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During the holiday season, Dealscape asked the question: Could upscale electronics retailer Tweeter Home Entertainment Group Inc. file for bankruptcy? The answer, it turns out, was yes. Tweeter filed for Chapter 11 on June 11, three months after announcing a restructuring, which faltered, and a month after reporting second-quarter losses and warning bankruptcy could be close. Tweeter was done in by six consecutive years of losses coupled with debt amassed through a string of poor acquisitions, as competition from big-box retailers like Wal-Mart Stores Inc., Best Buy Co. and Circuit City Stores Inc. hammered its share of the electronics retail and installation market. As The Deal's John Blakeley points out:
SCREECHING HALT The death knell for the Canton, Mass.-based company got louder in May, when alongside announcing a loss in its second fiscal quarter of 2007, the retailer said it didn't have enough working capital to fund its short-term needs and could choose to file for Chapter 11 protection if it wasn't able to secure more money (listen to Webcast). Sales peaked at $796 million in 2002, and only 2005 came close to beating the figure. In 2006, Tweeter had sales of $735 million. The company said it lost $35.2 million, or $1.38 per share, in its second fiscal quarter of 2007. Total revenue in the quarter fell 13% to $163 million compared with $187 million in the same period in 2006. The second-quarter loss follows the company's March announcement that it would close 49 of its 153 locations. As part of the restructuring, Tweeter made plans to close all of its stores in California, Tennessee, Alabama, New York and most of Georgia within two to three months, resulting in layoffs of approximately 20% of its total personnel. As part of the overhaul, Tweeter began to open "consumer electric playgrounds" at select stores to reaffirm its high-end niche of the $10 billion market. The company also entered into its $75 million revolving credit facility with GE Capital. When Tweeter filed for Chapter 11, it was with the GE DIP, which refinanced $25 million in prepetition secured debt, and later the retailer secured a second DIP, a $10 million loan from its buyer's affiliate. During a July 10 auction, Tweeter sold substantially all of its assets to Schultze Asset Management LLC for $38 million, a figure decried by many as too low. The deal includes a 18.75% interest in Tivoli Audio LLC, a stake that separately drew a $10 million offer from a joint venture of Whippoorwill Associates Inc. and Bay Harbour Management LLC. Tweeter dropped its executive pay plan July 25 after the auction's disappointing yield, amid cries from angry laid-off employees, many who never saw their promised severance packages. The yield was less than half of what shareholders had estimated the company to be worth — an implied enterprise value between $85 million and $119 million. These shareholders, including Xerion Partners, Seven Bridges Management LP and SeaRock Capital Management LLC, objected to the auction process before the court approved the sale and suggested the company could have tried to restructure around a group of core stores, or, at least, find a better bid. DINOSAUR SONG One possible explanation for Tweeter's stagnant sales is Best Buy's recent expansion of its upscale electronics unit Magnolia, which set it on a collision course with Tweeter and other regional up-market retailers that could send it down the same path that befell Montgomery Ward and The Wiz. The other big development that could further threaten the solvency of regional retailers is Wal-Mart's recent attempts to increase sales of electronics. In the past, smaller chains like Tweeter only competed with bigger rivals Best Buy and Circuit City in middle-tier electronics because Tweeter's entry products were the same models as the bigger rivals' mid-tier line up. The strategy kept Tweeter and its regional peers alive despite the growth of the big-box electronics retailers over the last decade. "We will continue to define the Tweeter brand as clearly focused on the mid- to high-end consumer, clearly delivering an outstanding service experience to our customer and clearly doing things that differentiate us from the pack," CEO Joe McGuire said in a statement. However, Tweeter has strayed from the model by carrying DVDs and video games. While today's shopper may not necessarily want to buy Windex where they buy their electronics — a behavior that could explain Wal-Mart's problems in the electronics market — they do want to buy DVDs and games where they buy Lysol. This dilemma put the squeeze on Tweeter. But like a cat, the company seems to have nine lives as it has avoided bankruptcy and hostile bids in the past. One way it avoided bankruptcy when Best Buy first arrived in its Boston home market in the 1990s was selling a stake to buyout firms. Tweeter took the capital and acquired retailers up and down the East Coast. OUT OF THE ASHES Post-restructuring, with old debts wiped away and new management and capital, perhaps Tweeter could enter a new round of acquisitions in an attempt to build national scale to better compete with Best Buy and Circuit City. Otherwise, the company will be a fond memory like Montgomery Ward and The Wiz. —Matthew Wurtzel and Carolyn Murphy
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