Trans World's Challenges Mount Amid Flowing Red Ink, Board Tension & Possible Stock Delisting

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Lately, Trans World Entertainment's management has been on a high wire, trying to navigate a tide of red ink, a shrinking pool of cash, a going-concern crises, disappearing market capitalization, a potential Nasdaq stock delisting and an internally launched board of directors takeover attempt engineered by the son of the company's deceased founder.   

Trans World, with 206 stores under the FYE brand as of May 4, is one of the music industry's heritage record store retailers, tracing its roots back to the early 1970s. It was also one of the first publicly-traded music companies, and at one time ran over 1,000 record stores. The chain was founded by Bob Higgins, an industry legend who passed away on March 1, 2017.   

In its just-announced earnings statement, the company reported that it lost $7.8 million, or 21 cents per diluted share on $80.15 million, for the fiscal quarter ended May 4.That's down from the prior year's fiscal first quarter loss of $8.15 million, or 22 cents per diluted share, on revenue of $96.6 million.   

This comes on the heels of two straight years of big losses for the company. In the year ended Feb. 2, 2019, the company reported a loss of $92.4 million, or $2.68 per diluted share, on sales of $418.2 million, versus a loss of $42.85 million, or $1.18 per diluted share, on sales of $442.86 million. Prior to those two years awash in red ink, the company had posted five straight years of profitability. 

On one hand, the doubling of the red ink last year isn't as bad as it seems because nearly $60 million of that was a non-cash impairment charge mainly related to the acquisition of etailz, an online merchant that offers a wide array of merchandise, mainly through the Amazon marketplace. Trans World paid $36 million in cash and issued 5 million shares to finance the acquisition in October 2016.

On the other hand, the company has long maintained a clean balance sheet (i.e., strong equity position, no long-term -- or even short-term -- debt, and plentiful cash on hand) but it has taken a bit of a beating over the last two years. While the company still has no long-term debt, shareholder equity had stood at $198 million at Jan. 28, 2017; it now stands at almost $64 million, which is one-third what it was then.

But more worryingly is the depletion of cash, from $104 million back then to $4.36 million at the end of the most recent fiscal year; and now down to $3.8 million at the close of the first quarter. Its cash position would have been worse -- less than $1 million dollars -- but it has has drawn down $3.1 million from its revolving credit facility. The company has long prided itself on its ability to finance operations through cashflow and often touted that it didn't need to draw on its credit revolver. Unless management can find a way to return to profitability, that likely won't be the case going forward.

It was these mounting losses and the depleting cash position that apparently gave the company a going-concern issue that delayed the filing of its 10-K annual report to the SEC. With its fiscal year ending Feb. 3, the company should have filed its 10-K by April 4, but instead a May 6 filing said that due to its losses and a shortfall in cash from operations, the company and its auditor, KPMG , were continuing to assess whether substantial doubt exists about the Company's ability to continue as a going concern.

Trans World did not respond to a request for comment on this story.

 

A GOING CONCERN

If KPMG had decided that Trans World had a going concern issue it likely would have triggered the financial covenants of its revolving credit facility, meaning that it would no longer have the ability to borrow money -- which would be a big problem for a business that is currently losing money.

That late filing itself would have been a default occurrence so it required a waiver from its lender, Wells Fargo Bank, allowing for the late delivery of the company's annual report to the SEC. 

In its 10-k filing on May 14, Trans World apparently side-stepped the going concern crises. The KPMG opinion on Trans World counting in the 10-K was devoid of any mention of the going concern issue. Meanwhile, the company itself said, "The consolidated financial statements for the fiscal year ended Feb. 2, 2019 were prepared on the basis of a going concern which contemplates that the company will be able to realize assets and discharge liabilities in the normal course of business. The ability of the company to meet its liabilities and to continue as a going concern is dependent on improved profitability, the performance improvement plan implemented for the etailz segment and the availability of future funding."

As of Feb. 2, the company had $21.3 million available for borrowing under its revolving crediting facility, secured by the company's assets. That facility also allows for the company to increase availability up to $60 million as long as its performance is compliant with the facility covenants, which likely requires the chain to meet certain financial barometers. If it does remain compliant, the company appears to have plenty of liquidity to meet its obligations this year, even it its losses result in the same levels of cash use as it had in the prior year -- when the company used $25.5 million in cash. (That means that instead of providing cash to the company, its operations produced losses that required the company to spend more cash than it took in.)

 

A DLIST DEADLINE

In reaction to the company's weak performance, the company's stock price has dropped precipitously over a three-year period from the $3.96 it closed at on May 27, 2017 to 31 cents on May 29, 2019.

As a result of its fallen share price, Trans World has been in danger of being delisted from the Nasdaq stock exchange since October. It has until July 15 to come back in compliance, which means that its shares must be at $1.00 or higher for a minimum of 10 consecutive business days.

As a way to achieve that, Trans World said it will seek shareholder approval for a reverse stock split at the upcoming June 27 annual shareholders meeting. It wants shareholders to approve turning in 20 shares and receiving one Trans World share in return, which means that its stock float would be reduced to 1.81 million shares from its current level of 36.26 million shares. That also means at current prices of 31 cents a share, one share of Trans World would have a value of $6.20, if the proposal is approved, and thus the company would likely be able to keep its share price above the $1 level for 10 consecutive days. 

 

BOARD BATTLE AHEAD?

In addition to the reverse stock split, the annual meeting also will vote on re-electing the current board of directors and compensation packages for management.

The company is recommending that the current board all be voted in again. But the losses of red ink, falling share price, and the threat of having the Trans World stock delisted has apparently prompted Mark Higgins, the former chief merchandise officer and the son of founder Bob Higgins to mount a challenge to the board. In a proxy statement, Higgins is offering a competing board by nominating himself and three others to the company's board of directors.

So shareholders can chose to vote for company's six director nominees or the four nominees put forth by Higgins, which also includes Jeff Hastings, a home video executive; Mark Freiman.,a retail consultant, and Philip Knowles, CEO of Topaz Distribution, a supply chain management company.

"Trans World Entertainment has tremendous potential and a dedicated workforce of approximately 2,200 employees that I believe can thrive under the right leadership," Higgins said in the preliminary proxy statement. "Unfortunately, the Company has experienced an extended period of underperformance. Since early 2015, shareholders have suffered nearly a complete loss of value, experiencing total shareholder returns of negative (-90%) while the Company's market capitalization has declined by over $88 million."

He is calling for an "overhaul in the boardroom"

The company currently has a market capitalization of about $12 million, which means that during the period cited it has fallen from a valuation of about $100 million.

In response to the Higgins statement, Trans World issued a statement saying that its current board is "deeply committed to enhancing value for all shareholders and overseeing the Company's strategy. Our Board is comprised of six highly qualified directors who bring expansive experience concerning retail operations, accounting and finance, management and leadership, risk assessment and corporate governance. Specifically, the Board has extensive knowledge of the challenges faced by the Company in the turbulent physical retail and physical media industries, and has been instrumental in identifying opportunities to improve results."

Moreover, the company added that it had reacted to problems with changes in strategy that had produced benefits in the just completed first quarter.

In addition to Higgins' 1.2% stake in the company, other Higgins family members -- he has two sisters and his mother -- are said to own similar-sized stakes. If the family backs his play and combined own, say, 10% of the company stock, the Robert J. Higgins TWMC Trust -- which owns a 39.4% stake in the company -- could be the swing vote that determines the outcome on what the board will look like.

However, Michael Reickert, who is the trustee overseeing the Higgins TWMC Trust, is already on the Trans World board of directors, so it will be interesting to see which way he will vote.

 

FYI: FYE'S BOTTOM LINE

Getting back to Trans World performance, of its total sales for the recently completed year, Trans World's store operation produced $231 million in sales while the etailz segment produced $187 million in revenue. Both segments posted operating losses, with $24.5 million coming from stores and $72.3 milion coming from etailz, for a combined operating loss of $96.8 million.

In its fiscal year, music sales totaled nearly $40 million, down from $51 million, while video stood at $63 million. Combined, entertainment software comprised about 45% of store revenue, while trend/lifestyle was 41% of revenue and electronics was the remainder.

In the last year, the company has closed 47 stores, down from 253 outlets at the end of the first quarter in the prior year.

In a conference call with investors this morning, Trans World CEO Mike Feurer said the company is seeing benefits from initiatives begun to improve performance. On the etailz front it said it was doing a vendor rationalization, strengthening its core business, and has implemented a 30% reduction in work force. For the store operation, he said the company was continuing its "reinvention of the FYE brand."

He noted that the company's initiatives have paid off and has resulted in reducing its cash use by more than $10 million, in the first quarter of this year versus the first quarter last year. During the most recent quarter, the company's operations spent $6.2 million in cash, down from $16.2 million in cash used in the prior period.

In a departure from analyst conference call protocol in general and Trans World calls in particular, the company took no questions and abruptly ended the call.