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Tweeter Sales Rise 4% In Fis. Q2, Loss Widens

4/27/2004 12:55:00 PM Eastern

Canton, Mass. — Along with Tweeter Home Entertainment’s acquisition of North Carolina-based specialty chain NOW! AudioVideo (see related story), the national retailer reported stronger fiscal second quarter revenue and comp-store sales, but a wider loss.

Tweeter pushed its second quarter revenue up by 4 percent, hitting $189.3 million from $182 million the previous year, with comp-store sales rising 3 percent.

However, the retailer increaed its net loss in the second three months, ended March 31, to $4.6 million from a year-ago $2.5 million. The latest quarter’s results included a $5.1 million non-cash compensation charge.

Excluding the charge, Tweeter’s operating loss for the second quarter was $2.2 million, compared with a $3.3 million loss in the year-ago period. As a percentage of revenue, the operating loss this year was 1.2 percent, compared with 1.6 percent year-on-year.

"Although our bottom-line performance for the second quarter does not speak to our progress," said Jeff Stone, president/CEO, "we feel that we are making substantial improvements in many facets of our business."

Tweeter attributes a nearly 1 percentage point decline in second quarter gross profit to both an increase in its mix and a decrease in the margin rate of television products, a fact which Tweeter said has been the case for several quarters. A decline in advertising, insurance and payroll costs led to nearly a 2 percentage point decrease in expenses, with a $6 million increase in corporate expenses attributable to $5 million in warrants issued by the retailer.

For the six months, Tweeter sales climbed to $444.5 million from $431.6 million, while net income declined to $551,000 from $2.7 million. Operating income for the six months reached $1.4 million, down from $5.7 million year-over year.

"We are very pleased with our progress managing expenses," said Joe McGuire, chief financial officer. "We are also pleased with the progress being made in our supply chain, inventory management and cash conversion cycle initiatives."

Tweeter posted net inventory at quarter end at $124 million, compared to a year-earlier inventory ending level of $144 million. Discontinued inventory held steady at 10 percent of total inventory, while in-stocks for the second three months ran on average at 87 percent, which is a continued improvement over the past two quarters.

In a conference call, Stone said key drivers going forward would be higher traffic, attained through better marketing, and expanding home installation sales.

Previous marketing efforts have been ineffective and cost-inefficient he said, and the hiring of Mark Richardson in March as senior marketing VP and chief brand officer, a new position, is designed to address that. He said Richardson is working on repositioning the brand so it will have "more sticking power in consumers’ minds," and on more targeted marketing that reaches Tweeter’s better customers. "We don’t need to spend $30,000 on a radio spot to talk to 800,000 customers," he said.

Tweeter will also abandon its recent sales-based strategy and return to a pricing-based strategy, Stone said.

On home installation, Stone described Tweeter as the largest custom installer in CE, and said that revenue from that business can grow from the current 3.5 percent of total sales to upward of 10 percent. This would be $100 million by the time the company hits the $1 billion mark in annual sales. Home installation is also a "key component" of Tweeter’s new business strategy, which will be fully unveiled to analysts later this spring, Stone said.

In the conference call, he and McGuire said that strategy would rest on home networking, with Tweeter playing a "significant role" in content management and the distribution of audio, video and data throughout the house using built-to-order media center PCs and wireless or hardwired in-wall systems.

Stone added that content distribution is a growing category that that more consumers will want in the future. "To be only an audio and video dealer two years from now wouldn’t allow us to be a meaningful entity," he said. — Additional reporting by Alan Wolf

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