Towering inferno

Venerable music retail chain Tower Records, which famously grew from the back of a Sacramento, California drugstore in the 1950s to cities across the globe, is looking for a buyer.

Last week, the retailer filed for bankruptcy for a second time after its music-label creditors pulled the plug. Music insiders point to the usual suspects behind music retailer woes: explosive growth in digital music and big box retailers like Best Buy, Wal-Mart and Target selling CDs as loss leaders. 

Tower Records: filing for bankruptcy

The chain consists of 89 stores throughout the US – none of which it currently plans to close – and already has two interested buyers. Tower is hoping to wrap up the sale before the holiday shopping season begins, when it reportedly registers a large chunk of its annual sales. 

But for distressed investors, who revel in getting their hands dirty with turnarounds, is the chain music retailing business the sort of thing that offers any sort of profitable upside?

It’s hard to argue with the numbers. Billboard magazine has reported there are around 2,000 music chain retailers in the US now, down from 9,500 in 1990. And everyone knows CD sales are down. According to Nielsen Soundscan data, albums are down to the lowest levels since January 1994 and, at the end of July, were down 7.8 percent for the year.

It’s not much better outside the record shop: Even adding in the up-tick in digital sales on sites like iTunes, overall record business is down 0.7 percent for 2006.

Of course, some have been able to harvest value from this business. One group that has been benefiting from music chains going out of business is conglomerate Albany, New York-based Trans World Entertainment, which owns more than 1,100 music- and movie-focused outlets under the f.y.e., Coconuts Music and Movies, Strawberries Music, Wherehouse, CD World, Spec’s, Second Spin and Planet Music banners.

Earlier this summer, the NASDAQ-traded firm acquired the Musicland chain – formerly a portfolio company of Boca Raton-based distressed investor Sun Capital Partners – out of bankruptcy. Musicland had filed for protection in January after it was unable to renegotiate leases at its underperforming locations. At the time, it reportedly had assets of $371 million and liabilities of more than $485 million.

Musicland, which went through cost-cutting and asset-repositioning maneuvers with Sun, has around 400 stores under the Sam Goody, Suncoast Motion Picture Company, On Cue and Media Play names. While the Media Play outlets have been shuttered, Trans World plans to keep around 355 of the best-performing stores operating under the Trans World brands.

But, as bleak as the picture may be, many feel there is still demand for brick-and-mortar record shops as the market shake out continues. This is particularly the case for Tower, which has long been praised by music fans for its deep selection. 

As Geoff Mayfield, the director of charts at Billboard magazine, recently told the Rocky Mountain News, “There are a lot of consumers out there, believe it or not, that don’t own an iPod or even a computer.”