Hi all, just digging around and found an article pertinent to the industry our TSIG is in. This was found in the Motley Fool, discussing Tsig's competitors and other interesting information. Anyway, here it is:
The Daily Double (Archive) - A review of a company whose stock
price has doubled within the last year.
Jun 01, 1998
National Record Mart, Inc.
(Nasdaq:NRMI - news)
Phone: 412-276-6200
Price (5/29/98): $12
HOW DID IT DOUBLE?
It's easy to imagine that National Record Mart got its name from its record-setting stock appreciation.
A 940% one-year gain from trough to peak is enough to get an investor's booty on the floor shaking
that thang. But before you start dusting off that polyester leisure suit, note that this music retailer's
improving fortunes represent merely a recovery from several years of suffering through a d isco
inferno. Plus, the last leg of the rally to $13 looks like K-tel (Nasdaq:KTEL - news) inspired Internet
hype.
The good news is that National Record survived industry consolidation and a couple of years of weak
music offerings by closing underperforming stores and being selective with new openings. That has
ushered in improved profitability.
For the nine months ended December 27, sales skipped 12% higher to $86.4 million thanks to 12.6%
comparable store revenue growth. Profits soared to $1.2 million from just $0.1 million in the year-ago
period, good for EPS of $0.23 vs. $0.02. On April 9, the company announced that fourth quarter sales
rose 17% on 13.7% comp store gains, bringing FY98 sales to $112 million, up 13.1% on a 12.8%
overall same-store revenue increase. Not too shabby.
The good news got better on April 22 when institutional investors injected $15 million into the company
by way of a debt offering. National Record will use the money to open a whopping 30 new stores this
year, particularly new Waves Music stores, which include a computer system that allows consumers to
check out music Internet sites and databases. That growth will be a huge increase from FY97 when it
swapped out 10 underperforming stores for 12 new ones, each offering an extra 1,000 square feet.
The last leg of the recent rally, though, owes a lot to K-tel's chart-topping success. For weeks, Internet
message boards have been rife with rumors that National will soon launch its own online sales, perhaps
in conjunction with one of the major search engines.
Business Week repeated the story last week, adding one analyst's view that the stock might be a
buyout target at $22 to $24 per share. Even as the stocks of K-tel and the other online music vendors
have cooled down, speculators have warmed up to National Record.
BUSINESS DESCRIPTION
Based in Carnegie, Pennsylvania, National Record Mart is the nation's sixth largest specialty retailer of
prerecorded music and other entertainment products. It operates 149 stores in 27 states, with a
concentration in western Pennsylvania and eastern Ohio.
Its four store concepts are National Record Mart or NRM Music, Waves Music, Music Oasis, and
Vibes Music. The mall-based Waves Music stores have been redesigned in recent years to offer
expanded inventories in hopes of dominating music buying in each mall. For the past several years,
sales of lower-margin CDs have been growing at the expense of more profitable cassettes, with CDs
accounting for 66.8% of sales last year (up from 61.6%) as cassettes declined by a roughly
comparable amount to 17.7% of sales.
Insiders own 26% of the stock, with most held by Chair/CEO William Teitelbaum. Teitelbaum's wife
controls an additional 309,000 shares.
FINANCIAL FACTS
Income Statement*
12-month sales: $108.7 million
12-month income: ($0.01 million)
12-month EPS: none
Profit Margins: N/A
Capitalization: $61.8 million
(*As of Dec. 27, 1997)
Balance Sheet*
Cash: $1.8 million
Current Assets: $49.4 million
Current Liabilities: $32.1 million
Long-term Debt: $13.3 million
(*As of Dec. 27, 1998, before the $15 million debt offering)
Ratios
Price-to-earnings: N/A
Price-to-sales: 0.57
HOW COULD YOU HAVE FOUND THIS DOUBLE?
The retail music business spent several years in turmoil, with overexpansion, price competition, and
lackluster product offerings leading to an industry shakeout. Former Daily Double Trans World
Entertainment (Nasdaq:TWMC - news) led the way out of the tunnel with a massive rally. The
bankruptcy-defying Musicland (NYSE:MLG - news) followed. Searching the industry for survivors,
an investor might have found National Record.
Results for FY97 and the first quarter of FY97 (ended last June) showed smaller losses and improving
same-store sales, early signs of recovery. The stock doubled late last summer as investors sensed a
turnaround afoot. While shopping for bargains in penny-stock land isn't usually recommended, broad
industry troubles can crush all players, creating bargain prices that investors with a stomach for spicy
turnarounds may find delectable.
WHERE TO FROM HERE?
National Record is rocking and rolling, with April sales jamming ahead 18% on comp store revenue
growth of 14%. That's the twelfth consecutive month of increasing same-store sales, with most months
showing double-digit gains.
Industry consolidation has also opened up prime real estate for the remaining music retailers, and music
vendors have stepped up efforts to prevent some retailers from undercutting the suggested retail price
by withholding co-op advertising dollars. Add in National's recent financing deal, and it looks like the
company has a good opportunity to accelerate its growth at a time when expansion should pay off.
The one analyst reporting to Zacks expects EPS of $0.11 for the year just ended with $0.45 expected
in FY99. In light of the new debt financing and a lower-interest revolving credit facility, talk that the
company is now blessing a $0.60 per share estimate for FY99 seems reasonable.
The wildcard, though, is the Internet business. Rumor has it that National will start selling new and
used CDs online in conjunction with a leading search engine. Since N2K (Nasdaq:NTKI - news) or
CDNow (Nasdaq:CDNW - news) appear to have locked up the other players, Infoseek
(Nasdaq:SEEK - news) would seem to be the likely partner. However, it's not clear how that's possible
given that Infoseek's new partner Netscape (Nasdaq:NSCP - news) already has an exclusive deal
with N2K.
While National's stock would likely surge on any announced deal, the long-term ramifications of doing
business online are uncertain. The conventional wisdom now is that contending e-commerce companies
will need to withstand years of money-losing brand building before discovering the holy grail of online
profits. Companies that are financially unequipped to play this game may make money in the short term
but end up with little market share. Teitelbaum has suggested that National would take a novel
approach if it entered the e-commerce market.
I think a reasonable investor has to recognize that even today's leading players (N2K and CDNow) will
have a tough enough time competing against Amazon's (Nasdaq:AMZN - news) very deep pockets
and established brand. Although National now has a profitable and growing retail business, it lacks
even the brand recognition of K-tel. It also sports a hefty debt-to-equity ratio.
Today's price seems to factor in a continued recovery and some expectation of an Internet launch. A
rocket ride from here on any deal announcement would likely bring the short-sellers onto the dance
floor.
-- Louis Corrigan |
