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Circuit City Losses, Exec Perks Skyrocket

21 Dec, 2007 By: Erik Gruenwedel

The fiscal fortunes of consumer electronics retailers Circuit City Stores Inc. and Best Buy Co. continue to spiral in opposite directions.

Richmond, Va.-based Circuit City Dec. 21 posted third-quarter (ended Nov. 30) losses of $207.3 million, compared to a loss of $20.4 million during the same period last year. Executives in a conference call with investors cited costs associated with restructuring operations at both the corporate and retail store level.

By comparison, Best Buy this week posted third-quarter (ended Dec. 1) income of $228 million, up $78 million from the same period last year.

“Clearly, we are very dissatisfied with our third quarter results,” Circuit City CEO Philip Schoonover said in the call. “We attribute the difference to underestimating the financial impact from the disruption of our store transformation work.”

Schoonover said fiscal shortfalls included fewer extended warranty sales and charges associated with its Fire Dog in-home customer service. He said cost-savings initiatives, which included the termination and rehiring at lower pay of almost 4,000 store employees last summer, were necessary to reduce operating costs.

“We needed to take immediate action,” he said. “[But] this amount of change was disruptive.”

Change apparently also included upping fiscal incentives to Circuit City's dwindling executive ranks. The company's board, according to a Dec. 19 regulatory filing, said executive and senior VPs would be eligible to receive cash retention awards of $1 million and $600,000, respectively, if they remained with the company to 2011.

The incentives, on top of current stock-based options, brought sharp rebukes from analysts.

“It seems like the top executives are getting paid more for poor performance and the rank-and-file associates … I don't see the see what the incentive is for them to perform and stay with Circuit City,” said Danielle Fox with Merrill Lynch.

Schoonover said senior executives had not received bonuses in two years and the additional compensation was required in light of the ongoing pressures associated with restructuring.

“This is very difficult work and not for the faint of heart and takes continued commitment,” he said.

The CEO said salaries and bonuses at the retail level remained competitive.

Bear Stearns analyst Chris Horvers questioned whether the company shouldn't be looking to sell as the losses mount.

Schoonover said he felt the company had identified what needed to be done to reverse its fiscal fortunes and increase shareholder value.

“We're staying the course on our longer term strategic initiatives,” he said.

Revenue for the quarter fell to $2.9 billion, from $3 billion last year. Same-store sales (open at least 12 months) increased 5.2% due in part to double-digit comparable store sales increases of video games. Comp sales of music CDs and movie DVDs declined sharply.

Notable sales drivers included high-definition, flat-panel televisions, which increased by double-digits in comp sales, according to the filing.

Finally, it wasn't all bad as Circuit City received a $1.3 billion asset-based credit facility commitment from Bank of America to amend its current $500 million facility.

The company opened 21 super stores in the quarter and looks to open 63 incremental and relocated superstores in 2008. Included in the openings, were six new The City concept stores, which company officials say offer kiosks, interactive sales displays and improved customer service.

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