Trans World Entertainment President and Chief Executive Officer Robert Higgins has been called the “last man standing” in the specialty retail music industry, but an independent investment research firm is predicting that he might have to take a seat soon.
Chicago analysis firm Morningstar released a report Wednesday naming five publicly traded companies — including Trans World in Guilderland — that it believes “are headed, sooner or later, for bankruptcy court.”
Morningstar largely based that outlook, which a Trans World executive refuted, on an August report by analyst Joseph Beaulieu. The report was titled, “We don’t think Trans World will be around five years from now.”
Morningstar’s bankruptcy forecast came as retailers are bracing for a dismal holiday shopping season and days before Trans World posts its third-quarter results, set for Nov. 20. Although Morningstar noted that the retailer’s balance sheets are strong enough to enable it to “continue to limp along indefinitely,” it added that its business model “is quickly becoming obsolete” and management does not have “a credible plan to change.”
“In its current form, Trans World is a no-moat company with minimal prospects of generating solid sales and earnings growth. … We don’t think that this firm will exist in its current form five years from now,” the report states.
Morningstar pegged Trans World’s stock at a fair value of zero. It believes that the retailer will take the same route to bankruptcy court that many of its competitors took, such as Tower Records in Sacramento, Calif., and Musicland Holding Corp. in Minneapolis. While Trans World acquired Musicland and its 400 stores in a bankruptcy court auction, it was outbid for Tower.
Over the past three years, Trans World executives have been trying to limit their exposure to the ailing music industry by diversifying the company’s offerings into DVDs, video games, electronics and accessories, making it an “all entertainment” retailer. This year, it ramped up closings of under-performing stores and consolidated distribution facilities in Canton, Ohio, and Johnstown. By Aug. 2, the company had 789 stores, compared with 963 a year earlier.
Trans World Senior Vice President and Chief Executive Officer John Sullivan said the company is not bankruptcy-bound and stressed how even the Morningstar report highlights the retailer’s strong balance sheet.
“We’re focused on that. When a company is going through tough times, it’s critical to manage the sheets,” Sullivan said.
For its second quarter, ending Aug. 2, Trans World’s net loss deepened to $31.1 million from $19.1 million a year earlier. During the same period, sales declined 19.1 percent to $447.8 million.
Those losses have helped knock Trans World’s stock price down precipitously over the past several years. By the close of trading Tuesday, the company’s stock was down 2.8 percent to $2.06 per share. By comparison, four years ago, it was trading at $10.85 per share.
“[I]nvestors have said, ‘We don’t think Trans World has a bright future,’ ” said Edward Woo, an analyst for Wedbush Morgan Securities in Los Angeles.
Morningstar said Higgins’ failed attempt last November to take Trans World private prompted it to review the company’s stock valuation. Beaulieu said the retailer does not appear to be an “attractive acquisition candidate.”
However, in recent weeks, three investors —including Higgins — have been buying chunks of company stock, stoking speculation of a renewed buyout bid. The other two investors include Bryant Riley, Higgins’ Los Angeles partner in the initial buyout bid, and Lloyd Miller III, whose Sherwood Investments Overseas in Naples, Fla., launched a counter bid to that $5-per-share offer last November.
The investor trio have bought more than 800,000 shares of Trans World since Sept. 30, but that represents less than 3 percent of the retailer’s 31.3 million shares of common stock. Woo said it is hard to tell whether the trio’s confidence in the company — or other investors’ lack of it — will prevail in the long term.
“They like the company. Otherwise, they wouldn’t be buying more stock,” Woo said of Higgins, Riley and Miller.