Retail Hopes For Q4 Bump

The music industry's fourth-quarter release schedule may be one of the heaviest in recent years with albums from big-name artists, but recent quarterly results and comments from music retailers suggest that still might not be enough to offset the effects of CD burning, free digital-file sharing, and mass merchants' powerful presence in music retail.

Trans World Entertainment chairman/CEO Robert Higgins, who has cited CD burning and file sharing as reasons behind his firm's lagging music sales, said there is "reason for optimism" this quarter. Releases from such artists as Jay-Z, Jennifer Lopez, Santana, and Shania Twain mean "there's something for everybody."

For its fiscal third quarter ended Nov. 2, Trans World had a net loss of $14.1 million, or 35 cents per share, in line with forecasts. The Albany, N.Y.-based retailer, which operates 888 stores, had a net loss of $11.6 million, or 28 cents per share, in the same period of 2001. Sales were $251.2 million, down 8%. Same-store sales fell 5%.

Yet Goldman Sachs retail analysts say that Trans World's forecast for fourth-quarter earnings per share of 65 cents-70 cents, compared with 82 cents a year ago, suggests that it will "only marginally capitalize on a promising" fourth-quarter release lineup. They say Trans World's problem, like that of other primarily mall-based music retailers, is the discounting of new releases by lower-overhead mass merchants.

Meanwhile, Hastings Entertainment's net loss for its third quarter ended Oct. 31 rose to $6.6 million, or 58 cents per share, from $5.5 million, or 46 cents per diluted share, last year. It cited a higher volume of music and books returned to vendors.

Sales rose 7% to $110.6 million. Yet through the first nine months of its fiscal year, Hastings' sales of new-release CDs fell 9.1%; the entire music category, which includes used CDs, accessories, and musical instruments, fell 5.2%.

Based on current trends, the Amarillo, Texas-based retailer—which has 146 superstores—now expects full-year earnings per diluted share of 13 cents-18 cents, down from its earlier forecast of 38 cents-43 cents. "We're in a malaise, and we have been for some time," Hastings VP/CFO Dan Crow says. "You get Wal-Mart and Best Buy selling below cost, and that impacts on sales."

One firm that has benefited from the mass-merchant trend is Troy, Mich., rackjobber Handleman Co., whose customers include Wal-Mart, Best Buy, and Kmart. Sales for its fiscal second quarter ended Oct. 26 were $348.9 million, down 2% from last year. Net income was $16 million, or 61 cents per diluted share, up from net income of $15.7 million, or 58 cents per share. It's the company's highest second-quarter profit ever.