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Tweeter Posts Fiscal Q2 Loss

Canton, Mass. – Tweeter Home Entertainment Group moved into the red in its fiscal second quarter, reporting a net loss of $2.5 million, compared with income of $2.6 million in the year-ago period.

Loss from operations in the second quarter, ended March 31, came in at to $3.3 million, compared with income from operations of $4.9 million in the same period last year.

Tweeter said operating income decreased to a negative 1.8 percent, as a percentage of revenue, compared with 2.6 percent in the same three months a year earlier. This was due to a 400-basis-point increase in selling expenses, as well as a 20-basis-point drop in gross margin from 35.7 percent, to 35.5 percent.

‘Our biggest issue continued to be store traffic in the March quarter,’ said Jeffrey Stone, president/CEO. ‘We remain focused on taking costs out of the business through improvements in process and systems. Our financial models demonstrate solid improvements in profitability as we approach flat comps.’

Last month, Tweeter announced sales for the second fiscal quarter. (See TWICE, April 21, P.1.) Revenue at Tweeter was down 2.1 percent, to $182 million, from $185.8 million in the year-ago period. Comp-store sales slid 12 percent, excluding January and February sales for the Hillcrest chain acquired on March 1, 2002.

Tweeter, which places the video category at 52 percent of sales, audio at 30 percent, auto at 12 percent and other, including installation labor, at about 8 percent, enjoyed a year-to-year comparative increase in video in the second quarter, while audio was down a bit and auto was stable.

In flat-panel television, an $11 million pick-up in second quarter revenue was negated somewhat by the loss of $7.6 million in tube sets, said Tweeter. Flat panel currently accounts for about 12 percent of overall revenue. The category commands a higher margin than tube, but has had little effect on overall margin short-term. Yet, this will change to a higher percentage over time, said Tweeter.

The home installation business has the potential for being a growth engine, said Tweeter. Labor revenue from this business grew to 2.8 percent of sales in the quarter, from 2.2 percent.

`Inventory at the end of the second quarter was $144 million, down from $162 million at the end of the first fiscal three months. This compares favorably to last year, when Tweeter had $155 million in inventory, with 19 fewer stores. The retailer expects the inventory level at the end of the third quarter to come in at about $135 million.

The company opened 12 new stores in the past six months, with none on board for the remainder of the year and maybe only a few next year.

Tweeter, which closed on a new three-year $110 million line of credit in April, also noted the current replacement of a long-term radio-based marketing strategy with print advertising, effective in the June quarter, but starting to commence in May.

‘We believe moving to this new [advertising] strategy will appeal to customers who we may have not touched with our radio campaign over the years, and bring new customers into our stores,’ said Stone in an analyst conference call. ‘We want to become more aggressive leading market comps,’ said Stone.

‘In the past, we would sit and wait for customers to come in, they would see our [advertised] price, but we would sell at the market price. The problem was this strategy was not driving sales,’ said Stone.

Tweeter’s new marketing campaign, which already has shown some success in tests, would let customers know about the chain’s competitiveness, its product values. ‘We just haven’t had the vehicle to tell customers this before,’ said Stone about new print ads for getting the message across.

Stone expects Tweeter will take a hit in margin, but the ads will help to solve the traffic problem. ‘Although we think this change in marketing strategy will help drive traffic, our concerns regarding the underpinnings of the economy and resultant mood of the consumer and the financial markets continue to cause us to be conservative with near-term sales expectations,’ said Stone.

Looking ahead to the third quarter, Tweeter is anticipating comp-store sales in the range of negative 6 percent to negative 10 percent, which will put revenue in the range of $176 million to $183 million.

Including charges in the third quarter, Tweeter expects a net loss for the three months of between $2.3 million and $3.9 million.