Wherehouse Entertainment Inc., which climbed out of bankruptcy protection four years ago to emerge as one of the nation’s largest music retailers, is once again undergoing a makeover to refocus its farflung chain after getting caught up in the overall industry downturn.
Changes include the sale of 64 stores in the southeast United States to Atlanta-based Music Network in an eight-figure cash deal.
The sale of the 64 stores is part of a strategy to boost returns on advertising, marketing and management of Wherehouse by maintaining a consolidated group of stores: the 414 more profitable ones in 28 states, including about 70 in Los Angeles County.
“It’s a good business decision for us to close these down,” said Larry Gaines, Wherehouse president and chief operating officer. “This is a group of 64 stores that at best were breaking even but in most cases were losing money. They were all poor performers. We’re very pleased with what this opportunity (to sell) has given us.”
Privately held Wherehouse lost $21.6 million for the year ended Jan. 31, coming on top of a $1.2 million loss the year before. The company posted net income of $7.1 million in fiscal 1999.
Wherehouse is not alone in the retail music downturn. The overall industry experienced a 3 percent sales drop in the first half of this year compared with 2000, according to SoundScan, which tracks U.S. music sales.
The smaller Tower Records chain, which posted a net loss of $34.4 million in the quarter that ended April 30, has been flirting with Chapter 11 bankruptcy protection. Last month, Moody’s Investor Service dropped its credit rating on Tower’s $110 million subordinated notes.
Industry problems
Record companies blame the industry’s problems on a slowing economy, the lack of releases from high-profile performers and the loss in sales to Web sites that allow listeners to download music for free.
“The rising tide raises all boats,” said Thane Tierney, senior director of catalog developers for WEA Corp., the distribution arm of AOL Time Warner. “When you have an established superstar who has a highly anticipated album coming out, it brings people into record stores who might otherwise not be there.
“While they’re there, in addition to the album they came to buy, they may buy several other albums. All the kids who were downloading from Napster and other MP3 sites and burning CDs have (also) had a dramatic impact on the industry.”
The sale of inventory and fixed assets, as well as lease transfers at the 64 Wherehouse operations in Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee and Virginia to Music Network, follows that chain’s purchase of three of Wherehouse’s southeast stores earlier this year.
Torrance-based Wherehouse will keep its 25 stores in Atlanta, where it dominates market share compared to Music Network’s four stores there.
In addition to the sale, Wherehouse will begin upgrading its stores installing televisions that show videos, listening stations that play CDs and company logo signs. “We’re reinvesting in each one of the communities,” said Gaines. “Everybody will feel and taste this stuff.”
Despite its troubles over the years, the chain still ranks among the industry’s music retail giants, along with Trans World Entertainment Corp., which owns the Camelot, Strawberries and other chains, MTS Inc., of which Tower is a subsidiary, and Best Buy Co. Inc., which last January bought the Musicland Stores Corp.
Absorbed Blockbuster
In 1998, after emerging from bankruptcy protection, Wherehouse purchased Viacom Inc.’s 378 Blockbuster Music stores in 29 states. The company immediately closed down or sold off 30 money-losing stores and placed the rest under the Wherehouse brand. It has closed a total of 116 stores in the past three years.
But a strategic partnership formed to sell Wherehouse’s music products through entertainment Web site Checkout.com went bust earlier this year and now the company is exploring the development of its own retail Web site.
