Company lost $3.6 million.

The Handleman Corp. got off to a disappointing start in its new fiscal year, with the company losing $3.6 million, or 17 cents per diluted share, on revenue of $240.4 million in the three-month period ended July 31. That compares with a net income of $925,000, or four cents per share, that the company tallied in the fiscal first quarter of the prior year, when sales were $232.1 million.

While sales were up 3.5% in the first quarter, gross margin was off significantly, from 18.6% of total revenue in the prior year to 16.7% this year. Meanwhile, expenses--selling, general and administrative--increased to 19.7% of total revenue this year as compared to the 18.4% it was in the prior year.

A company representative said gross margin was hurt by returns while the higher expenses were due to increased costs from readying the company's new computer system, and higher stock-based compensation and labor costs.

Steve Strome, chairman and CEO, labeled the results disappointing in a statement but noted the company recently was awarded the latin music category management and distribution for the Circuit City chain. But this is offset by the company losing 25 stores it was servicing for Wal-mart to another supplier. Sources say that the giant retailer took Handleman's weakest performing 25 stores--in total, Handleman services about one-third of Wal-Mart's 3000 plus stores--and game them to Anderson Merchandisers.

The company announced its earnings yesterday (Aug.23) after the close of trading. At mid-day, share price had dropped 93 cents to $13.85. The company's 52-week range is $12-$23.84.