Tweeter Q3 Sales, Earnings Slide

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Canton, Mass. — Specialty retailer Tweeter Home Entertainment Group recorded lower revenue, comparable store sales and a widening loss in its fiscal third quarter.

Tweeter sales for the three months, ended June 30, slipped 1 percent, to $168.6 million, from $170.4 million in the year-ago period. Comp-store sales were off 2 percent in the third quarter.

The retailer reported increases in both its operating and net loss for its third quarter. Its operating loss climbed to $9.6 million, up from a loss of $6.8 million in the same three months in 2003, while its net loss moved up to $6.1 million, compared with a loss of $4.1 million in the same quarter a year ago.

As a percentage of revenue, Tweeter’s operating loss was 5.7 percent, compared with an operating loss of 4 percent year-on-year. This was primarily due to a slight increase in gross margin, nearly a 1 point increase in selling expenses and a near 2 point rise in corporate expenses.

The increase in gross margin can be attributed to additional vendor allowances received, while the rise in selling expenses can be traced to an increase in compensation expense associated withbuilding its in-home installation infrastructure, occupancy costs and vehicle expenses, said Tweeter.

However, the retailer is enjoying some better results in the current period, with comp-store sales through July up about 2 percent, and comp expectations for the quarter ending in September at between flat and up 2 percent.

“Our team continues to make great strides improving the balance sheet,” said Jeff Stone, president/CEO. “During our fourth fiscal quarter we will introduce refinements to our marketing program, work out any bugs and be prepared to enter fiscal 2005 with a strong marketing voice — something that has been missing for the last two years.”

Net inventory at the end of the third quarter was $114 million, compared with the year earlier inventory-ending level of $133 million. This resulted in about a one-half-point improvement in turns year-over-year, and the retailer expects to finish the fiscal year with turns near four times.

In a conference call, Stone and Joe McGuire, chief financial officer, assured analysts the bottom line is being bolstered by continued debt-reduction, cost cutting, supply chain improvements and fatter margins.

The latter were attributed to better attachment rates, increased use of private label lines, rebounding audio sales and a burgeoning home installation business, which represented 4.1 percent of total revenue in June and is constrained only by Tweeter’s nascent installer base.

Indeed, attachment rates of audio products and service contracts hit record levels during the third quarter, which will help offset expected declines in the average selling prices and margins of flat and microdisplay TVs this holiday season, as retails on 42-inch EDTV plasma panels hit $3,000, McGuire said.

“We’re seeing an increase in supply, an increase in suppliers and an increase in the number of SKUs from those suppliers,” continued McGuire. “We’ll just have to see how it all shakes out in the fall.”

McGuire added that direct-view TVs had fallen to 3 percent to 4 percent of Tweeter’s revenue last quarter, compared with 6 percent to 8 percent last year, and he predicted these will fall to between 1 percent and 2 percent of the revenue mix early next year.

Conversely, Stone said the price declines on high-end TVs are largely responsible for the “relative strength” the company is seeing in audio receiver and loudspeaker sales, following annual industry declines of 30 percent to 40 percent in recent years. Stone also attributed Tweeter’s audio increases to the introduction of new product lines and the popularity — and rich margins — of in-wall speakers as part of a home installation solution.

Looking ahead, Tweeter will launch a new, “more focused” radio and limited TV ad campaign by the end of August. This will emphasize the new products and services now offered by the chain, which has tentative plans to open four new stores, relocate two and close one sometime next year.


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