Sometimes retail can resemble the Clint Eastwood spaghetti western The Good, the Bad and the Ugly. The "ugly" is when you tell your shareholders you don't think you have enough cash to keep the lights on for much longer, as Tweeter Home Entertainment Group
The company's second-quarter results were downright awful. Sales slid by 13% and gross profit margin dipped 380 basis points. While the company shaved $5 million from expenses, operating income before restructuring and impairment charges was negative $9 million compared to positive $1 million last year.
The company went on to explain that despite receiving a $13.9 million tax refund during the quarter, it "believes it does not have sufficient working capital to fund its short-term needs." The final piece of an all-around ugly announcement was Tweeter suggesting it may choose to file for Chapter 11 bankruptcy if it can't raise some more cash soon.
In the short term, the company needs time to execute a restructuring plan announced in March to close 49 stores (about one-third of the total) and convert the remaining stores to its revamped "Consumer Electronics Playground" concept. Six of the 49 stores have closed, and Tweeter has moved through about half the $35 million inventory in the closing stores, but it is now in a cash crunch. The company is investigating the sale of its minority stake in Tivoli and trying to raise additional capital, but the bankruptcy warning likely means time is running out.
I'm a little surprised the situation has deteriorated this quickly, since in March the company announced a new five-year revolving credit facility with GE Capital that was supposed to provide more liquidity. A quick check of the balance sheet shows what is happening. Working capital declined from $57 million in December to $25 million in March. You can only borrow against assets that provide effective collateral. The company has been liquidating inventory, but sales and margins haven't been high enough to improve the cash position to a meaningful degree. The liquidity factor is shrinking dangerously.
Chapter 11 might be the right short-term answer for Tweeter. Closing one-third of your locations is a tough act. Landlords don't take kindly to early lease terminations. A filing could offer an easier route to exiting the leases, and help to fend off creditors while Tweeter struggles to transform itself.
More problematic is the vendor side of the equation -- you can't sell merchandise if you don't have it. Can Tweeter convince its suppliers the company occupies a viable niche for the future? For my money, a company like Sony
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Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, but doesn't own shares of any companies mentioned in this article. The Fool's disclosure policy whistles while it works.