This Small Cap Company May go Bankrupt Despite Rising Earnings (TWMC)

Trans World Entertainment Corporation TWMC operates stores and websites selling entertainment products, most notably under the name f.y.e.

Industry

Sales of physical video made up 43.8 percent of 2012 sales. As stated in their annual report, industry sales of physical video fell five percent from 2011 to 2012. DVD sales fell nine percent while Blu-ray sales climbed nine percent.

Similarly, 30 percent of total sales are sales of physical music. As reported by BusinessWire, sales of physical music fell 12.8 percent from 2011 to 2012. This is the result of the shift to digital sales and an overall decline in music sales.

Competition

In the physical media space Trans World faces tough competition from big retailers. Largely Wal-Mart WMT, Target TGT and Best Buy BBY. The company has an upper hand against these retailers because many of its locations are in malls. However, these bigger retailers are often able to offer bigger discounts and a wider array of products.

As already noted, the growing digital industry is a threat to Trans World. Amazon and Apple are of the largest players in this space.

Financials

Sales have been falling for several years and are down 15.5 percent for the year ended February 2, 2013 versus 2012. However, earnings surged from 2.2 million to 33.7 million. This marked five straight years of income gains. The most recent quarter did underperform year over year.

Although sales have been falling, the company has successfully decreased their costs as a percentage of sales, primarily selling and general expenses.

In addition, the balance sheet strengthened over the past year. Cash rose almost fifty percent while inventories dropped. Liabilities fell by more than 11 percent over the year.

Related: Trans World Entertainment Commences Tender Offer to Purchase up to 25 Million of Stock

Valuation

In terms of valuation, the Price/Book is the most interesting statistic. With the ratio at 0.97, shares are worth less than the company’s book value. All other key valuation measures are below the industry averages.

Up fifty percent this year, shares closed Friday at $5.22.