Retail Track: Alliance Pries 400 Kmart Stores From Handleman

In the continuing market-share war among wholesalers, Alliance Entertainment Corp.—now owned by magazine wholesaler Source Interlink—scored a big hit when it landed 400 Kmart stores.

Handleman Co. has exclusively racked Kmart for decades, but somewhere along the way, chinks appeared in its seemingly impregnable hold. The retailer made inquiries among the majors early last year about the possibility of buying direct, then word leaked out at the National Assn. of Recording Merchandisers convention in August that it was doing a test with AEC stocking 38 stores.

This was only Kmart's third test of another supplier in more than four decades. The first was in the late 1970s with now-defunct Lieberman Enterprises; in the early '90s, there was a five-store test with Trans World Entertainment. Handleman always retained a stranglehold on the account—until now.

It is unclear why Kmart decided to rethink the Handleman connection, and the retailer did not return a call for comment.

Tension first surfaced between the companies—both based in Troy, Mich.—when Kmart was operating under Chapter 11 protection. Handleman was designated a critical supplier and was paid $64 million in pre-petition debt. But other creditors challenged that payment, and the new Kmart management team decided not to defend the initial designation but to chase repayment.

Handleman and Kmart have since reached a settlement in the matter but did not disclose the amount; we will probably have to wait until the rackjobber files its 10-K report with the Securities and Exchange Commission in July.

Back in 2000, Kmart represented one-third, or about $450 million, of Handleman's revenue base, but since the retailer's bankruptcy in 2002 and subsequent reorganization, it has closed or sold nearly 1,000 stores, reducing its music revenue to about $200 million last year, sources say.

It is hard to blame Handleman for the drop, given Kmart's troubles. On the other hand, Kmart's music losses occurred while Target was becoming the most aggressive and visible big-box store by pursuing music sales. Despite Target's moves, Wal-Mart still reigns supreme in music market share, leaving Kmart not only a distant third, but on a downward curve.

The 400 stores AEC is picking up represent about $50 million in business, AEC said in announcing the move. The press release also stated that parent Source Interlink has a "longstanding relationship with Kmart."

Kmart recently merged with Sears, giving the combined operation 1,100 specialty stores and 2,350 big-box outlets. Kmart is the only one of these carrying music, and while some of its stores are being converted to Sears, and vice versa, and most of the big-box stores are being remerchandised, it is unclear if music will be added to the remaining Sears outlets.



MAKING TRACKS: DeVaughn Searson, the Tower Records CFO who was instrumental in the chain's three-year-long restructuring, retired March 31. His replacement is Rebecca Roeddell, who previously worked at Tower's bank. She has been with the chain for a number of months in anticipation of the change.



CHECK OUT DA MANN: For the second time in a row, entertainment data provider Muze will stream an entire Aimee Mann album ahead of its release. Fans of Mann's music will be able to preview "The Forgotten Arm," due May 3 from Super Ego, at any Web site that uses Muze services. The tracks will be streamed at no charge for one month before street date.

In addition to such accounts as Best Buy, CD Universe, Hastings, Tower Records and Virgin Entertainment Group North America, New York-based Muze provides data to some 100 Web sites.

Muze offered a preview of Mann's previous studio set, "Lost in Space," which sold about 31,000 units in its September 2000 debut week, according to Nielsen SoundScan. That figure beats first-week sales for other Mann releases, according to Muze president Paul Zullo. It was the No. 1 independent record and the No. 1 Internet record of that week, he adds.

Zullo says his company plans to approach other artists, managers and labels and "essentially create a distribution arm for previews." While the typical 30-second song sample may have some value for online consumers, he believes that full tracks make for a more compelling marketing tool.

"I read a review of Moby's 'Hotel' album at the New York Times online, which trashed, or should I say, raped the album," Zullo says. Embedded in the story was a link to 30-second samples of three songs from the album. "I listened to those samples, and after reading the review, they sounded awful," he continues. "But how unfair is that to the artists? Why not put the whole song there—and let the listener hear if the song goes somewhere—rather than a disembodied piece of the song?"

Getting back to Mann and why Muze is previewing her album, Zullo says, "We are friends of the industry and fans of the music, and this is the kind of stuff we want to facilitate."



NUMBERS GAME: Hastings Entertainment's performance for its fiscal fourth quarter and full year was off from the previous year's numbers.

For the three months ended Jan. 31, the Amarillo, Texas-based merchant posted net income of $4.8 million, or 40 cents per diluted share, on sales of $173.1 million. Net income for the corresponding quarter of the previous year was $12.3 million, or $1.06 per diluted share, on revenue of $163.2 million.

For the year ended Jan. 31, Hastings reported net income of $5.8 million, or 51 cents per share, on revenue of $440.6 million, compared with $8.3 million, or 72 cents per diluted share, for the prior year, when revenue was $508.3 million.

The company said that while revenue was up, so were expenses as it integrated a new warehouse management system. It said profit was also affected by higher shrinkage, a reduction in vendor promotional dollars and smaller profits from its rental business.

For the full year, the company posted a 5% increase in comparable-store sales. Within that, music was up 1.8%, books were up 1.5%, movies were up 15.4%, videogames were up 29.6%, and other product lines rose 9.8%.



IN PASSING: Bravado, Sanctuary Group's merchandising company, acquired Blue Grape, Roadrunner's merchandising company, back in December. Billboard estimates that Blue Grape generated annual revenue of $15 million, while Bravado's is thought to be about $60 million. That means the company's total yearly revenue is now about $75 million.

Executives at both companies confirm the acquisition but decline to provide further details.