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Best Buy, Circuit City Q4: Fiscal Opposites

4 Apr, 2007 By: Erik Gruenwedel

The fourth quarter results (ended March 3 and Feb. 28) of No. 1 and 2 consumer electronics retailers Best Buy Co., Inc. and Circuit City Stores Inc. would appear to represent a picture of disparate fortunes.

Ongoing fallout from last quarter's unexpected steep discounts by flat-panel TV manufacturers coupled with PC hardware challenges and internal restructuring resulted in Circuit City posting a loss of $12.2 million, compared to income of $141.4 million during the same period last year.

Net sales grew 1.3% to $3.93 billion from $3.89 billion despite comparable same-store sales (open at least a year) of movie DVDs declining by mid-single digits. Overall comp store sales declined 0.5%, compared to 11.6% increase last year.

Web sales increased more than 50% to more than $1 billion. Revenue from Circuit City's FireDog in-home consumer service grew 80% to $200 million.

For the year, revenues increased 7.8% to $12.4 billion, compared to $11.5 billion last year.

“We had assumptions about the growth of flat-panel TV business and how quickly it would commoditize,” said Philip Schoonover, chairman, president and CEO of Circuit City, in an analyst call. “The pricing in television declined a year faster than we had expected and the resulting change impacted many parts of our business in the third and fourth quarters.”

By comparison, Best Buy posted profit of $763 million, up almost 18.5% from $644 million last year.

The Minneapolis-based retailer apparently stayed ahead of falling HDTV margins, citing strong flat-panel TV and video gaming hardware sales, in addition to new store openings when posting quarterly revenue of $12.9 billion, up 20.5% from $10.7 billion last year.

Entertainment software, which represented 21% of fourth quarter revenue, increased 9.2% on a comparable same-store basis due primarily to strong video game sales. Movie DVD and music CD sales dropped an undisclosed amount.

For the quarter, same-store sales increased 4.8% compared to a 7.4% increase last year.

Fiscal year revenue increased 16.5% to $35.9 billion from $30.8 billion last year.

The company opened 10 domestic stores in the quarter excluding Best Buy's first Chinese retail operation in Shanghai.

Best Buy operates 822 stores, 20 Magnolia Audio Video stores, 14 Pacific Sales showrooms and 12 Geek Squad locations in the United States. It operates 304 stores internationally, including Canada.

Best Buys employs about 140,000 people.

Richmond Va.-based Circuit City, which operates 643 retail stores and superstores domestically and more than 800 retail stores and dealer outlets in Canada, last week announced the termination of 3,400 hourly employees, the elimination of two operating regions and the outsourcing of its IT infrastructure to IBM.

“We identified a lack of discipline in managing our wages and rates,” said Schoonover. “I acknowledge that this decision was difficult and painful to the people who were impacted. We did not have a competitive cost structure carrying the burden of this labor rate. These decisions are not easy and required some tough judgment calls.”

The staffers, who made at least 51 cents per hour above the market-based salary range for their positions, were given severance and allowed to reapply for their positions at lower hourly rates after 10 days, according to a company spokesperson.

Schoonover said there would be additional personnel changes, including management, in an effort to remain competitive in the marketplace. The retailer shuttered 69 stores in February.

Circuit City employs more than 40,000 people.

The retailer said the restructuring contributed about $145 million in pre-tax expenses to fiscal year 2007.

Circuit City said it had hired Goldman Sachs to “explore options,” including the sale of its Canadian operations.

Schoonover said higher gas prices, slowing housing sales and eroding consumer confidence will contribute to a “significant loss” in the first half of fiscal 2008.

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