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Circuit City Loss Bigger Than Expected

By Erik Gruenwedel | Posted: 29 Sep 2008

While Wall Street took its lumps Sept. 29, Circuit City Stores absorbed its own knocks when it reported second-quarter (ended Aug. 31) losses of more than $239 million, compared to losses exceeding $62 million during the prior-year period.

The chain’s share prices plummeted more than 25% to $1.02 in midday trading.

“The Dow is dropping pretty fast, but Circuit City is dropping faster,” said Edward Woo, analyst with Wedbush Morgan Securities in Los Angeles.

Richmond, Va.-based Circuit City cited a 14.4% drop in same-store sales open at least 12 months and a 9.4% decline in net revenues to nearly $2.4 billion from more than $2.6 billion last year.

“Clearly, the performance of the company is unacceptable to all of our stakeholders, and it is imperative that we take the right steps to accelerate our turnaround,” said James Marcum, vice chairman and acting president and CEO, in a statement.

Marcum last week replaced beleaguered CEO Philip Schoonover, who resigned. Marcum joined the board last month as one of three new directors in settlement deal with dissident shareholder Mark Wattles.

The CEO said management was taking a comprehensive review of all aspects of the business to determine the best methods of improving financial performance and maximizing shareholder value.

Circuit City attempted to soften the bad news by saying losses from continuing operations before taxes ($162.7 million, excluding $73 million of non-cash asset impairment charges) were actually less than the $170 million to $185 million projected.

Analyst Stacey Widlitz with Pali Research chided that revelation as “not exactly impressive.” In a research note, she characterized Circuit City’s financials a “mess.”

For example, the analyst questioned why the retailer opened 17 stores in the quarter when competitor Best Buy reported a 5% comp-sales increase.

“[This] highlights our negative outlook for the business [going] into [the] holiday,” Widlitz said. “We are also concerned free financing promotions that drive TV sales will be harder to come by.”

In a call with analysts, Circuit City management cited declining store traffic as a primary driver of its financial woes.

Bruce Besanko, EVP and CFO of Circuit City, said traffic was “somewhat worse than what we saw in the first quarter.” He said weakening of the chain’s brand relevance and significant declines in music-CD and movie-DVD sales also contributed to the poor quarter.

He said a pending marketing campaign would attempt to restore relevance to the Circuit City brand.

Besanko said the few bright spots included large LCD screens, which he said continued to be a primary sales driver coupled with digital converter boxes and social gaming products.

The company reported available cash and cash equivalents of $92.5 million, compared with $424.4 million a year ago. Circuit City is expecting an $80 million tax refund in the third quarter.

But even that faces “unexpected” and “disappointing” administrative issues, Besanko said, that “complicate” the refund process.

The CFO said Circuit City’s liquidity going forward depended significantly on its vendors, which he described as supportive.

“We maintain very good relationships with them,” Besanko said. “Everybody wants to see a healthy Circuit City in the marketplace.”

CEO Marcum said it remained prudent to focus on improving the company’s performance in order to operate as a standalone business rather than finding third-party acquisition offers.

This led some analysts to ponder whether few, if any, outside offers for the chain existed, and whether it even mattered.

“The risks of bankruptcy are very real, in our opinion,” said David Schick, analyst with Stifel Nicolaus, in a research note.

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