Earnings Call: Q4 2016

Mar 16, 2017

Greetings and welcome to the TransWorld Entertainment Corporation Fourth Quarter And Annual Twenty 16 Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to Michael Sewer, Chief Executive Officer. Thank you. Please go ahead. Thank you, Brenda. Good morning. Thank you for joining us as we discuss our fourth quarter and annual results. On the call with me today are John Anderson, our Chief Financial Officer and Scott Hoffman, our Chief Merchandising Officer. Before I begin, I would like to comment on the passing of Bob Higgins, All of us at Transworld were deeply saddened by his passing, serving as its relentless champion, Bob was proud of Transworld Entertainment and all of its associates. His never ending drive to excellence, determination, and commitment to our company standard that will inspire and stay with us as we honor the legacy he created over the last 45 years. We will miss him greatly. Before John reviews our financial results, I'd like to provide highlights from this past year. During the year, we completed the acquisition of E tails and innovative and leading high growth digital marketplace retailer. Our results demonstrate the importance, benefit, and potential of our acquisition of etailz. Transworld's sales growth is directly attributable to the diversification of our business into our business is correctly positioned for growth. In addition, we greatly improved our digital and marketing capabilities through the acquisition of key talent. We engaged dynamic alliances and collaborations required to unlock the potential of Transworld Entertainment. In our FYE segment, we created a new store model, which coupled with our digital initiatives, has elevated the brand and customer experience. We experienced double digit growth in our lifestyle categories, which contributed 43% of our sales in 2016 versus 33% in 2015. However, we were impacted by the acceleration of negative mall traffic and the ongoing disruption in our heritage media categories. These headwinds will continue to impact our brick and mortar business in 2017 and as such, we will continue to evaluate and rebalance our store portfolio. Now John will take you through financial highlights for the fourth quarter fiscal year. Thanks, Mike. Good morning, everyone. I will be touching on the combined results of the FYE and etailz segments. The breakout of the segments was included in our press release. For the fourth quarter, our net income was $7,900,000 or $0.22 per diluted share as compared to a net income of $9,900,000 or $0.32 per diluted share in the fourth quarter of last year. The decrease in net income was primarily driven in the FYA segment by a 6.9 decline in comparable store sales and 120 basis point decline in gross profit. Partially offset by a $5,200,000 reduction in expenses. Adjusted EBITDA as presented in note 1 of our press release was $10,800,000 Total revenue increased 20% compared to last year to $147,000,000 for the quarter driven by $36,000,000 from etailz. Now let me touch on our annual results. Total revenue increased 4 percent to $354,000,000 compared to $340,000,000 in fiscal 2015. Driven by $40,000,000 in revenue from etails for the post acquisition period. Adjusted EBITDA was $6,600,000 compared to $8,000,000 and $3,100,000 in costs related to our acquisition of etailz was $2,800,000 or $0.09 per diluted share as compared to net income of $2,700,000 or Cash and cash equivalents at the end of the fiscal 2016 were $28,000,000 compared to $104,000,000 at the end of last year. The primary use of cash was $65,000,000 related to included technology enhancements, the repurchase of shares, investment in our new and remodeled stores, and the chain wide roll out of new marketplace fixtures support the shift in our merchandising assortment. Inventory including $16,000,000 from etailz was $126,000,000 at the end of fiscal 2016 versus $120,000,000 at the end of fiscal 2015. Excluding the impact of etailz, inventory per square foot was $69 at the end of fiscal 2016, the same level as last year. We ended the year with 2.84 stores and 1.7000000 Square Feet. Now, Scott will take you through our merchandising sales highlights. Thanks, John. Good morning. I will now review our results by category For the year, comparable store sales declined 3.6%. In our trend category, comp sales increased 18% for the quarter. We continue to take advantage of opportunities to strengthen our assortment, shift our inventory mix, and improve our product presentation and value proposition. Trend represented 38% of our business for the quarter compared to 29% last year. For the year, comp sales for trend increased 31%. Trend represented 32% of our business for the year compared to 22% last year. For the quarter, electronics comp sales increased 1%. Electronics represented 15% of our business for the quarter compared to 13% last year. Compared to 9% during the quarter compared to 33% last year. For the year, comp sales for video declined 15%. Video represented 34% of our business during the year compared to 43% last year. Music comp sales declined 22% for the quarter. The music category represented 18% of our business for the quarter, compared to 22% last year. For the year comp sales for music declined 16%. The music category represented 22% of our business for the year compared to 26% last year. Both the video and music categories were impacted by weaker new releases this year compared to last year. While these categories continued to decline, they still represent 56% of our business. We are focused on providing our loyal customers a strong selection in these categories. Now, I'll turn it back over to Mike. Thank you, Scott. The etailz acquisition represents a significant step forward in our reinvention. We believe the rapid growth of marketplace sales will continue and is clear evidence of the vibrant long term trends underway in retail. With etailz contributing a quarter of our sales and trending upward our business is correctly positioned for growth. Our strategy 2017, we'll focus on embracing, changing customer preferences, reallocating our resources, and enhancing our capabilities to better serve our customer and the channel of their choice. Our progress onboarding digital and marketing talent accelerated through the etailz acquisition will enable the company to continue to build upon its credibility with fans of entertainment and pop culture. Transworld is growing and diversifying through re platforming and upgrading our digital foundation, collaborating with entertainment partners, embracing a data and development approach and immediately immersing into the vibrant digital marketplace. Details expertise and marketplace leadership, coupled with FYE's experience in the entertainment category unlocks a unique opportunity for TransWorld to engage, compete and thrive. We will continue to create a next generation 360 degree consumer commerce model. Now, I'd like to open the call for questions. Thank Our first question comes from the line of Michael Hess with Hess Investments. Please go ahead with your questions. Hi. I was hoping you could give us a little more detail on the quarter for etailz, just to give us an idea of the growth that took place in the fourth quarter versus last year? Yes. Overall, the details were up kind of for the year, if you looked at them as a stand alone, they were up about 30%. And in the 4th quarter, they were up just under, 10%. On the top line. And is the 4th quarter by far their best quarter? Or does it, is it more Is it less seasonal than our business? It is less seasonal than our business, but it does have a seasonality to it. Thank you very much. Our next question comes from the line of William Myers with Miller Asset Management. Please go ahead with your questions. Yes. You used the term unlock potential. I think referring to etailz and FYE. Could you give us a little bit of detail. I mean, in my imagination, that's something like Etail's help helping to sell the physical product that's in your stores or warehouses. Is that right? Hi, William. It's, it's Michael. Great question. Without getting into too many specifics, we did reveal that we are going to be operating details as a standalone business. I think that that, that is very prudent. But at the same time, there are synergies that will be unlocked There are things like, the things you mentioned, but, you know, vendor access, as an example, or costing, or, even a corporate data approach and in the future trend identification. I mean, these are just a couple of the things that we're already unlocking through this relationship. Okay. If I could just follow-up on that. Tell me about trend identification. Again, without getting into too many specifics about the underlying tech technology. It is a data driven approach and a data driven merchandising approach that etailz engages in. And so through that data approach and algorithms, etcetera, they do identify trending opportunities in the marketplace. Okay. Thanks. Sounds good. Okay. Thank you. This concludes today's conference, excuse me, Q And A. I would like to turn the call back of management for closing comments. Thank you, Brenda. I would like to thank you for your time today. We look forward to talking to you about our first quarter 2017 results in May. Thank you, everyone. Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.