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Handleman, revised

Rack jobber to restructure biz, lay off 35%

Handleman Co., the leading Midwestern rack jobber that last month took a 75% stake in Itsy Bitsy Entertainment Co., announced a major restructuring Wednesday designed to make it more of a player in licensing and entertainment.

The restructuring was reported along with a loss of $8.5 million for the quarter ended May 2, as net sales fell 2% to $272 million. Excluding nonrecurring charges, which were incurred to facilitate the company’s repositioning and its closing of two distribution centers, Handleman would have posted earnings of $2.7 million, compared with $200,000 in the year-earlier quarter.

Streamlining what’s left

The repositioning essentially spins off such non-core properties as domestic video, book and software distribution and services, while streamlining its music distribution business by cutting off 88 of its less-profitable customers. The surviving operations are expected to serve as a “cash cow” for new ventures.

At the same time, Handleman CEO Stephen Strome said the company was committed to “growing” its North Coast Entertainment subsidiary, which encompasses Itsy Bitsy Entertainment. Described as the only exception was SofSource, the subsidiary’s software publishing unit, which is being sold off to the Learning Co.

Though profitable, SofSource, according to Troy, Mich.-based Handleman, “is at a point where the resources necessary for growth are best provided by another investor that has the critical mass and commitment to focus on the industry.”

Staff cuts seen

Handleman estimated all the maneuvers would lead to staff cuts of 900-1,000, about 35% of the total workforce. It also said it would take an additional nonrecurring charge this quarter of $90 million-$110 million before taxes, reflecting severance payments and writedowns on businesses that are being exited.

Although the stock lost 7¢ on the news, to close Wednesday at $11.94, Barry Sosnick, a New York-based analyst who covers Handleman for Genesis Merchant Group Securities, characterized the repositioning as “positive.” No doubt Handleman’s commitment to buy back $70 million in common stock contributed to that assessment.