Tweeter Threatens Chapter 11

On May 10, Tweeter Home Entertainment Group announced that it has insufficient working capital to cover its long- and short-term costs and may have to consider filing for Chapter 11. The immediate cause of the shortfall is the cost of closing 49 stores and two distribution centers. This Week in Consumer Electronics reported specifically that lump sum payments to lease-holding landlords was a contributory factor.

The chain currently has about $12 million in credit and is attempting to sell its 19% equity in Tivoli. The company has not announced a timetable for declaring bankruptcy, although it did announce a 13% decline in same-store sales in the preceding quarter (ended March 31).

Nobody is denying that Tweeter is in trouble, but many insiders point out that the company has not been flailing around without purpose. While everybody in the retail electronics business had a disappointing Christmas season this year, Tweeter has made major institutional changes, including opening new stores based on a retail model that has been working—including "gross sales, gross margins, sales per square foot, average ticket, percentage of tickets with labor attached, average labor per ticket—you name it, that any mid-to-high-end retailer would love to see," in the words of one analyst familiar with the operation.

Tweeter's vendors know its situation—reportedly most of them have been conducting business on a cash basis for some time, but there has not been a sense of panic. So why the warning? Tweeter is a publicly traded company, but some industry pundits look at those landlords that haven't yet negotiated to let the chain out of its leases. Reportedly, over 40 of them are still at the bargaining table with Tweeter, and it might not be a bad time to remind them that it would be better to have a rentable location than to be stuck in a protracted bankruptcy spiral, which would keep the property in limbo.

We hope that's the case and that it works, because Tweeter's quality initiative is precisely what the retail electronics industry needs to consider—especially since it appears to give consumers what the big-box stores have been taking away: better customer service.

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