Handleman (HDL) Shares Continue to Fall - Could Be Takeover Target

March 12, 2008 11:38 AM EDT

Handleman Co. (NYSE: HDL) falls 3% after reporting Q3 earnings last night. HDL reported Q3 EPS of $0.12 compared to $0.21 for Q3 of last year. Revenues for Q3 were $346.9 million, compared to $485.0 million for the third quarter of last year. Revenues in the category management and distribution operations segment decreased to $245.6 million in Q3 from $391.5 million during the same period last year. This decrease was primarily due to revenues from music and video category management. The discontinuance of the ASDA music supply arrangement in the UK resulted in a revenue decline of $113.7 million in the third quarter of this fiscal year. In addition, the U.S. continued to experience weaknesses in the music market which resulted in $63.5 million decrease in revenues. Revenues in the video game operations segment were $95.8 million in the quarter ended January 31, 2008, compared to $88.5 million in the quarter ended January 31, 2007.

Some important notes from HDL's 10-Q:
The Company's Handleman UK Limited subsidiary determined, in conjunction with its customer (ASDA), that their business relationship related to the greeting cards business would terminate effective May 2008. Music and DVD sales to ASDA represented $57.3 million, or 15%, of the Company's consolidated revenues for the first four months of fiscal 2008 and $268.0 million, or 20%, of the Company's consolidated revenues during the fiscal year ended April 28, 2007.

The overall music industry continues to be impacted by digital distribution, downloading and piracy. The Company believes that this trend has increased significantly during the last few years and believes the trend is likely to continue until the music industry is able to develop a solution that encourages the legal consumption of music and provides a physical music product that is appealing to consumers.

The Company's revenues have declined in each of its major markets as a result of the deterioration in the music industry, and the Company expects this downward trend to continue. The Company is unable to quantify the impact on future earnings and liquidity, although both will be negatively impacted by this downward trend.

During fiscal years 2007 and 2008, the Company implemented cost reduction plans to reduce expenses and streamline operations. The plans included work force reductions; the consolidation of the operations of two U.S. automated distribution facilities into one facility; the reduction of benefit programs and realigning medical plans; initiatives to reduce customer product returns; and various other cost reduction initiatives.

NOTE - HDL shares have fallen approximately 85% from the 52-wk high of $7.76. The company's music business has been discontinued in the UK and revenues have suffered significantly. The company has implemented cost reductions, but the only light of hope is in the video game business - The video game operations are related to Crave Entertainment Group - which grew by 10% in terms of revenues (quarter vs. last year quarter). It seems this company may be ripe for a takeover or may even divide it's two businesses (music and video games) and sell/merge or take the company private.[SM]

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