Thursday, July 14, 2011

Trans World: Pre-Turnaround?

Trans World Entertainment (TWMC) is a specialty retailer in the US. It sells a collection of electronics, music and other items through the 400+ stores it operates. From a balance sheet point of view, the company looks cheap; though the company trades for just $65 million, it has net current assets of $130 million.

The problem, of course, is that the company has been burning through its assets for several years now. In the last four years, the company has lost a combined $200 million!

There are some signs, however, that things are turning around. The company has been closing unprofitable stores and cutting SG&A expenses, and this has led to a much-improved bottom line despite the commensurate reductions in revenue. In its last fiscal quarter, operating losses were less than $2 million, a $9 million improvement over last year.

Furthermore, the company has generated positive cash flow from operations for two years in a row, to the tune of a combined $60 million. A skeptic would likely point out that all of this cash flow was sourced from working capital (namely, inventory) reductions and thus may need to be reversed. However, because the company has been closing stores, this capital has been freed up permanently.

And there may even be more room for inventory reductions, as the company continues to aggressively close stores due to the timing of certain operating leases. Though Trans World has $100 million in operating leases due over the next 6 years, it will get through $47 million of that this year. This gives management a great opportunity to cherry-pick which locations it wants to keep and which it wants to close. This should be a catalyst in the direction of improved profitability.

Unfortunately, a big part of Trans World's business is in decline. The distribution of music and video programming is increasingly shifting to electronic rather than physical forms. So the company still faces a lot of headwinds, making it difficult to say if the turnaround is indeed here to stay.

Though the numbers are trending in the right direction, extrapolating continued improvement may prove to be a mistake. Some value investors may see enough upside here to justify an investment at the current price, while others may prefer to wait and see how the next few quarters play out, sacrificing potential upside in return for more assured downside protection.

Disclosure: No position

1 comment:

jeff said...

This may well become a solvent modern-day publicly traded horse and buggy whip company.