Filed with the SEC from Apr 3 to Apr 9:
Trans World Entertainment (TWMC)
Trans World Entertainment CEO Executive Robert Higgins and Riley Investment Management extended the terms of their nonbinding letter of intent to acquire Trans World to May 31. Riley and Higgins are proposing to acquire all of the company's outstanding shares for $5 each in cash. Higgins and his related entities currently hold 34,872,822 shares (46.5%) of Trans World. Riley holds 3,716,325 shares (11.9%).
Trans World Entertainment Corporation, which, together with its consolidated subsidiaries, is referred to herein as ‚Äúthe Company‚ÄĚ, was incorporated in New York in 1972. It owns 100% of the outstanding common stock of Record Town, Inc., through which its principal operations are conducted. The Company operates retail stores and five e-commerce sites and is one of the largest specialty retailers of entertainment software, including music, home video, and video games and related products in the United States.
In March 2006, the Company acquired substantially all of the net assets of Musicland Holding Corp. (‚ÄúMusicland‚ÄĚ). Musicland, an entertainment specialty retailer which operated retail stores and websites under the names Sam Goody (samgoody.com), Suncoast Motion Picture Company (suncoast.com), On Cue and MediaPlay.com, filed a voluntary petition to restructure under Chapter 11 of the United States Bankruptcy Code in January 2006. The transaction represented total consideration of $78.8 million in cash and $16.3 million in assumed liabilities, including certain customer obligations, rent and occupancy liabilities and employee obligations. Under the terms of the Asset Purchase Agreement, the Company agreed to acquire 335 of Musicland‚Äôs 400 remaining stores, with the remainder of the stores being liquidated under an agency agreement with Hilco Merchant Resources, LLC. As of February 3, 2007 the Company operated 210 of the 335 acquired stores. See Note 3 of Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K for detail.
In March 2006, the Company acquired an 80% interest in Mix & Burn LLC, a company that is fully consolidated for financial reporting. The Company committed funding of $5.2 million, of which $4.0 million was funded as of February 3, 2007.
Stores and Store Concepts
At February 3, 2007, the Company operated 992 stores totaling approximately 6.0 million square feet in the United States, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands.
At February 3, 2007, the Company operated 737 mall-based stores, predominantly under the f.y.e. (‚ÄúFor Your Entertainment‚ÄĚ) brand, including:
Traditional stores . The Traditional store averages about 5,600 square feet and carries a full complement of entertainment software, including music, home video, video games and related accessories. There were 587 Traditional f.y.e. stores at the end of Fiscal 2006.
Superstores. The Superstores carry the same merchandise categories as Traditional locations, but with a much broader and deeper assortment. This concept is a semi-anchor or destination location in major regional malls. There were 13 f.y.e. mall Superstores at the end of Fiscal 2006 that averaged about 24,000 square feet.
Video only stores. At the end of Fiscal 2006, the Company operated 137 video only stores, under the Suncoast and Saturday Matinee brands. These stores specialize in the sale of home video and related accessories. They are located in large, regional shopping malls and average about 2,400 square feet.
The Company operated 255 freestanding stores, as of February 3, 2007, under the brand names of f.y.e. (‚ÄúFor Your Entertainment‚ÄĚ), Sam Goody, Coconuts Music and Movies, Strawberries, Wherehouse Music and Movies, CD World, Spec‚Äôs Music, and Second Spin. They carry a full complement of entertainment software, including music, home video, video games and related accessories and are located in freestanding, strip center and downtown locations. The freestanding stores average approximately 6,400 square feet (excluding f.y.e. Superstores and Planet Music). The Company operates 6 freestanding f.y.e. Superstores that average about 53,000 square feet and a single 31,400 square foot Planet Music store in Virginia Beach, VA.
The Company is in the process of re-branding its freestanding stores to f.y.e. (‚ÄúFor Your Entertainment‚ÄĚ). This initiative is expected to be completed during Fiscal 2007.
The Company operates five retail web sites including, www.fye.com, www.wherehouse.com, www.secondspin.com, www.samgoody.com and www.suncoast.com. These sites offer substantially the same complement of products as offered in the Company‚Äôs stores.
Music, home video and video games represent an approximately $38 billion industry nationwide, and represented approximately 90% of the Company‚Äôs sales in Fiscal 2006.
According to statistics from Nielsen Soundscan, the total number of music albums sold, including CD, cassette, LP and digital albums, was 588.2 million units in 2006, a 4.9% decline from 2005. Excluding digital albums, total sales were 555.6 million units in 2006, a 7.8% decline from 2005.
According to statistics obtained from Rentrak Home Video Essentials, overall home video sales in 2006, including DVD and VHS, were $15.9 billion, a decrease of 0.9% from 2005. DVD retail sales in 2006 were $15.7 billion, flat compared to 2005.
The NPD Group published that video games sales in 2006 were $12.5 billion including portable and console hardware, software and accessories, an increase of 19% over 2005 sales.
Music sales have suffered from the legal (e.g., iTunes) and illegal downloading of music and specialty retailers have been impacted by the proliferation of mass merchants (e.g., Wal-Mart and Target) and electronics superstores (e.g., Best Buy and Circuit City) that offer entertainment software and have gained a larger share of the market. The number of specialty and independent retailers has dramatically decreased due to their reliance on sales of recorded music. The Company has taken advantage of competitor exits from markets, made acquisitions, diversified its products and taken other measures to position itself competitively within its industry. The Company believes it effectively competes in the following ways:
Location and convenience: a strength of the Company is its convenient store locations that are often the exclusive retailer in centers offering a full complement of entertainment software;
Marketing: the Company uses newspaper, radio and television advertising and in-store visual displays to market to consumers;
Selection and assortment: the Company differentiates itself by maintaining a high in-stock position in a large assortment of product, particularly CDs and DVDs;
Customer service: the Company believes it offers personalized customer service at its stores;
Listening and Viewing Stations (‚ÄúLVS‚ÄĚ): the Company‚Äôs LVS is a sampling and selection tool designed to encourage customer purchases. The third generation of LVS (‚ÄúLVS 3‚ÄĚ) is currently installed in over 700 of the Company‚Äôs stores. LVS 3 enhances the customers‚Äô in-store experience through improved product information displays and product search and suggestion capabilities;
In-store CD burning and digital downloading: The Company has begun offering CD burning and digital downloading stations in selected stores and plans on expanding these capabilities to a greater number of stores in Fiscal 2007.
The Company‚Äôs business is seasonal, with the fourth fiscal quarter constituting the Company‚Äôs peak selling period. In Fiscal 2006, the fourth quarter accounted for approximately 40% of annual sales. In anticipation of increased sales activity during these months, the Company purchases additional inventory and hires additional temporary employees to supplement its full-time store sales staff. If, for any reason, the Company‚Äôs net sales were below seasonal norms during the fourth quarter, the Company‚Äôs operating results could be adversely affected. Quarterly sales can also be affected by the timing of new product releases, new store openings or closings and the performance of existing stores.
The Company makes extensive use of visual displays. It uses a mass-media marketing program, including newspaper, radio, and television advertisements. The majority of vendors from whom the Company purchases merchandise offer advertising allowances to promote their merchandise.
Suppliers and Purchasing
The Company purchases inventory from approximately 990 suppliers. In Fiscal 2006, 68% of purchases were made from ten suppliers including EMI Music Distribution, Sony-Bertelsmann Music Group, Warner/Electra/Atlantic Corp., Universal Music and Video Distribution, Fox Video Inc., Paramount Home Video, Buena Vista Home Video, Warner Home Entertainment, Universal Studios Home Entertainment and Sony Pictures Home Entertainment. The Company does not have material long-term purchase contracts; rather, it purchases products from its suppliers on an order-by-order basis. Historically, the Company has not experienced difficulty in obtaining satisfactory sources of supply and management believes that it will continue to have access to adequate sources of supply.
Trade Customs and Practices
Under current trade practices with large suppliers, retailers of music and home video products are generally entitled to return unsold merchandise they have purchased in exchange for other titles carried by the suppliers. Two of the four largest music suppliers charge a related merchandise return penalty and the remaining two largest suppliers charge a combination of return penalties and return handling fees. Most manufacturers and distributors of home video products do not typically charge a return penalty or handling fee. Under current trade practices with large suppliers, retailers of video games and related products are generally entitled to markdown support from suppliers to help clear slow turning merchandise. Merchandise return policies and other trade practices have not changed significantly in recent years. The Company generally adapts its purchasing policies to changes in the policies of its largest suppliers.
As of February 3, 2007, the Company employed approximately 9,600 people, of whom approximately 4,400 were employed on a full-time basis. All others were employed on a part-time or temporary basis. The Company hires seasonal sales employees during its fourth quarter peak selling season to ensure continued levels of customer service. Store managers, district managers and regional managers are eligible to receive incentive compensation based on the sales and profitability of stores for which they are responsible. Sales support managers are generally eligible to receive incentive compensation based on the sales and profitability of the Company as a whole. None of the Company‚Äôs employees are covered by collective bargaining agreements and management believes that the Company enjoys favorable relations with its employees.
Robert J. Higgins, Chairman of the Board, founded the Company in 1972, and he has participated in its operations since 1973. Mr. Higgins has served as Chairman and Chief Executive Officer of the Company for more than the past five years. He is also the Company‚Äôs principal shareholder. See ‚ÄúPRINCIPAL SHAREHOLDERS.‚ÄĚ
Mark A. Cohen has been a Professor at Columbia University Graduate School of Business since April of 2006. Prior to his Professorship, Mr. Cohen was the Chairman and Chief Executive Officer of Sears Canada Inc. from January 2001 to August 2004. Mr. Cohen joined Sears, Roebuck and Company as Senior Vice President, Merchandising in 1998. From December 1998 until August 1999 he served as Executive Vice President, Marketing before being promoted to Chief Marketing Officer and President, Softlines. Prior to joining Sears, Mr. Cohen held various positions at other retailers, including Bradlee‚Äôs Department Stores, Federated Department Stores, Dayton Hudson Corporation, Gap Stores and Lord & Taylor.
Dr. Joseph G. Morone has been the President and CEO of Albany International Corp since January 2006 and President since August 2005. From August 1997 to July 2005 he was the President of Bentley College. Previously, Dr. Morone was the Dean of Rensselaer Polytechnic Institute‚Äôs Lally School of Management and Technology from July 1993 to July 1997. Prior to his appointment as dean, Dr. Morone held the Andersen Consulting Professorship of Management and was Director of the School of Management‚Äôs Center for Science and Technology Policy. Before joining the School of Management in 1988, Dr. Morone was a senior associate for the Keyworth Company, a consulting firm specializing in technology management and science policy. Dr. Morone also served in the White House Office of Science and Technology Policy and spent seven years at General Electric Company‚Äôs Corporate Research and Development. Dr. Morone also serves on the Board of Directors of Albany International Corp.
Brett Brewer has been the President at Adknowledge, Inc., a behavioral based advertising company, since November 2006. Prior to joining Adknowledge, Mr. Brewer served as President and a Director of Intermix Media from August 29, 2000 until October 2005 when the company was sold to NewsCorp. Prior to joining Intermix Media, Inc., Mr. Brewer helped run the Southern California Retail Sales Division of CB Richard Ellis between October 1996 and December 1998. Mr. Brewer also serves on the Board of Directors of Treemo.com and Bizworld, Inc.
Martin E. Hanaka has served as Chairman of Golfsmith International Holdings since April 2007. He also has served as Chairman Emeritus of the Board of The Sports Authority, Inc. since June 2004. Mr. Hanaka was the Chairman of the Board of The Sports Authority from November 1999 until June 2004 and was its Chief Executive Officer from September 1998 until August 2003. Mr. Hanaka joined The Sports Authority‚Äôs Board of Directors in February 1998. From August 1994 until October 1997, Mr. Hanaka served as President and Chief Operating Officer of Staples, Inc. an office supply superstore retailer. Mr. Hanaka is also a Director of The Sports Authority and Brightstar Corporation, a wireless wholesale distributor.
Isaac Kaufman, a Certified Public Accountant, has been Chief Financial Officer and Senior Vice President of Advanced Medical Management Inc., a manager of medical practices and an outpatient surgical center, since September 1998. Mr. Kaufman was Executive Vice President and Chief Financial Officer of Bio Science Contract Production Corporation, a contract manufacturer of biologics and pharmaceutical products, from February 1998 to September 1998. Mr. Kaufman serves as a Director of Kindred Healthcare, Inc. (operates nursing centers and long-term acute care hospitals) and Hanger Orthopedics (operates Orthotics and Prosthesis patient care centers).
Lori J. Schafer has served as Vice President of SAS‚Äô global retail practice, since October of 2003, when Marketmax was acquired by SAS. Before joining SAS, Schafer served as Chairman, President and Chief Executive Officer of Marketmax Inc., a merchandise intelligence software company acquired by SAS in October 2003.She has directed Marketmax operations since 1996. Prior to her move into retail consulting and software development, Ms. Schafer held positions of increasing and diverse responsibility at The Procter & Gamble Company, including assignments in brand management, sales and management information systems. Ms. Schafer is also a Director at A.C. Moore Arts and Crafts, Inc and geoVue, Inc.
Michael B. Solow is the Managing Partner of the Chicago office of Kaye Scholer LLP, an international law firm based out of New York City, where he has practiced since January 2001 and is currently a member of the firm‚Äôs Executive Committee and Co-Chairman of the Corporate Restructuring Practice Group. Prior to joining Kaye Scholer LLP, Mr. Solow was a Partner and Practice Manager for the Financial Services Practice at Hopkins & Sutter, a Chicago, Illinois law firm. Mr. Solow is also a member of the Board of Directors for Christen Residential Trust, Inc. and has previously served on other corporate boards, including Camelot Music, Inc.
Edmond S. Thomas, a Certified Public Accountant, has served as President and Co-Chief Executive Officer of Tilly‚Äôs, Inc., a privately held men and women‚Äôs apparel retailer, since September 2005. Mr. Thomas also has served as Managing Partner of The Evans Thomas Company, LLC, a privately held consumer goods advisory firm, and AXIS Capital Fund I, LP, an investment fund, since 2000. Prior to that, Mr. Thomas served as President, Chief Operating Officer, and Director of The Wet Seal, Inc., a publicly traded women‚Äôs apparel retailer, from 1992 to 2000. Mr. Thomas is currently a member of the Board of Directors of Directed Electronics., a publicly traded designer and marketer of consumer branded vehicle security and convenience systems, and Comark, Inc., a privately held Canadian apparel retailer.
Components of Executive Compensation
The Company‚Äôs compensation program for its named executive officers consists of the following components:
Base Salary. Base salaries for our executives are established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions. Base salaries are reviewed annually, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience. For 2007, the executives will receive grants of restricted stock in lieu of merit increases.
Annual Incentives. Our annual incentive bonus plan, approved by shareholders, provides for a cash bonus, dependent upon the level of achievement of the stated corporate goals and personal performance goals, calculated as a percentage of the officer‚Äôs base salary, with higher ranked executive officers being compensated at a higher percentage of base salary. The Compensation Committee approves the annual incentive award for the Chief Executive Officer and for each officer below the Chief Executive Officer level, based on the Chief Executive Officer‚Äôs recommendations. For 2007, the target bonus awards (as a percentage of base salary) will be as follows: Chief Executive Officer, 75%; Chief Operating Officer, 50%; Executive Vice President, 40%; Senior Vice President, 35%; and Vice President, 30%. Depending on the achievement of the predetermined targets, the annual bonus may be less than or greater than the target bonus. Maximum payout (as a percentage of base salary) for officers is as follows: Chief Executive Officer, 150%; Chief Operating Officer, 120%; Executive Vice President, 100%; Senior Vice President, 80%; and Vice President, 60%. Further information regarding the 2007 bonus opportunities to our named executives is set forth under ‚Äė‚ÄėGrant of Equity and Incentive Plan-Based Awards‚Äô‚Äô.
For fiscal 2006 and 2007, the Committee approved a special bonus plan designed to reward select associates, including Executive Officers for exceptional performance. The plan would pay an incentive bonus for company operating income performance above the levels required to pay maximum bonuses under the annual incentive bonus plan. During 2006, the Company failed to achieve the operating income levels required to payout bonuses per the special bonus plan. For 2007, the target operating income level to begin payout under the plan is $48.1 million.
Long-Term Incentive Program. We believe that long-term performance is achieved through an ownership culture that encourages long-term performance by our executive officers through the use of stock-based awards. During 2005, our Board of Directors adopted and Shareholders‚Äô approved the Long Term Share and Incentive Award Plan, which permits the grant of stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, and other stock-based awards. Historically the Company has granted equity awards to employees, including Executive Officers, each May 1. The determination of the size of any long-term equity compensation grant is made based on competitive factors and the attainment of strategic long term objectives. Equity compensation and stock ownership serve to link the net worth of Executive Officers to the performance of our common stock. In 2007, we intend to provide long-term awards through stock settled appreciation rights, which will vest based on continued employment.
Retirement and Other Benefits. The Company‚Äôs benefits program includes retirement plans and group insurance plans. The objective of the program is to provide Executive Officers with reasonable and competitive levels of protection against the four contingencies (retirement, death, disability and ill health) which could interrupt the Executive Officer‚Äôs employment and/or income received as an active employee. Retirement plans, including the supplemental executive retirement plans that cover the Executive Officers, are designed to provide a competitive level of retirement income to Executive Officers and to reward them for continued service with the Company. The retirement program for Executive Officers consists of a supplemental executive retirement plan.
The group insurance program consists of life, disability and health insurance benefit plans that cover all full-time management and administrative employees and the supplemental long-term disability plan, which covers Executive Officers and other Officers.
Other Compensation. We continue to maintain modest executive benefits and perquisites for officers; however, the Compensation Committee in its discretion may revise, amend or add to the officer‚Äôs executive benefits and perquisites if it deems it advisable. We believe these benefits and perquisites are currently below median competitive levels for comparable companies.
MANAGEMENT DISCUSSION FROM LATEST 10K
Management‚Äôs Discussion and Analysis of Financial Condition and Results of Operations provides information that the Company‚Äôs management believes necessary to achieve an understanding of its financial condition and results of operations. To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment for the Company‚Äôs merchandise, including the entry or exit of non-traditional retailers of the Company‚Äôs merchandise to or from its markets; releases by the music, home video, and video game industries of an increased or decreased number of ‚Äúhit releases‚ÄĚ; general economic factors in markets where the Company‚Äôs merchandise is sold; and other factors discussed in the Company‚Äôs filings with the Securities and Exchange Commission. The following discussion and analysis of the Company‚Äôs financial condition and results of operations should be read in conjunction with ‚ÄúSelected Consolidated Financial Data‚ÄĚ and the Consolidated Financial Statements and related notes included elsewhere in this report.
In March, 2006, the Company acquired substantially all of the net assets of Musicland Holding Corp. (‚ÄúMusicland‚ÄĚ). Musicland, an entertainment specialty retailer, operated retail stores and websites under the names Sam Goody (samgoody.com), Suncoast Motion Picture Company (suncoast.com), On Cue and MediaPlay.com, and filed a voluntary petition to restructure under Chapter 11 of the United States Bankruptcy Code in January 2006. See Note 3 of Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for further detail.
In March 2006, the Company acquired an 80% interest in Mix & Burn LLC, a company that is fully consolidated for financial reporting. The Company has committed funding of $5.2 million, of which $4.0 million was funded as of February 3, 2007.
At February 3, 2007, the Company operated 992 stores totaling approximately 6.0 million square feet in the United States, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. In the fiscal year ended February 3, 2007 (referred to herein as ‚Äú2006‚ÄĚ), the Company‚Äôs sales increased as compared to the fiscal year ended January 28, 2006, (referred to herein as ‚Äú2005‚ÄĚ) as a result of increased store count related to the Musicland acquisition, partially offset by a decrease in comparable store sales. Income before extraordinary items decreased in 2006 as greater overall sales and gross margin were not able to offset increased SG&A expenses associated with the higher average store count and integration costs associated with the Musicland acquisition. Comparable store sales decreased 6.2% during Fiscal 2006 as double digit comparable store sale declines in music were partially offset by positive comparable store sales in home video, video games and accessories and related products.
The Company focuses on the following areas in its effort to improve its business:
Developing its Brands ‚Äď f.y.e. brand
The Company is creating a recognized national brand under the name f.y.e. (‚ÄúFor Your Entertainment‚ÄĚ). The f.y.e. brand initiative is aimed at broadening the Company‚Äôs customer base by creating a more relevant entertainment shopping experience and differentiating f.y.e. from its competition. It is centered on an engaging and personalized approach in marketing and merchandising, an interactive in-store and on-line entertainment experience and a best-in-retail-class customer service level ‚Äď all designed to draw customers into stores and enhance long-term customer loyalty. As of February 3, 2007, the Company had over 650 f.y.e. stores and is in the process of re-branding the remaining of its freestanding stores to f.y.e. during 2007. The video only Suncoast brand will be retained. There were 118 Suncoast stores at February 3, 2007. During 2005, the Company introduced its customer loyalty program, f.y.e. Backstage Pass, which is designed to drive repeat business.
Improving Merchandise Assortment and Product Mix
The Company tailors the product mix of its stores toward regional tastes in order to optimize the productivity of its stores, seeking to serve key customer segments within each store. This involves tailoring the overall square footage allocation in line with a store‚Äôs trend, and increasing inventory and square footage allocations for growth categories. As music sales have continued to decline on an industry wide basis, the Company has been able to offset the impact by shifting square footage allocations from music to home video, video game, and other product categories. In addition, the acquisition of the video only Suncoast stores in March 2006 has helped diversify the product mix and lower music as a percentage of the total business. This is evident as music has decreased to 44.2% of total sales in Fiscal 2006 compared to 53.6% in Fiscal 2005.
The acquisition of Mix and Burn in 2006 will allow the Company to offer customers CD burning and digital downloading stations in selected stores during 2007.
The Company has historically grown its sales by opening new stores and by acquiring specialty retailers in its business. During 2006, the Company acquired 335 stores and closed 189 stores, including 125 of the acquired stores, opened 64 stores and repositioned 15 stores. In 2007, the Company will open very few new stores.
Historically, about 10% of the Company‚Äôs stores are evaluated at any time for closure. The composition of these stores changes from time-to-time as the result of competitive changes and other factors. The Company closes stores when minimum operating thresholds are not achieved. In 2006, the Company experienced a significant net store increase, as acquired stores and new store openings outpaced store closings.
Key Performance Indicators
Management monitors a number of key performance indicators to evaluate its performance, including:
Sales: The Company measures the rate of comparable store sales change. A store is included in comparable store sales calculations at the beginning of its thirteenth full month of operation. Mall stores relocated in the same shopping center after being open for at least thirteen months are considered comparable stores. Closed stores that were open for at least thirteen months are included in comparable store sales through the month immediately preceding the month of closing. The Company further analyzes sales by store format and by product category.
Cost of Sales and Gross Profit: Gross profit is a function of the cost of product in relation to its retail selling value. Changes in gross profit are impacted primarily by sales levels, mix of products sold, vendor discounts and allowances and distribution costs. The Company records its distribution and product shrink expenses in cost of sales. Distribution expenses include those costs associated with purchasing, receiving, inspecting and warehousing merchandise and costs associated with product returns to vendors. Cost of sales also includes obsolescence costs and is reduced by the benefit of vendor allowances.
Selling, General and Administrative (‚ÄúSG&A‚ÄĚ) expenses: Included in SG&A expenses are payroll and related costs, occupancy charges, professional and service fees, general operating and overhead expenses and depreciation charges (excluding those related to distribution operations, as discussed in Note 4 of Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K). SG&A expenses also include asset impairment charges and write-offs, if any, and miscellaneous items, other than interest.
Balance Sheet and Ratios: The Company views cash, net inventory investment (merchandise inventory less accounts payable) and working capital (current assets less current liabilities) as indicators of its financial position. See Liquidity and Capital Resources for further discussion of these items.
Sales increased in 2006 due to an increase in the average store count. Due to the Musicland acquisition, average store count increased from 801 in Fiscal 2005 to 1,044 in Fiscal 2006. Additionally, the 53 rd week in Fiscal 2006 contributed approximately $23.0 million in sales. These factors were partially offset by a comparable store sales decrease of 6.2%. Non-comparable store sales for Fiscal 2006 and 2005 were $349.5 million and $37.6 million, respectively. Total product units sold in Fiscal 2006 increased 13.4% over Fiscal 2005, and the average retail price for units sold increased 3.8% as a larger portion of the Company‚Äôs total units sold represented DVDs, video games and electronics which, in general, sell at higher average retail unit prices than CDs.
The Company‚Äôs stores offer a wide range of new and used CDs across most music genres, including new releases from current artists as well as an extensive catalog of music from past periods and artists. The music category represented 44.2% of the Company‚Äôs sales in Fiscal 2006 compared to 53.6% in Fiscal 2005. The music category has declined as a percentage of total sales due to a shift in square footage allocations to higher growth categories and due to the acquisition of over 160 video only Suncoast stores in March 2006 (118 remain open at February 3, 2007) which has shifted a larger portion of total sales into the home video category.
Total sales in the music category declined 2.0% from $663.7 million in Fiscal 2005 to $650.4 million in Fiscal 2006. The Company‚Äôs annual CD unit sales decreased 2.7% in Fiscal 2006. This decrease in total music sales is due to lower comparable store sales, partially offset by increased average store count.
On a comparable store basis, music sales declined 14.0% due to continued industry sales declines and the aforementioned shift in store square footage allocations. According to Soundscan, total CD unit sales in the United States declined 6.2% during the period corresponding with the Company‚Äôs Fiscal 2006.
The Company offers DVDs in all its stores. The home video category represented 37.6% of the Company‚Äôs sales in Fiscal 2006 compared to 30.0% in Fiscal 2005. The majority of the increase is due to the addition of the video only Suncoast stores in March 2006. The increase is also partially due to the increase in store square footage to support the home video category.
Total sales for Fiscal 2006 in the home video category, including DVD and VHS, increased 48.6% from $372.0 million in Fiscal 2005 to $552.7 million in Fiscal 2006. Total sales in the DVD category increased 55.5% in 2006 and represented 99.1% of total home video sales in 2006. The total sales increase in home video is due the addition of the Suncoast stores, a greater average store count and an increase in comparable store sales.
Comparable store sales, during Fiscal 2006, increased 5.5% in the DVD category. Comparable store sales in the total home video category, including VHS, increased only 1.2% due to the declining VHS category as the Company has discontinued carrying VHS during Fiscal 2006.
The increase in DVD comparable store sales reflects the increase in inventory and floor space to support growth in this category. According to statistics obtained from Rentrak Home Video Essentials, overall home video sales in calendar year 2006, including DVD and VHS, were $15.9 billion, a decrease of 0.9% from 2005. DVD retail sales in calendar year 2006 were $15.7 billion, flat compared to 2005.
The Company offers video game hardware and software in most of its stores. Total sales in the video game category increased 26.7% from $90.4 million in Fiscal 2005 to $114.5 million in Fiscal 2006 and represented 7.8% of the Company‚Äôs total sales in Fiscal 2006 compared to 7.3% in Fiscal 2005.
Comparable store sales in the video games category increased 4.0% in 2006. The increase was due to the release of Sony‚Äôs Play Station 3 and Nintendo‚Äôs Wii in November 2006 and Microsoft‚Äôs Xbox 360 which was released in November 2005. According to the NPD Group, video games sales during calendar year 2006, including portable and console hardware, software and accessories increased 19% over calendar year 2005 sales.
The ‚ÄúOther‚ÄĚ category consists of electronics, accessories and trend items and represented 10.4% of total sales in Fiscal 2006 compared to 9.1% in Fiscal 2005. Total sales in this category increased 36.6% to $153.6 million in Fiscal 2006 compared to $112.4 million in Fiscal 2005. This increase is due to the increase in average store count and a comparable store sale increase of 7.9%.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
RESULTS OF OPERATIONS
Thirteen and Thirty-nine Weeks Ended November 3, 2007
Compared to the Thirteen and Thirty-nine Weeks Ended October 28, 2006
Net Sales. Net sales decreased 12% and 8%, respectively, during the thirteen and thirty-nine weeks ended November 3, 2007. The decrease in net sales was due, in part, to comparable store sales declines of 4% and 7%, respectively, during the thirteen and thirty-nine weeks ended November 3, 2007. Additionally, during the thirteen and thirty-nine weeks ended November 3, 2007, the Company operated, on average, 13% and 4% fewer stores, respectively, as compared to the thirteen and thirty-nine week periods ended October 28, 2006.
The Company‚Äôs stores and Internet websites offer a wide range of compact discs (‚ÄúCDs‚ÄĚ) and music DVDs across most music genres, including new releases from current artists as well as an extensive catalog of music from past periods and artists. The CD category represented 96% of total music sales for the thirty-nine weeks ended November 3, 2007.
During the thirteen and thirty-nine weeks ended November 3, 2007, CD sales in comparable stores decreased 23% and 22%, respectively, as compared to the thirteen and thirty-nine weeks ended October 28, 2006. The decrease is related to continued CD industry sales declines. Comparable store sales for the total music category, including music DVD, were down 21% during the thirteen weeks ended November 3, 2007.
The Company offers video products, including DVD and HD DVD, in all of its stores. Comparable store sales in the video category increased 8% and 7%, respectively, during the thirteen and thirty-nine weeks ended November 3, 2007. The increase in video sales was driven by increased space and inventory allocations.
The Company offers video game hardware and software in many of its stores. Comparable store sales increased 29% during the thirteen weeks ended November 3, 2007, while increasing 9% during the thirty-nine week period ended November 3, 2007. The comparable store sales improvement in the video game category is due to greater hardware availability and improved software sales.
The Company offers accessory items for the use, care and storage of entertainment software, along with boutique and electronic products . Comparable store sales, on a combined basis, increased 22% and 18%, respectively, during the thirteen and thirty-nine weeks ended November 3, 2007 . In addition, on a combined basis, these categories represented 12% of total sales during the thirty-nine weeks ended November 3, 2007 compared to 10% for the thirty-nine weeks ended October 28, 2006. The growth of this category has been primarily due to increased sales of electronics and boutique products through better product assortments and lifestyle statements.
The decrease in gross profit as a percentage of net sales for the thirteen weeks ended November 3, 2007 compared to the thirteen weeks ended October 28, 2006 is due to a lower amount of vendor allowances being earned as a result of product sales. The increase in gross profit as a percentage of net sales for the thirty-nine weeks ended November 3, 2007 as compared to last year represents higher merchandise margin in the Company‚Äôs core categories of music and video.
The $14.9 million decrease in SG&A expenses for the thirteen weeks ended November 3, 2007 compared to prior year is due to the Company operating an average of 13% fewer stores during the quarter compared to the thirteen weeks ended October 28, 2006. The $24.2 million decrease in SG&A expenses for the thirty-nine weeks ended November 3, 2007 compared to prior year is due to the operation of fewer stores and the absence of approximately $7.6 million in transition costs related to the acquisition of Musicland in 2006. The increase in SG&A expenses as a percentage of net sales for the thirteen and thirty-nine weeks ended November 3, 2007 compared to the thirteen and thirty-nine week periods ended October 28, 2006 is due to the respective sales declines.
Interest Expense. Interest expense was $1.9 million and $5.2 million during the thirteen and thirty-nine weeks ended November 3, 2007 compared to $1.7 million and $4.1 million for the thirteen and thirty-nine weeks ended October 28, 2006. The increase is due to higher average borrowings under the Company‚Äôs revolving credit facility.
Other Income. Other income includes interest income and a realized gain of $3.5 million on the sale of an investment in an unconsolidated affiliate recorded during the second quarter of 2006.
The Company records its quarterly income tax (benefit) expense based on an estimate of its annual effective tax rate, which further requires the Company to estimate its annual pretax income. The higher the estimate of annual pre-tax income, the lower the tax rate, due to the inclusion in income tax expense of certain taxes that are incurred regardless of the level of taxable income and due to the impact of nondeductible expenses. Conversely, these items cause the tax rate to increase as pre-tax income (and estimates thereof) decrease. The effective tax rate before impact of period-specific items for the thirteen and thirty-nine weeks ended November 3, 2007 increased because the estimate of annual pre-tax income for 2007 is lower than the estimate of 2006 annual pre-tax income used to determine income taxes for the thirteen and thirty-nine weeks ended October 28, 2006.
For the thirty-nine weeks ended November 3, 2007, the tax expense associated with period-specific items is primarily attributable to state tax legislation enacted during the period. For the thirty-nine weeks ended October 28, 2006, the tax benefit of period-specific items is attributable to a tax favored gain from the sale of an investment and the net impact of favorable settlements of tax examinations and federal tax credits approved by the IRS offset by state tax legislation enacted during the period and changes in management‚Äôs estimates of the realization of state net operating losses.
Extraordinary Gain ‚Äď Unallocated Negative Goodwill. On March 27, 2006, the Company acquired substantially all of the net assets of Musicland Holding Corp. During the thirteen and thirty-nine weeks ended October 28, 2006, the Company determined the preliminary purchase price allocation in accordance with the provisions of SFAS No. 141, Business Combinations , resulting in an extraordinary gain of $1.9 million, net of income taxes of $2.0 million and $5.3 million, net of income taxes of $4.8 million, related to unallocated negative goodwill for the respective thirteen and thirty-nine week periods ended October 28, 2006.