Monday, October 6, 2014

An Obsolete Retailer In Runoff

I've been looking for an electronics retailer that has done what I say Radio Shack should have done; go into runoff for the benefit of shareholders. A correspondent suggested TWMC:

"Trans World Entertainment Corporation is a chain of entertainment media retail stores in the United States. It currently operates just over 350 freestanding and shopping mall-based stores under several brand names, down from about 540 in August 2010. [That's closing 9% of stores per year.]

On Wednesday, November 28, 2012, Trans World had two big announcements. First, they sold real property that they owned in South Beach, Miami, Florida, for $30 million. Prior to the sale, Trans World has been leasing the property to Walgreens. They purchased the property for just $7 million back in 2007. Secondly, they announced a $0.47 per share special cash dividend, payable to shareholders as of December 10, 2012. Trans World will pay out $15 million in cash to shareholders in this dividend payout, which will be made on December 26, 2012."
Closing stores, selling real estate, paying dividends. That sounds like a runoff. They also paid a 50 cent dividend in March 2014. The company has also bought back $5 million of stock over the past year.

The market cap is $112 million, but there is $156 million in net current assets, of which $86 million is cash. Putting a haircut on the inventory and assets, the market cap seems to be about liquidation value. Not super cheap, but cheap relative to Radio Shack which has roughly the same market cap!

Here's a key difference between TWMC and RSH: there's a former CEO of TWMC, Robert Higgins, who owns 45% of the company. That makes it less likely that money will be wasted on store renovations and "super bowl" advertisements.

You can see the difference in share performance over the past three years - not even counting the special dividends that TWMC has paid!

This pair should continue to do well: TWMC continues returning cash and RSH crashes into the mountain.

Most of the TWMC stores are the "fye" (for your entertainment) stores.
The stores are mostly mall stores, but there are some freestanding stores. All but one of the stores is leased, and 78% of the leases expire by the end of 2015. So, they should have all the flexibility they need to close more stores if necessary.

TWMC has had 35% gross margins in the last fiscal year. They are incredibly stingy with capex, the way a company in runoff should be. Only $13.3 million combined over the three fiscal years ended this year. That's about what Radio Shack spends on a "super bowl" ad.

They seem like better retailers than Radio Shack. They talk about actual retailing, for example:
"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 2013 was 1.6, the same level as Fiscal 2012. 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. Inventory investment per square foot was $74.0 per square foot at the end of Fiscal 2013 as compared to $70.4 per square foot at the end of Fiscal 2012. 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 51.7% as of February 1, 2014 compared with 51.1% as of February 2, 2013."
Part of what we see with TWMC is that when you don't have too much debt, it's easier to be in control of your own destiny.


Anonymous said...

They aren't bad, I'm long...but a lot of what they've done has been as a result of pressure from minority holders. Higgins is greedy, puts his interests ahead of shareholders and is reluctant to wind it down as quick as he should. He continues to accrue pension benefits, and owns real estate which he leases to the co. The co is increasingly exploring "trend" merchandise in lieu of CD and DVDs, which could be hazardous to shareholders health.

jHurt said...

GTAT! Next bk/dumb equity trade. Not enough info yet to really evaluate but easily most liquid post-ch11 stock I have ever come across (at less right now...)

CP said...

Aw what a jerk then. I did see in the K that they are opening a few new stores, and that they rent space from him.

I'd pay $50 million for the company, not $112.

CP said...