rate                190.1 %     6.30 %




The fiscal 2016 and 2015 income tax expense includes state taxes, adjustments to
the reserve for uncertain tax positions, the accrual of interest, and income tax
benefit from the etailz, Inc. acquisition. See Note 4 in the Notes to
Consolidated Financial Statements for further detail.



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



             ($ in thousands)                                          2016 vs. 2015
                                               2016        2015              $

Net income                                    $ 3,211     $ 2,689     $           522

Net income as a percentage of total revenue 0.9 % 0.8 %

Net income for fiscal 2016 increased by $522 thousand to $3.2 million, as compared to $2.7 million for fiscal 2015.

26




               Fiscal Year Ended January 31, 2015 ("fiscal 2015")

         Compared to Fiscal Year Ended February 1, 2014 ("fiscal 2014")



Net Sales. The following table sets forth a year-over-year comparison of the
Company's total net sales:



                                                  2015 vs. 2014
($ in thousands)     2015          2014            $           %
Net Sales          $ 334,661     $ 358,490     ($ 23,829 )     (6.6 %)



The 6.6% net sales decline from the prior year is due to a 6.1% decline in
average stores in operation and a 0.7% decline in comparable store net sales.
Stores closed in fiscal 2015 and fiscal 2014 recorded sales of $17.6 million and
$45.2 million. Total product units sold for fiscal 2015 decreased 5.7% and the
average retail price for units sold decreased 1.7%.



Net sales by merchandise category for fiscal 2015 and fiscal 2014 were as
follows:



                                                                         Total $         Total %         Comparable
   ($ in         2015           %             2014            %         Net

Sales Net Sales Store % Net thousands) Net Sales Total Net Sales Total Change Change Sales Change

Video         $  132,191         39.5 %   $    157,378         43.9 %   $  (25,187 )         (16.0 %)           (11.2 %)
Music             84,000         25.1 %         96,792         27.0 %      (12,792 )         (13.2 %)            (7.5 %)
Trend             74,295         22.2 %         54,490         15.2 %       19,805            36.3 %             40.2 %
Electronics       36,143         10.8 %         34,415          9.6 %        1,728             5.0 %             12.8 %
Video games        8,032          2.4 %         15,415          4.3 %       (7,383 )         (47.9 %)           (37.7 %)
Total         $  334,661        100.0 %   $    358,490        100.0 %      (23,829 )          (6.6 %)            (0.7 %)




Video

The Company's stores offer a wide range of new and used DVDs and Blu-rays in a
majority of its stores. Total net sales for in the video category declined 11.2%
on a comparable store sales basis in fiscal 2015. Video sales were negatively
impacted industry wide declines in physical video due to non-physical options.



According to Warner Home Video, total video sales in the United States declined 11% during the period corresponding with the Company's fiscal 2015.

Music

The Company's stores offer a wide range of new and used CDs, music DVDs and
vinyl across most music genres, including new releases from current artists as
well as an extensive catalog of music from past periods and artists. Total net
sales in the music category declined 7.5% on a comparable store sale basis in
fiscal 2015. The Company has offset declines in CD sales by adding vinyl to
its
stores.


According to SoundScan, total CD unit sales in the United States declined 11.9% during the period corresponding with the Company's fiscal 2015.

Trend


The Company's stores offer a selection of trend products that relate to
theatrical releases, music, and gaming. The trend category increased 40.2% on a
comparable store sales basis in fiscal 2015. The trend represented 22.2% of the
Company's total net sales in fiscal 2015 versus 15.2% in fiscal 2014. The
Company continues to take advantage of opportunities to

27



strengthen its selection and shift product mix to growing categories of entertainment-related merchandise. The Company grew sales by strengthening its assortment and improving the product presentation and value proposition.

Electronics


The Company's stores offer a selection of complementary portable electronics and
accessories to support our entertainment products. The electronics category
increased 12.8% on a comparable store sales basis. Electronics represented 10.8%
of the Company's total net sales in fiscal 2015 versus 9.6% in fiscal 2014.

Video games

Comparable net sales in the games category decreased 37.7%. The Company continues to shift its inventory investment and space allocation away from games to higher margin growth categories.




Gross Profit. The following table sets forth a year-over-year comparison of the
Company's Gross Profit:



       ($ in thousands)                                              2015 vs. 2014
                                        2015          2014           $           %
       Gross Profit                   $ 130,572     $ 135,918     ($ 5,346 )     (3.9 %)

       As a percentage of net sales        39.0 %        37.9 %




The decline in gross profit was due to lower sales partially offset by a 110
basis point increase in Gross Profit as a percentage of sales. Gross Profit as a
percentage of sales increased due to increases in a majority of its merchandise
categories and the contribution shift to the higher margin trend category.

Selling, General and Administrative Expenses.


The following table sets forth a year-over-year comparison of the Company's SG&A
expenses:



($ in thousands)                                                           2015 vs. 2014
                                       2015            2014              $               %
Selling, general and
administrative expenses             $  126,002      $  132,143      ($    6,141 )          (4.7 %)

As a percentage of net sales              37.7 %          36.9 %




The $6.1 million decrease in SG&A expenses is primarily due to fewer stores in
operation and a one-time reimbursement of expenses incurred in prior years
related to a legal settlement of $1.4 million. SG&A as a percentage of net sales
increased 80 basis points from 36.9% in 2014 to 37.7% in 2015 due to higher
annual incentives.



Interest Expense. Interest expense in fiscal 2015 was $1.9 million, compared to $2.0 million in fiscal 2014.

Other Income. Other income, which is primarily made up of interest income, was $160 thousand in fiscal 2015 compared to $70 thousand in fiscal 2014.

28



Income Tax Expense. The following table sets forth a year-over-year comparison of the Company's income tax expense:



                 ($ in thousands)                          2015 vs. 2014
                                      2015      2014             $
                 Income tax expense   $ 181     $ 116     $            65

                 Effective tax rate     6.3 %     6.1 %




The fiscal 2015 and 2014 income tax expense includes state taxes, adjustments to
the reserve for uncertain tax positions and the accrual of interest. See Note 4
in the Notes to Consolidated Financial Statements for further detail.



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




                ($ in thousands)                                        2015 vs. 2014
                                                2015        2014              $

     Net income                                $ 2,689     $ 1,778     $         1,712

     Net income as a percentage of net sales       0.8 %       0.5 %




Net income for fiscal 2015 increased by $0.9 million to $2.7 million, as
compared to $1.8 million for fiscal 2014 primarily due to a one-time
reimbursement of expenses incurred in prior years related to a legal settlement
of $1.4 million and increases in gross margin as a percentage of sales,
partially offset by the impact of the decrease in sales and increase in SG&A
expenses as a percentage of sales.

29



LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Cash Flows: The Company's primary sources of working capital are
cash provided by operations and borrowing capacity under its revolving credit
facility. The Company's cash flows fluctuate from quarter to quarter due to
various items, including seasonality of sales and earnings, merchandise
inventory purchases and returns, the related terms on the purchases, stock
purchases and capital expenditures. Management believes it will have adequate
resources to fund its cash needs for the foreseeable future, including its
capital spending, its seasonal increase in merchandise inventory and other
operating cash requirements and commitments.



Management anticipates any cash requirements due to a shortfall in cash from
operations will be funded by the Company's revolving credit facility, discussed
hereafter. Cash flows from investing activities are expected to be comprised
primarily of capital expenditures during fiscal 2017. 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 three-year summary of key components of cash
flow and working capital:



                                                                     2016 vs.                    2015 vs.
             ($ in thousands)            2016            2015          2015

2014 2014

                Operating Cash Flows   $   4,436       $   7,963     $  (3,527 )   $  16,808     $  (8,845 )
                Investing Cash Flows     (57,333 )       (20,185 )     (37,148 )      (8,774 )     (11,411 )
                Financing Cash Flows      (7,337 )        (2,004 )      (5,333 )     (20,499 )      18,495

                Capital Expenditures     (24,672 )       (20,700 )      (3,972 )      (8,774 )     (11,926 )

             End of Period Balances:

Cash, Cash Equivalents, and

                     Restricted Cash      44,077 (1)     104,311       

(60,234 ) 118,537 (14,226 )

               Merchandise Inventory     126,004         120,046         5,958       126,377        (6,331 )
           Merchandise Inventory Per
                         Square Foot        68.8            69.4                        70.3
                     Working Capital      98,601         161,142      

(62,541 ) 173,444 (12,302 )

                     Inventory turns         1.5             1.6                         1.5

(1)   Cash and cash equivalents per Consolidated
      Balance Sheets                                   $  27,974
      Add: Restricted cash                                16,103

      Cash, cash equivalents, and restricted cash      $  44,077




During fiscal 2016, cash flow from operations was $4.4 million primarily due to
net income of $3.2 million, plus depreciation and amortization of $9.3 million,
less a deferred tax benefit of $7.0 million. During fiscal 2015, cash flow from
operations was $16.8 million primarily due to a reduction of inventory of $23.8
million and income from operations of $3.8 million partially offset by a $14.1
million reduction in accounts payable.



The Company monitors various statistics to measure its management of inventory,
including inventory turnover (annual cost of sales divided by average
merchandise inventory balances), inventory investment per square foot
(merchandise inventory divided by total store square footage) and inventory
leverage (accounts payable divided by merchandise inventory). Inventory turnover
measures the Company's ability to sell merchandise and how many times it is
replaced in a year. This ratio is important in determining the need for
markdowns and planning future inventory levels and assessing customer response
to our merchandise. Inventory turnover in fiscal 2016 was 1.5 as compared to 1.6
at the end of fiscal 2015. Inventory investment per square foot measures the
productivity of the inventory. It is important in determining if the Company has
the appropriate level of inventory to meet customer demands while controlling
its investment in inventory.

30




Inventory investment per square foot in the fye-segment was $68.8 per square
foot at the end of fiscal 2016 as compared to $69.4 per square foot at the end
of fiscal 2015. Accounts payable leverage measures the percentage of inventory
being funded by the Company's product vendors. The percentage is important in
determining the Company's ability to fund its business. Accounts payable
leverage on inventory was 40.2% as of January 28, 2017 compared with 43.2%
as of
January 30, 2016.



Cash used by investing activities was $57.3 million in fiscal 2016, compared to
cash flows used by investing activities of $20.2 million in fiscal 2015. During
fiscal 2016, the primary uses of cash were the investment in etailz of $36.6
million and capital expenditures of $24.7 million offset by proceeds from sale
of St. Louis property and sale of miscellaneous investments. During fiscal 2015,
cash used by investing activities consisted primarily of capital expenditures.
The Company's capital expenditures consisted primarily of the expenditures for
new and remodeled stores, a new point-of-sales system, store improvements and
investments in information technology.



The Company has historically financed its capital expenditures through
borrowings under its credit facility, select financing arrangements and cash
flow from operations. The Company anticipates capital spending of approximately
$9 million in fiscal 2017 as the Company continues to invest in strategic
initiatives.



Cash used in financing activities was $7.3 million in fiscal 2016, compared to
$2.0 million in fiscal 2015. In fiscal 2016, the primary uses of cash were
payment of etailz's outstanding line of credit of $4.7 million and stock
repurchases of $2.6 million. In fiscal 2015, the primary uses of cash were stock
repurchases of $1.1 million and payments on capital leases of $0.9 million.



In January 2017, the Company amended and restated its revolving credit facility
("Credit Facility"). The Credit Facility provides for commitments of $50
million, subject to increase up to $75 million during the months of October to
December. The availability under the Credit Facility is subject to limitations
based on receivables and inventory levels. The principal amount of all
outstanding loans under the Credit Facility together with any accrued but unpaid
interest, are due and payable in January 2022, 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 contains customary affirmative and negative covenants,
including restrictions on dividends and share repurchases, incurrence of
additional indebtedness and acquisitions and covenants around the net number of
store closings and restrictions related to the payment of cash dividends and
share repurchases, including limiting the amount of dividends to $5.0 million
annually and not allowing borrowings under the amended facility for the six
months before or six months after the dividend payment or repurchase of shares.
The Credit Facility also includes customary events of default, including, among
other things, material adverse effect, bankruptcy, and certain changes of
control. As of January 28, 2017, the Company was 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 1.75% to 2.00% and the Applicable Margin for
Base Rate loans ranging from 0.75% to 1.00%. In addition, a commitment fee of
0.25% is payable on unused commitments.



As of January 28, 2017 and January 30, 2016, the Company did not have any
borrowings under the Credit Facility. Peak borrowings under the Credit Facility
during fiscal 2016 were $21.5 million. During fiscal 2015, the Company did not
have any borrowings under the Credit Facility. As of January 30, 2016 and
January 31, 2015, the Company had no outstanding letters of credit. The Company
had $39 million and $41 million available for borrowing as of January 28, 2017
and January 30, 2016, respectively.



During the fiscal year ended January 28, 2017, in connection with the acquisition of etailz, the Company paid off etailz's outstanding line of credit in the amount of $4.7 million.

Off-Balance Sheet Arrangements. The Company has no off-balance sheet arrangements as defined by Item 303 (a) (4) of Regulation S-K.

31



Contractual Obligations and Commitments. The following table summarizes the Company's contractual obligations as of January 28, 2017, and the effect that such obligations are expected to have on liquidity and cash flows in future periods.



          Contractual                          2018-      2020-     2022 and
           Obligation                2017       2019       2021      Beyond     Total
         $ in thousands

Operating lease and maintenance
agreement obligations                24,778     23,057     11,481      3,540     62,856
Other long-term liabilities (1)       4,160        877        433         
-      5,470
Pension benefits (2)                  1,161      2,394      2,372      6,288     12,215
Total                                30,099     26,328     14,286      9,828     80,541



(1) Included in other long-term liabilities in the Consolidated Balance Sheet as

of January 28, 2017, is the long-term portion of deferred rent of $3.9

million which are not reflected in the table above as these amounts do not

represent contractual obligations. Also included in other long-term

liabilities is the long-term portion of the straight line rent liability of

$1.6 million, which is included in operating lease obligations in the table

above. Other long-term liabilities in the table above are the estimated

asset retirement obligations associated with the fixed assets and leasehold

improvements at the Company's store locations that arise under the terms of

operating leases.

(2) In addition to the scheduled pension benefit payments, the Company offers

401(k) Savings Plans to eligible employees (see also Note 6 of Notes to

Consolidated Financial Statements in this report). Total expense related to

the Company's matching contribution was approximately $592,000, $424,000 and

    $437,000 in fiscal 2016, fiscal 2015 and fiscal 2014 respectively.




Related Party Transactions.


The Company leases its 181,300 square foot distribution center/office facility
in Albany, New York from an entity controlled by the estate of Robert J.
Higgins, its former Chairman and largest shareholder. The original distribution
center/office facility was occupied in 1985. On December 4, 2015, the Company
amended and restated the lease. The lease commenced January 1, 2016, and expires
December 31, 2020.



Under the new lease dated December 4, 2015, and accounted for as an operating
lease, the Company paid $1.2 million and $103,000 in fiscal 2016 and fiscal
2015, respectively. Under the three original capital leases, dated April 1,
1985, November 1, 1989, and September 1, 1998, the Company paid annual rent of
$2.1 million and $2.3 million in fiscal 2015 and fiscal 2014, respectively.
Under the terms of the lease agreements the Company is responsible for property
taxes and other operating costs with respect to the premises.



Sara Neblett, the wife of Josh Neblett, the President of etailz, was employed
with the Company as the Vice President of Partner Care of etailz. Ms. Neblett
received $44,707 in cash compensation.



CRITICAL ACCOUNTING POLICIES


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. Note 1

32



of the Notes to Consolidated Financial Statements in this report includes a
summary of the significant accounting policies and methods used by the Company
in the preparation of its consolidated financial statements. Management believes
that of the Company's significant accounting policies, the following may involve
a higher degree of judgment or complexity:



Merchandise Inventory and Return Costs: Merchandise inventory is stated at the
lower of cost or market under the average cost method. The average cost method
attaches a cost to each item and is a blended average of the original purchase
price and those of subsequent purchases or other cost adjustments throughout the
life cycle of that item.


Inventory valuation requires significant judgment and estimates, including
obsolescence, shrink and any adjustments to market value; if market value is
lower than cost. Inherent in the entertainment products industry is the risk of
obsolete inventory. Typically, newer releases generate a higher product demand.
Some vendors offer credits to reduce the cost of products that are selling more
slowly, thus allowing for a reduction in the selling price and reducing the
possibility for items to become obsolete. The Company records obsolescence and
any adjustments to market value (if lower than cost) based on current and
anticipated demand, customer preferences, and market conditions. The provision
for inventory shrink is estimated as a percentage of sales for the period from
the last date a physical inventory was performed to the end of the fiscal year.
Such estimates are based on historical results and trends and the shrink results
from the last physical inventory. Physical inventories are taken at least
annually for all stores and the distribution center throughout the year and
inventory records are adjusted accordingly.



Shrink expense, including obsolescence was $5.9 million, $4.7 million and $5.0
million, in fiscal 2016, fiscal 2015 and fiscal 2014, respectively. As a rate to
net fye sales, this equaled 1.9%, 1.4% and 1.4%, respectively. Presently, a 0.1%
change in the rate of shrink provision would equal approximately $0.2 million in
additional charge or benefit to cost of sales, based on fiscal 2016 net sales
since the last physical inventories.



The Company is generally entitled to return merchandise purchased from major
music and video vendors for credit against other purchases from these vendors.
Certain vendors reduce the credit with a per unit merchandise return charge
which varies depending on the type of merchandise being returned. Certain other
vendors charge a handling fee based on units returned. The Company records
merchandise return charges in cost of sales. The Company incurred merchandise
return charges in its fiscal 2016, fiscal 2015 and fiscal 2014 of $0.6 million,
$0.5 million and $0.7 million, respectively.



Income Taxes: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and tax operating loss carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the results of operations in the period that includes the
enactment date.



Accounting for income taxes requires management to make estimates and judgments
regarding interpretation of various taxing jurisdictions, laws and regulations
as well as the ultimate realization of deferred tax assets. These estimates and
judgments include the generation of future taxable income, viable tax planning
strategies and support of tax filings. In assessing the value 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 upon 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 the available objective evidence, management
concluded that a full valuation allowance should be recorded against its net
deferred tax assets as of January 28, 2017. During fiscal 2016 and in future
years, the Company will continue to record a valuation allowance against
recorded net deferred tax assets at a level deemed appropriate by management.



Business Combination: In accordance with Accounting Standards Codification
("ASC") 805, Business Combinations ("ASC 805"), we use the acquisition method of
accounting to allocate costs of acquired businesses to the assets acquired and
liabilities assumed based on their estimated fair values at the dates of
acquisition. The

33




excess costs of acquired businesses over the fair values of the assets acquired
and liabilities assumed are recognized as goodwill. The valuations of acquired
assets and liabilities will impact the determination of future operating
results. In addition to using management estimates and negotiated amounts, we
use a variety of information sources to determine the estimated fair values of
the assets and liabilities, including third-party appraisals for the estimated
value and lives of identifiable intangible assets. Our identifiable intangible
assets resulted from our acquisition of etailz and consist of vendor relations,
technology and tradenames. The business and technical judgment of management is
used in determining the useful lives of finite-lived intangible assets in
accordance with the accounting guidance for goodwill and intangible assets.



Goodwill: Our goodwill results from our acquisition of etailz and represents the
excess purchase price over the net identifiable assets acquired. We are required
to evaluate our goodwill and other indefinite-lived intangible assets for
impairment at least annually or whenever indicators of impairment are present.
Our annual test is completed during the fourth fiscal quarter, and interim tests
are conducted when circumstances indicate the carrying value of the goodwill or
other intangible assets may not be recoverable.



Recently Issued Accounting Pronouncements.


In June 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 February 4, 2018.
To date the Company has identified relevant arrangements and performance
obligations and is assessing the impact of the new guidance. Evaluation is
ongoing and it is too early to provide an assessment of the impact. 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 February 2, 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. Given the nature of the
operating leases for the Company's home office, distribution center, and stores,
the Company expects an increase to the carrying value of its assets and
liabilities.



In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, which
require that a statement of cash flows explain the change during the period in
the total of cash, cash equivalents, and amounts generally described as
restricted cash or restricted cash equivalents. Therefore, amounts generally
described as restricted cash and restricted cash equivalents should be included
with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. The Company
adopted this standard as part of its quarterly report for the period ended
October 29, 2016.

34

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