TWMC

Trans World Entertainment Corp. (TWMC)

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Trans World Entertainment Corporation (TWMC)

Q1 2011 Earnings Call

May 19, 2011 10:00 am ET

Executives

Bob Higgins – Chairman and CEO

Mike Honeyman – President and COO

John Sullivan – CFO

Analysts

Brandon McMillan – Centurion Investment

Presentation

Operator

Good day, ladies and gentlemen. Welcome to the Trans World Entertainment First Quarter 2011 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. I would like to introduce your host for today’s call, Mr. Bob Higgins, Chairman and CEO. Sir, you may begin.

Bob Higgins

Thank you, Duranda [ph]. Good morning. On the call with me today is Mike Honeyman, our President and Chief Operating Officer; and John Sullivan, our Chief Financial Officer. Thank you for joining us as we discuss our first quarter results. We’ll take questions following our comments.

During the quarter, we achieved positive EBITDA, which marked our best first quarter EBITDA performance since 2005. During the fourth quarter of last year, which is our highest volume sales quarter, we improved EBITDA year-over-year by $11 million. I’m pleased to report that we followed that performance by improving this year’s EBITDA by $7.8 million to be a positive EBITDA of $36,000, compared to an EBITDA loss of $7.8 million last year.

Total sales in the first quarter decreased 16% to $131.5 million as we operated 18% fewer stores. Comp store sales decreased 2% compared to last year.

Now, let me touch on our performance by category. Video comp sales decreased by 5%, comp sales in our top 50 skews decreased 39% during the quarter due to the strength of new releases last year, which included Avatar and New Moon.

Our comp sales excluding top 50 increased 3%, demonstrating the underlying strength of our core catalog business. Video represented 42% of our business, down from 45% last year for the quarter on an industry-wide basis video sales were down 20%.

Music comp sales declined 3%, comp sales in our top 50 skews decreased 13% during the quarter, similar to our comp sales in video, our comp sales excluding the top 50 increased 3%, demonstrating the underlying strength of our core catalog business. The music category represented 37% of our business for the quarter, compared to 36% last year. For the quarter on an industry-wide basis, excuse me, physical CD sales were down 6%.

Electronics comp store sales increased 15%. Electronics sales represent 9% of our total business, compared to 7% last year.

Trend comparable store sales increased 80%. Trend product represented 7% of our business in the quarter, up from 6% last year.

Video games comp store sales were down 10% for the quarter. Last year at this time, we were still liquidating games in stores that our games removed from their assortment. We now have games at 121 stores, which represent 27% of our chain. Comp sales in the 121 go-forward stores were flat to last year in the game category. Game sales represent 5% of our business as compared to 6% last year.

John will now take you through the financial highlights for the quarter. John?

John Sullivan

Thank you, Bob. Good morning. Our net loss for the quarter was $2.5 million or $0.08 per share, a 78% improvement over last year’s net loss of $11.4 million or $0.36 per share. As Bob mentioned, EBITDA was a positive $36,000 in the quarter versus an EBITDA loss of $7.8 million last year, which is the best first quarter performance an EBITDA since 2005.

Our gross margin rates for the quarter increased 380 basis points to 36.7% of sales from 32.9% last year. The increase in gross profit as a percentage of sales was due to higher margin rates across all of our product categories. And the leveraging of our distribution of freight costs due to the closing of a distribution facility in Carson, California last year.

SG&A expenses were $48.3 million, a reduction of 18.6% and a total sales decline of 16%, resulting in a decrease as a percentage of sales to 36.7% this year from 37.9% last year. The decrease in SG&A was driven by the closing of underperforming stores and continued focus on a factor of expense management.

Net interest expense was $832,000 in the quarter versus $688,000 last year. The increase was primarily due to the amortization of commitment fees, related to the three year extension we signed in April of 2010. In addition, interest expense also increased due to a 55 basis point increase in our unused loan commitment fee.

The company did not require any borrowings under its line of credit during this year's first quarter and we ended the quarter without any borrowings outstanding under the line of credit and a cash balance of $29.7 million compared to $21.3 million last year.

Year-over-year, we have lowered our inventory by $35 million our quarter end inventory position was $218 million versus last year's $251 million. Our first square foot basis was a $74 a foot versus $69 a foot last year. During the quarter, we closed 17 stores and opened one new store. We ended the quarter with 444 stores and 3 million square feet in operation versus last years 544 stores and 3.6 million square feet.

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