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Tweeter Revenue Rises 2%, Net Loss Widens

Canton, Mass. — In the process of closing underperforming stores, Tweeter Home Entertainment Group posted a 2 percent fiscal third-quarter increase in revenue from continuing operations, climbing to $166.6 million from a year-ago $162.9 million.

Subsequently, the retailer increased its loss from continuing operations to $33.9 million for the three months, ended June 30, compared with a year-on-year loss of $8.7 million. The $33.9 million was 20.3 percent of total revenue.

Excluding restructuring charges, the operating loss from continuing operations would have been $17 million, or 10.2 percent of total revenue, compared with $8.7 million, or 5.4 percent of total revenue in the third quarter last year.

Net loss from continuing operations was $24.5 million, which includes restructuring charges of $16.9 million, related to store closings. This compares with a net loss from continuing operations of $5.6 million in the same three months in 2004. Net loss for the quarter hit $31.9 million, compared with $6.1 million year-over-year.

In the second quarter of this year, Tweeter had announced the closing of 19 underperforming stores, of which, 18 have been closed to date. The final store will be closed by Sept. 30.

Thirteen of the closed stores were in markets where the retailer will have a continuing presence, and results of their operations are included in continuing operations. Closing of the 13 stores resulted in a restructuring charge of $16.9 million. The quarterly and year-to-date operating losses from these stores are excluded from the restructuring charges. The remaining six closed stores were in single-store markets and were accounted for as discontinued operations.

Excluding the impact of the 19 closed stores, comp-store revenue dropped 3.8 percent, while gross margin improved by slightly over 1 percentage point. The operating loss from closing stores totaled $4.1 million, while store closings resulted in a 5 percent reduction of Tweeter’s total workforce.

“In our third quarter, we carried out the difficult process of closing underperforming stores,” said newly named CEO Joe McGuire. “Combining our operating losses and restructuring charges, these stores accounted for more than $28 million of our operating losses in the quarter. These stores, which represented 11 percent of our fleet, accounted for only 4.7 percent of our revenue. We have streamlined and upgraded our fleet, and we can now focus our resources and management attention on improving its performance.”

Encouraged by changes in pricing and volume trends at Tweeter this quarter, McGuire said, “For the first time, unit lift exceeded ASP decline for flat-panel TVs. While ASP’s declined more than 20 percent, volume was up more than 50 percent, compared to a year ago. The only product category that disappointed us was mobile electronics, which fell more than 15 percent from last year.”

In a conference call with analysts, McGuire said flat-panel TVs, including LCD and plasma units, accounted for 25 percent of Tweeter revenue in the third quarter, up from 21 percent year-over-year. Rear-projection sets moved down to 16 percent of chain revenue in the three months, from 18 percent in the same three months in 2004, while tube sets accounted for only 1 percent of revenue in the third quarter, down from 3 percent the previous year.

Looking at the audio category, McGuire said, while category business still was negative, sales were flattening out. “I am excited about audio. It could grow again as a percent of our product mix. It’s about to turn the corner.”

Asked about a possible sale of Tweeter, McGuire said, “We are focused on turning the enterprise around. [As for a sale,] everything else is just talk.”

Asked about plans for holiday sales, Sandy Bloomberg, Tweeter’s chairman and founder, said, “We clearly are going away from price and item advertising. We will be spending on radio and television, like in the ‘90s. Little will be spent on newsprint, and there will be a good increase in direct marketing.”

As for the company’s growing installation business, Tweeter said there had been more integration of both the sales process and the installation process, so the entire process can “be brought to life in the home.” The retailer has both the in-store selling part of installation and the actual installation operating more as one unit, bringing the customer a “greater experience.”

For the nine months, Tweeter sales rose to $606.8 million, from $591.9 million in the same period a year earlier. Loss from continuing operations for the nine months jumped to $31.5 million, from a loss of $6.2 million last year. Net loss from continuing operations increased to $45 million in the third quarter, up from a loss of $4.4 million the previous year. Net loss for the period reached $54.4 million, compared with $5.6 million in the same nine months a year ago.