tweeter stores by mcmustymust


									                                             OLSON PARTNERSHIP LTD.

                                 With the right management, Tweeter could be successful

                                                     BY MAX OLSON

              Home Entertainment re-
Tweeter announcedstores andsell one
third of its 153 retail
                        it will
                                lay off
                                            price consumer durables at much high-
                                            er prices than their equivalents at Wal-
                                            Mart and Costco because they give
                                                                                             comes to $15 per square foot. So,
                                                                                             Tweeter needs to generate over $15
                                                                                             per square foot of retail space in oper-
over 650 workers. Although such cuts        customers something the discounters              ating income (before rent expense) to
are never good news, these actions may      don't: convenience and speed. Some-              justify the investment. For 2006, that
constitute a necessary step for Tweeter     one who needs a prescription in the              threshold was about $11 per square
to take to further its turnaround effort.   middle of the night or a tube of tooth-          foot, including excess depreciation.
With a 2006 net loss of $0.66 per           paste isn’t going to make the trip to a              That's not too bad. $11 per square
share, Tweeter needs to be as lean and      discount superstore when there's a               foot is slightly higher than Sears/
competitive as possible. The company        Walgreens right around the corner.               Kmart at the moment—however,
hasn't turned a profit since 2001;          But, this kind of “service” differentia-         Sears Holdings has a much lower real
clearly something needed to be done.        tion only goes so far.                           estate cost. Compare this to Best Buy
    Management still has a lot more to          Paying an extra dollar for tooth-            who has sales of $930 per square foot
do to turn things around, and I blame       paste isn’t bad. But, when you’re shel-          (vs. Tweeter's $457) and operating in-
them for Tweeter’s poor performance         ling out a couple grand on a flat-screen         come before rent expense of $72 per
in recent years. They are not as bad as     TV, saving $500 means a lot. Some                square foot – which is over six times
some others I've seen. They just seem       home entertainment buyers would like             Tweeter’s profit per square foot.
stuck on the idea that people will keep     the extra service and knowledge that                 With the right management team
coming to their stores for all their        comes from buying at Tweeter. But,               (or a completely different view from
home entertainment needs, regardless        apparently the cost of providing this            the current team) Tweeter could be
of price. A sign in their store reads:      service is more than the premium                 very successful—both with its stores
“Price should never be a reason to not do   charged for that service.                        and with its shareholders. Right now,
business with us.”                              In an article announcing the store           the stock is trading at approximately
            CARVING A NICHE                 closings, the Associated Press wrote:            53% of tangible book value. By my cal-
       hen you have places like Costco,                                                      culations, if the company achieved a
W      Best Buy, and Circuit City un-
                                                 "[CEO Joe] McGuire said Tweeter
                                            wants to focus on its strengths, which include
                                                                                             1.7% or greater pre-tax free cash flow
                                                                                             margin, each share of Tweeter could
dercutting them on TV prices, it's          seven new ‘playground stores’ featuring simu-
hard to convince customers to buy           lated home room setups displaying high-end       be worth at least double today's price.
from Tweeter. The company can’t             equipment in various installation possibili-     ♦
                                            ties."                                                             Update
compete with the category killers and
discount retailers on price. A quick on-                                                         On June 11 [2007], Tweeter Home En-
                                                 For Costco or Home Depot, open-             tertainment announced they would be filing
line example: A Panasonic 50” Plasma        ing a few "concept" stores to test some          for Chapter 11 bankruptcy. With the amount
HDTV is on sale at Tweeter, Best Buy,       new retail ideas is fine. But, I don't           of money they were already losing, and the
and Circuit City where it sells for         think Tweeter can afford to take that
                                                                                             most recent financial burden of the store
$2,498.00, $1,999.99, and $1,999.99                                                          closings (getting out of leases, etc.), it was in-
                                            kind of risk right now.                          evitable that something had to be done.
respectively.                                    Having seen pictures of the store,          Whether that came in the form of new fi-
    Just because you can’t win on prices    I'll be the first to admit I would love to       nancing arrangements, Chapter 11, or a
doesn’t mean you’re dead in the water.      go in one just to take a look around.
                                                                                             complete restructuring, was unclear at first.
Many customers would be willing to                                                           Hopefully while in bankruptcy, and with the
                                            But, can Tweeter generate enough                 new $60 million credit facility from GE
pay more for the same products at           profit per square foot from these                Capital, Tweeter will be able to turn itself
Tweeter, if Tweeter provided much           "showcases" to justify the investment?           around and emerge as a much leaner, money
better service and helped customers         I have a hard time believing it can.
                                                                                             making operation. I also hope that manage-
solve their problems. This is how                                                            ment gets their act together and finds a suc-
                                                         THE NUMBERS                         cessful strategy without having to compete
Tweeter differentiates itself: by offer-                                                     head-to-head with the bigger home electron-
                                                weeter's combined [lease] cost for
ing consumers an enriched experience,
expert information, in-home installa-       T   the real estate (about $13 per
                                            square foot) and working capital for
                                                                                             ics retailers. If not, I would love for a dis-
                                                                                             tressed investor to come along and do what
                                                                                             Eddie Lampert did to Kmart while in bank-
tion, and an assurance they will be tak-
                                            the stores (about $2 per square foot)            ruptcy.
en care of in the future. Walgreens can
                                                                                                         MARCH 23, 2007                      1

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