APRIL 2008 W2 ALERTCircuit City to Investors: I've Got Good News and I've Got Bad News
Company Announces Small Profit But Sees Rough Road Ahead
<Stratecon-Reuters><April 9, 2008>Circuit City announced today that it had a profit of $4.5 million for the fourth quarter as compared to a loss of $7.2 million last year. This, along with some other items, is the good news. However, sales for the quarter declined 7.7%, comparable store sales declined 11.3% and gross profits declined a significant 20.4% versus last year. This…along with some other things…is the bad news.
Before you pop the champagne cork, it should be noted that Circuit City’s results benefited from a favorable tax adjustment and a lower goodwill impairment charge to help create the small profit. That having been said, Circuit has clearly benefited from a reduction in SG&A expenses of $200 million or $50 million more than originally forecast.
In a conference call today, Circuit City Stores chairman, president and chief executive officer Phil Shoonover sounded at times serious and at other times optimistic, “We are currently facing the toughest macroeconomic environment in years, but, despite the headwinds of the economy we have stopped the declining trends in close rate, services attachments and warranty units. For most of the operating metrics the trends are still below prior year, but the gap is narrowing.”
Schoonover went on to say that management has slowed store growth in order to allow employees to focus on execution. He points to progress with stores showing an average ticket increase of low single digits, store traffic rates increasing, home theater service attachment rates increasing…and even though close rates are down…they improved late in the quarter.
Of course, many in the industry suggest that most of Circuit’s current problems are self inflicted. Last year, in a move to cut labor expenses, Circuit laid off 3,400 of their most experienced and highest paid salespeople. (See story in previous Alert, Of peanuts and monkeys in retailing.) They then replaced them with new and lower cost hires. Not only was this scheme disruptive in store operations, but sales of higher margin products and profitable warranties declined dramatically.
As bright a shine as Schoonover may try to put on the results – it may be too little too late: Schoonover is facing pressure from Wattles Capital Management, LLC which is waging a proxy battle against Circuit City. Mark Wattles is demanding that the Circuit City board oust Schoonover and seat five directors nominated by Wattles.
And, depending on who you talk to, that is either good news or bad news.