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Tweeter Q3 Net Income Turns Red

7/24/2003 08:18:00 AM Eastern

Canton, Mass. - Tweeter Home Entertainment group announced its earnings moved into the red for the three month period, ended June 30, posting a net loss of $4.1 million, compared with a barely-breakeven net income of $103,000 for the year-ago third quarter.

Tweeter's loss from operations reached $6.4 million in the third quarter, compared with income from operations of $678,000 in the same three months in 2002.

'Our biggest issue continues to be store traffic,' said Jeffrey Stone, president/CEO. 'As evidenced by the increase as a percent of sales of items such as rent, depreciation and a few other categories, driving top-line sales is the key. We reduced the pace of declining customer counts during the quarter, which we believe is a result of the new marketing strategy.

'One month, however, is not enough time and does not allow for the adequate collection of data to thoroughly evaluate the effect of our marketing changes,' continued Stone, 'so we are continuing to monitor this important metric as our marketing evolves. We will continue to be cautious with near-term sales expectations.'

Also in its fiscal third quarter, Tweeter said operating income, as a percentage of revenue, decreased to a negative 3.8 percent, down from 0.4 percent in the same period last year. This was due to a 230-basis-point increase in selling expenses, excluding an adjustment for reclassifying $5.7 million of co-op advertising funds from selling expenses to cost of sales, as well as a 240-basis-point decline in gross margin.

Overall gross margin in the third quarter decreased 240 basis points, to 33.8 percent, from 36.2 percent in the same three months in 2002. The majority of this was due to a 140-basis-point reduction in vendor rebates, with the balance due primarily to product margin and mix changes.

For its fourth fiscal quarter, ended in September, Tweeter expects comp-store sales in the range of negative 3 percent to negative 6 percent, with revenue in the range of $184 million to $189 million.

Nine month sales dropped to $602.1 million, down from $613.1 million, while the company reported a net loss of $1.4 million for the period, compared with net income of $16.2 million in the same nine months last year. The retailer took a $643,000 loss from operations in the nine months, compared with income from operations of $28.6 million in the same period in 2002.

In a conference call, Stone said the company is working to identify and correct operational issues and to develop a new strategic direction under its Foundations for Winning initiative. Targeted improvements include higher attachment rates for accessories and warranties; maximizing buying power; better store execution and category management; centralized freight costs; more efficient use of ad dollars; and improved supply chain efficiencies to reduce inventory and out-of-stocks.

On the strategic side, the company is considering various plans to re-invent itself in advance of dramatic changes in CE technology and market share gains by national discount chains, which would emphasize service and solutions in addition to product. 'Tweeter’s days of being a product-centric CE retailer only are on the way out,' Stone said. 'The digital world and the realities for a connected future have changed CE retailing, as have changes in industry players, and we are morphing, as all successful companies do in their lifecycle.'

Tweeter also is planning to increase gross advertising expenditures by $1 million, from 5.2 percent to 5.7 percent of planned revenue in the fourth quarter. The retailer expects a net loss of between $3.5 million and $5.2 million for the upcoming three months.

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