Tower Records Faces Bankruptcy as Credit Tightens

Tower Records, one of the nation’s oldest music retail chains, may have to file for bankruptcy protection if it cannot restructure weakening finances in the coming months, according to the nation’s top bond-rating agency.

Despite moves to reduce operating costs and restructure debt, Tower “may have difficulty demonstrating improvements during the current weak environment for music product,” wrote Marie Menendez, an analyst at New York-based Moody’s Investors Service Inc., in a report issued Wednesday.

Officials at the West Sacramento-based chain, which has 174 stores in the U.S. and about a dozen other countries, said they had “no present intention” of filing for bankruptcy.

Michael Solomon, Tower’s president and chief executive, said the chain “continues to hold its own and we are encouraged by a more promising album release schedule starting in June, which we anticipate will favorably impact sales.”

The 41-year-old Tower is being squeezed by a decline in album sales and a protracted price war with discount houses that is driving down profit margins.

This year, the company launched a restructuring that will result in the firing of an estimated 250 of its roughly 7,000 employees and closed 10 stores in its fiscal quarter ended April 30.

Music merchants say sales are down 5% to 10% for the first six months of the year, following disappointing showings by releases from such big-name acts as Ricky Martin, Aerosmith and Depeche Mode.

Retailers also note that music fans are spending money on other forms of entertainment such as video games.

According to research firm SoundScan, which provides computerized sales data for the record industry, album sales at chain stores are down about 3.6% from a year ago.

Record chains such as Tower also blame their tepid sales on cutthroat competition from discount houses such as Best Buy, which purchase CDs from manufacturers for about $10.80 and often sell them for less than $10 to lure customers in to buy other products such as electronic equipment. Online discounters such as Amazon.com also are threatening traditional chains’ market share, though Tower itself has a well-regarded Web store.

Tower has tried to compete by offering a diverse array of products such as books and toys in many of its stores.

But the company’s restructuring means that Tower is largely exiting the book business.

Tower said last week it had closed all but one of its stand-alone bookstores and liquidated most of its book inventory.

Tower also is retrenching its international operation, which has about 70 stores in 10 countries, negotiating to sell its operations in Argentina, Taiwan and Hong Kong. In a regulatory filing, Tower said it also would close or sell its operations in Canada.

Michael Solomon’s father, Russell, started selling records out of his family’s drugstore and opened the first Tower Records in 1960 in Sacramento.

The maverick chain was the first to usher in the compact disc a decade ago.

In a regulatory filing, Tower said that it recently received a one-year extension to its credit line, but that the amount of money it could borrow also was reduced, to $225 million from $275 million.

Although that’s enough to meet the company’s current obligations, the credit line will shrink further in the coming months, Menendez noted.

She downgraded by a notch her rating on the company’s ability to repay $110 million in senior notes to Ca, or highly speculative, from Caa3, or poor.

Tower officials said they are seeking additional financing. In the most recent quarterly report, Tower said losses for the three months ended April 30 ballooned to $34.4 million from a $4.3-million deficit in the same year-earlier period.

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Associated Press was used in compiling this report.