TRANS WORLD ENTERTAINMENT CORP filed 10-K on Tue, May 14

TRANS WORLD ENTERTAINMENT CORP revealed 10-K form on Tue, May 14 accessible here.

As of August 3, 2018, 36,225,824 shares of the Registrant’s Common Stock were issued and outstanding. The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Registrant’s Common Stock on August 3, 2018 as reported on the Global tier of The NASDAQ Stock Market, Inc. was $21,287,726. Shares of Common Stock held by the Company’s controlling shareholder, who controlled approximately 39% of the outstanding Common Stock, have been excluded for purposes of this computation. Because of such shareholder’s control, shares owned by other officers, directors and 5% shareholders have not been excluded from the computation. As of March 29, 2019, there were 36,258,839 shares of Common Stock issued and outstanding.

Trans World Entertainment Corporation, which, together with its consolidated subsidiaries, is referred to herein as ‘the Company’, ‘we’, ‘us’ and ‘our’, was incorporated in New York in 1972. We own 100% of the outstanding Common Stock of Record Town, Inc. and etailz, Inc. See below for additional information.

etailz generates revenue across a broad array of product lines primarily through the Amazon Marketplace. Approximately 60% of total etailz revenue was generated by four major categories: health & personal care; home/kitchen/grocery; tools/office/outdoor; and baby.

Video and music accounted for approximately 45% of the segment’s net sales in fiscal 2018 versus approximately 50% of net sales in fiscal 2017. Physical media sales have suffered from the shift of content to digital distribution, media streaming and online retailers that offer entertainment products to consumers and collectively have gained a larger share of the market.

E-commerce sales are growing faster than physical store sales. According to the U.S. retail e-commerce sales statistics, total estimated e-commerce sales for 2019 are projected at $560.7 billion, an increase of 11% from 2018, while e-commerce sales in 2018 accounted for 10% of total retail sales as compared to 9% of total retail sales for 2017.

During the fourth quarter of fiscal 2018, etailz implemented certain strategic initiatives in order to create operation efficiencies directed towards improving the etailz segment’s performance, operations, and cash flow to support the ongoing operating model changes and to create a leaner organization that is better aligned with current and future business focus. As part of the initiatives, a 30% reduction in force was implemented during the fourth quarter of fiscal 2018, in addition to changes in senior management. Additional reductions implemented included expenses related to technology, hardware, and employee benefits.

§Diversified product mix: the Company is expanding the range of product offerings in our non-media businesses. As a result, the non-media categories contribution to total sales increased to 55% in fiscal 2018 as compared to 50% in fiscal 2017. §Customer service: the Company offers personalized customer service in its stores guided by a commitment to approach every customer with gratitude, humility and respect. §Location and convenience: a strength of the Company is its convenient store locations that are often the exclusive retailer in regional shopping centers offering a full complement of entertainment products. §Marketing: the Company utilizes in-store visual displays, live events and digital marketing strategy that leverages email marketing, keyword buys, search engine optimization, social media, and display advertising.

The Company’s business is seasonal, with its fourth fiscal quarter constituting the Company’s peak selling period. In fiscal 2018, fourth quarter revenue accounted for approximately 30% of annual total revenue. In anticipation of increased sales activity in the fourth fiscal quarter, the Company purchases additional inventory and hires seasonal associates to supplement its core store sales and distribution center staff. If, for any reason, the Company’s net sales were below seasonal norms during the fourth fiscal quarter, the Company’s operating results could be adversely affected. During the fourth quarter of fiscal 2018, fye comparable store sales (as defined within Key Performance Indicators of Item 7) increased 2.8% compared to the same quarter last year. etailz sales declined 8.3% for the fourth fiscal quarter of 2018 compared to the same quarter last year and adversely affected annual results. Quarterly sales can also be affected by the timing of new product releases, new store openings or closings and the performance of existing stores.

The fye segment purchases inventory from approximately 460 suppliers. In fiscal 2018, 37% of fye purchases were made from ten suppliers including Universal Studio Home Entertainment, Paramount Video , Buena Vista Home Video, SONY Music, Twentieth Century Fox Home Entertainment, Warner/Elektra/Atlantic, Universal Music Group Distribution, Funko LLC, Warner Home Video, and Alliance Entertainment.

During fiscal 2018, etailz purchased inventory from various suppliers in numerous product categories, primarily through the Amazon Marketplace. In fiscal 2018, no individual supplier exceeded 10% of etailz revenue.

Physical media sales have suffered from the shift of content to digital distribution, streaming and online retailers that offer entertainment products at discounted prices and collectively have gained a larger share of the market. Physical video and music represent approximately 45% of sales and have been impacted by new distribution channels, including digital distribution, streaming and internet fulfillment.

During the fourth quarter of fiscal 2018, etailz implemented certain strategic initiatives in order to create operation efficiencies directed towards improving the etailz segment’s performance, operations, and cash flow to support the ongoing operating model changes and to create a leaner organization that is better aligned with current and future business focus. As part of the initiatives, a 30% reduction in force was implemented during the fourth quarter of fiscal 2018. Additional reductions implemented included expenses related to technology, hardware, and employee benefits.

Approximately 37% of fye segment’s purchases come from ten major suppliers. As is standard in its industry, the Company does not maintain long-term contracts with its suppliers but instead makes purchases on an order-by-order basis. If the Company fails to maintain customary trade terms or enjoy positive vendor relations, it could have an adverse effect on the Company’s results of operations.

Historically, the etailz segment has not experienced difficulty in obtaining satisfactory sources of supply and management believes that it will continue to have access to adequate sources of supply. No individual supplier exceeded 10% of etailz purchases.

We operate a distribution center in Albany, New York. We ship approximately 82% of our fye segment merchandise inventory through our distribution center. If our distribution center is destroyed or disrupted for any reason, including weather, fire, labor, or other issues we could incur significantly higher costs and longer lead times associated with distributing our products to our stores during the time it takes to reopen or replace the distribution center.

We maintain an asset-based revolving credit agreement with Wells Fargo Bank, N.A., which provides for a senior secured revolving credit facility (‘ABL Facility’) of up to $75 million. The ABL Facility contains various representations, warranties and restrictive covenants that, among other things and subject to specified circumstances and exceptions, restrict our ability to incur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers, dispose of certain assets or change the nature of their business. In addition, excess availability equal to at least 10% of the loan cap must be maintained under the ABL Facility. The ABL Facility does not otherwise contain financial maintenance covenants. These restrictions could (1) limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and (2) adversely affect our ability to finance our operations, strategic acquisitions, investments or other capital needs or to engage in other business activities that would be in our interest.

The Robert J. Higgins TWMC Trust (the ‘Trust’) owns approximately 39% of the outstanding Common Stock. Therefore, the trustees have significant influence and control over the outcome of any vote of the Company’s Shareholders.

The Robert J. Higgins TWMC Trust owns approximately 39% of the outstanding Common Stock and there are no limitations on the Trust acquiring shares in the future. Accordingly, the trustees have significant influence over the election of our directors, the appointment of new management and the approval of actions requiring shareholder approval, such as adopting amendments to our articles of incorporation and approving mergers or sales of all or substantially all of our assets. Such concentration of ownership and substantial voting influence may have the effect of delaying or preventing a change of control, even if a change of control is in the best interest of all shareholders. There may be instances in which the interest of the Trust may conflict or be perceived as being in conflict with the interest of a holder of our securities or the interest of the Company. W. Michael Reickert, a member of the Board of Directors of the Company, is a trustee of the Trust.

The Company believes that it has adequate distribution facilities to meet the Company’s current business needs. Shipments from the Albany distribution facility to the fye segment’s retail stores provide approximately 82% of merchandise shipment requirements to stores. Stores are serviced by common carriers chosen on the basis of geography and rate considerations. The balance of the stores’ merchandise requirements is satisfied through direct shipments from vendors. The Spokane, WA distribution center supports the distribution to outside distribution facilities for sale on third-party marketplaces.

To strengthen customer loyalty, the fye stores offer its customers the option of signing up for a Backstage Pass card which provides an additional 10% discount off of everyday selling prices on nearly all products in addition to other value added benefits members receive through the program in exchange for a membership fee. The Company also hosts events to provide various segments of customers an opportunity to experience entertainment and shop for unique and exclusive products based on their particular interests.

During the fourth quarter of fiscal 2018, etailz implemented certain strategic initiatives in order to create operation efficiencies directed towards improving the etailz segment’s performance, operations, and cash flow to support the ongoing operating model changes and to create a leaner organization that is better aligned with current and future business focus. As part of the initiatives, a 30% reduction in force was implemented during the fourth quarter of fiscal 2018. Additional reductions implemented included expenses related to technology, hardware, and employee benefits.

The Company’s fiscal year is a 52 or 53-week period ending the Saturday nearest to January 31. Fiscal 2018, and 2017 ended February 2, 2019 and February 3, 2018, respectively. Fiscal 2018 had 52 weeks and fiscal 2017 had 53 weeks. The 53rd week in fiscal 2017 contributed approximately 1% to net sales.

Total revenue decreased 5.6% to $418.2 million compared to $442.9 million in fiscal 2017.

The 13.9% net sales decline from the prior year is primarily due to an 11.1% decline in average stores in operation and a 2.0% decline in comparable store net sales. Stores closed in fiscal 2018 and fiscal 2017 recorded sales of $26.5 million and $14.9 million, respectively. Total product units sold for fiscal 2018 decreased 18.5% while the average retail price for units sold increased 3.3%.

fye stores offer a selection of trend/lifestyle products that primarily relate to theatrical releases, music, and gaming. The trend/lifestyle category increased 5.1% on a comparable store sales basis in fiscal 2018 and represented 41.5% of the Company’s total net sales in fiscal 2018 versus 37.3% in fiscal 2017. The Company continues to take advantage of opportunities to strengthen its selection and shift product mix to growing categories of entertainment-related merchandise. The Company grew sales in this category by strengthening its assortment of consumables and collectables, as well as by improving the product presentation and value proposition.

fye stores offer a wide range of new and used DVDs, Blu-rays, and 4Ks in all of its stores. Total net sales for the video category declined 8.8% on a comparable store sales basis in fiscal 2018. Video sales were negatively impacted by industry wide declines in physical video due to digital options. According to the Industry Dashboard, during the period equivalent to the Company’s fiscal 2018, total industry video sales declined 12.8%.

fye stores offer a wide range of new and used CDs, music DVDs and vinyl across most music genres, including new releases from current artists as well as an extensive catalog of music from past periods and artists. Total net sales in the music category declined 8.6% on a comparable store sale basis in fiscal 2018.

fye stores offer a selection of complementary portable electronics and accessories to support our entertainment products. The electronics category increased 5.0% on a comparable store sales basis. Electronics represented 13.3% of the Company’s total net sales in fiscal 2018 versus 12.5% in fiscal 2017.

Gross profit decreased 11.0% to $128.1 million compared to $143.9 million in fiscal 2017 primarily due to the closure of 50 stores.

Gross profit as a percentage of sales was 38.6% in fiscal 2018 as compared to 38.8% in fiscal 2017. The slight decline in rate was due to higher inventory markdowns to sell off seasonal and slow moving merchandise and liquidation sales for closed stores.

etailz gross profit as a percentage of revenue was 20.8% in fiscal 2018 as compared to 22.7% in fiscal 2017. The decline in the gross profit rate was primarily due to higher marketplace fulfillment and warehousing fees.

SG&A, excluding depreciation and amortization, decreased $7.8 million, or 6.8%, primarily as a result of lower expenses due to fewer stores in operation. The increase in the rate as a percentage of fye revenue was primarily due to the comparable sales decline and increased corporate home office expenses to support strategic growth initiatives.

etailz SG&A, excluding depreciation and amortization, expenses increased $9.5 million, or 24.1%, primarily as a result of investments in product identification and sourcing, technology, and platform diversification, in addition to an increase in marketplace commissions as a result of higher sales.

Interest under the Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of availability, with the Applicable Margin for LIBO Rate loans ranging from 1.75% to 2.00% and the Applicable Margin for Prime Rate loans ranging from 0.75% to 1.00%. In addition, a commitment fee of 0.25% is also payable on unused commitments.

February 2, 2019 compared with 44.0% as of February 3, 2018. Accounts payable leverage on inventory for the etailz segment was 22.7% as of February 2, 2019 compared with 16.6% as of February 3, 2018.

Shrink expense, including obsolescence was $3.4 million and $5.4 million in fiscal 2018 and fiscal 2017, respectively. As a rate to net sales, this equaled 0.8% and 1.2% for fiscal 2018 and fiscal 2017, respectively.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. It is the Company’s practice to recognize interest and penalties related to income tax matters in income tax expense (benefit) in the Consolidated Statements of Operations.

The new standard also provides practical expedients for an entity’s ongoing accounting. Management currently expects to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition, which represents approximately 158 retail stores, or 75%, of the total number of retail stores in operation at February 3, 2019. Management also currently expects to elect the practical expedient to not separate lease and non-lease components for all of its leases.

Interest under the Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of availability, with the Applicable Margin for LIBO Rate loans ranging from 1.75% to 2.00% and the Applicable Margin for Prime Rate loans ranging from 0.75% to 1.00%. In addition, a commitment fee of 0.25% is also payable on unused commitments.

The fye segment offers a 401(k) plan which permits participants to contribute up to 80% of their salary, including bonuses, up to the maximum allowable by IRS regulations. The Company matches 50% of the first 6% of employee contributions after completing one year of service. Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Participant vesting of the Company’s matching contribution is based on the years of service completed by the participant. Participants are fully vested upon the completion of four years of service. As of February 3, 2019, the fye segment suspended its matching contribution in response to one of the Company’s cost-cutting initiatives.

The etailz segment offers a 401(k) plan which permits participants to contribute up to the maximum allowable by IRS regulations. The Company matches 100% of the first 6% of employee contributions after completing one year of service. Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Participant vesting of the Company’s matching contribution is based on the years of service completed by the participant. Participants are fully vested upon the completion of three years of service. All participant forfeitures of non-vested benefits are used to reduce the Company’s contributions or fees in future years.

On December 22, 2017, the Tax Cuts and Jobs Act (the ‘Act’) was enacted. The Act makes broad and complex changes to the U.S. tax code including a significant reduction to the U.S. federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018. These changes were presented on prior year, rate reconciliation, accordingly, the federal deferred tax assets were written down to account for the change in fiscal 2017. The write down is reflected in both the valuation allowance and the deferred tax assets which total $35.0 million in fiscal 2017. As of February 3, 2018 this change is also presented in the effective tax rate schedule as a reduction to the prior year losses by 79.4%. The valuation allowance rate impact includes an offsetting reduction for the tax rate which results in no change to the provision for income taxes.