Wednesday, November 02, 2005

Trading Below Net Current Asset Value:
Trans World Entertainment Corp
Ticker: TWMC
Price: $6.45
Current P/E: 11
Shares Out: 31.9 million
Market Cap: $208 million
Net Current Asset Value: $215.4 million
Average daily volume: 115,000
*All Data as of market close 11/1/05

Trans World entertainment is an Albany, New York based specialty retailer, operating a chain of 810 stores, selling music, video, video home system products and games in 46 states. 249 stores are free standing, operating under the“Coconuts Music and Movies”, “Wherehouse Music and Movies”, “CD World”, “Streetside Records”, “Spec’s Music”, and “Second Spin” brands, while 560 are mall based, operating under the “FYE, For Your Entertainment” brand. The company also operates one Planet Music store. Music (CD’s, mainly) accounted for 55 percent of 2005 sales, Video products represented 29.2 percent, while Games and other represented 15.8 percent. (Before we go any further with this report, this company is not a potential real estate play, as 809 of the stores are under operating leases)

We recently identified this as a profitable company trading below NCAV. (Finding a company trading below NCAV that isn’t profitable is relatively easy. Those that are simultaneously generating a profit are few and far between.)

We are not typically crazy about retailers here at Cheap Stocks, especially those in highly competitive spaces, such as Trans World. However, discovering a retailer trading below NCAV is quite rare. One of our first postings when we started this site focused on Circuit City, at the time, cash rich, and trading below its NCAV, also in a highly competitive retail segment. Circuit City subsequently had a nice run-up. We are not making a comparison between the two companies, however.

The numbers
Fiscal year 2005 sales were $1.365 billion, up slightly from 2004’s $1.33 billion. Net income was $41.8 million in 2005, versus income of $23 million in 2004. Net profit margins were 2.8 percent in 2005, up sharply from 2004’s 1.4 percent.

…..And Now For The Bad News….
Companies often make the NCAV list because their price, and hence market cap fall, sometimes dramatically. It’s not typically a case of net current assets rising. In Trans World’s case, the company has taken a hit recently, falling from the $15 range this past spring, to the current $6 level. Why the drubbing? The company has been lowering earnings guidance significantly. Back in May, the company announced earnings expectations of $.85-$.90 per share for the year (ending 1/06). By July, their expectations fell to $.80-$.85. In August, the company lowered guidance again, to $.65-$.70. Last month, the company lowered guidance yet again, all the way down to $.25-$.30. Trans World attributed the latest news to weakness in music and DVD sales, and the lack of any strong new releases. Can it get any worse? It certainly could, given this company’s recent pre-announcement record.

The balance sheet
As of 7/30/05, the company had $50.9 million in cash and $20.9 million in long-term debt (including capital leases). Current ratio stood at 2.22, while quick ratio was .38. All in all, a decent, but not great, balance sheet. (If you’ve read our NCAV reports in the past, you know how much we here at Cheap Stocks love cash, and dislike debt in our NCAV companies)

The NCAV Calculation (in millions)
Current Market Cap: $208
Current Assets: $484
Current Liabilities: $218
Long Term Liabilities (primarily LT debt) $40
Net Current Asset Value: $215
NCAV/Market Cap: 1.03

Institutional ownership (greater than 2 percent)
Morgan Stanley: 10.3 %
Dimensional Fund Advisors: 9.2 %
Barclays Global Investors: 4.8 %
LSV Asset Management: 3.5 %
American Century Investment Management: 2.1 %
AX Rosenberg Investment Management: 2%

We are not crazy about the highly competitive business in which Trans World operates. While the current assets are highly concentrated in inventory- which must be moved in order to realize sales/profits- that is par for the course with a retailer. Otherwise, the balance sheet is decent, with net cash of $30 million, or about $1 per share. The company’s constant negative earnings guidance announcements are troublesome. The question is whether all the bad news, and none of the positives, are currently reflected in what appears to be a cheap current price. Only time will tell, but this is one worth watching.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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