Trans World's sack of coal

Trans World Entertainment (NASDAQ: TWMC), owner of mall-based entertainment stores Fye, Coconuts, Strawberries, and Suncoast (among others), reported a 6% decline in its sales for the holiday season due, once again, to continued weakness in CD sales and competition from downloading. The company also revised their fiscal year earnings estimates from 10-20 cents a share down to 0-5 cents. Ouch!

The sales were another disappointment for TWMC and its shareholders, as the shares have declined from over 14 dollars per share in early 2005 to their current price of $6.14, after today's 7% drop.

Breaking down the results, music sales were down about 12% and video sales were down 2%. Video games sales were up 6%, but this couldn't halt a 6% decline overall. They had previously been anticipating a low single-digit gain in comparable store sales. To listen to their conference call for the holiday season, visit their website.

If there's one thing that you have to admire about TWMC, it's their commitment to their industry. In the face of declining sales and profitability, they purchased the Musicland chain out of bankruptcy and recently were outbid in their effort to purchase Tower Records out of bankruptcy. While the move was brave, the increased debt load and lack of profitability has made TWMC a far less attractive potential acquisition target than it may have once been.

Should investors invest in TWMC? I don't know. But it may be an illustration of an important rule for investors: valuation matters. Just because the business is in decline doesn't mean the stock is a sell. With a price-book ratio of slight over half, TWMC has all the hallmarks of a classic contrarian stock: extremely negative sentiment about the business, huge decline in recent years, and very low price to book and price to sales ratios. The success of this stock will depend on management: will they be successful in shifting Trans World from a mall-based music store into an "entertainment destination," as they've talked about in conference calls?