Trans World Entertainment Corporation (NASDAQ:TWMC) is one of the largest specialty music and video retailers in the United States. The company has 350 stores and a retail web site. The majority of the company’s stores are mall-based and offer a wide selection of entertainment products such as CDs, DVDs, video games and related accessories. Trans World is a relatively small company with a market capitalization of only $131 million and an average daily volume of 29 thousand shares.

Trans World

It is well known that sales of DVD’s and CD’s are on the decline, and Trans World Entertainment Corporation (NASDAQ:TWMC) is not avoiding the pain. After several years of collapsing sales, aggressive cost cutting and asset divestments, the company is still reporting losses and there does not seem to be any relief for the company on the horizon. For example, over the key holiday trading period just passed, Trans World’s sales at stores open for at least a year declined 5.4% and for the nine weeks ending January 4th sales slumped 6%.

Trans World working hard to return to profit

However, Trans World Entertainment Corporation (NASDAQ:TWMC) could be a turn-around play. The company is working flat-out to try and return to profit, closing down loss making brick and mortar stores while trying to drive sales online. Additionally, the company is trying to improve the profitability of existing stores without spending vital capital on opening new stores.

Aside from this efficiency drive, there is value to be found in Trans World’s balance sheet. For example, Trans World Entertainment Corporation (NASDAQ:TWMC) owns its brick and mortar stores, at the end of fiscal 2013 the company reported the value of property on its balance sheet was worth $159 million, more than the current market capitalization. The company also has plenty of financial headroom to execute a turnaround. Specifically, at the end of the last reported fiscal quarter, Trans World’s net cash balance stood at $86 million (there was no debt). The current ratio for the period was around 3, less inventories this ratio dropped to 1.1.

That being said, with working capital of $183 million, and non-current liabilities of $26 million, Trans World’s market capitalization is currently below its Graham net-nets value, which is $157 million. So, Trans World could be a deep value turn-around.

Words of caution

Still, I would be cautious here as many record shops are being forced to sell off their CDs and DVDs at lower than cost price, just to shift the stock. With this in mind I would be extremely wary about Trans World Entertainment Corporation (NASDAQ:TWMC)’s $175 million worth of stock, which could be worth almost nothing in the worst case scenario.

Other points to consider:

  • The company has not issued a significant amount of stock during the past five years to bolster its cash balance.
  • On a per share basis, Trans World’s book value is $5.5 per share and cash per share is worth $2.7.
  • The company paid a hefty $0.47 per share dividend to long-suffering investors at the end of 2012, despite poor business performance. This special dividend was a 13.4% yield. Investors could be in line for another.
  • A break-up would be lucrative
  • The company has dug itself out of a deep hole where it was losing $40 million per annum in the depts. Of the financial crisis. As of fiscal 2013 the company is profitable.

Trans World Entertainment Corporation (NASDAQ:TWMC) could be a risk worth taking, albeit an all-or-nothing risk.

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