Circuit City Spinning Off CarMax

By Alan Wolf -- TWICE, 2/22/2002

Richmond, Va. - Circuit City Stores, the corporate parent of No. 2 CE specialty chain Circuit City, plans to spin off its CarMax used car subsidiary as a separate, publicly-traded company late this summer.

The split-off, which is subject to approval by Circuit's board of directors and shareholders, would allow the two disparate businesses to better focus on their operations and financing 'without the constraints imposed by being affiliates within the same corporate group,' said president/CEO W. Alan McCollough.

With two consecutive years of solid sales and earnings growth under its belt, CarMax could now stand on its own 'with no assistance from Circuit City,' McCollough said. The split would also enable investors to analyze each operation on its own merits, he added.

Circuit City stock is currently comprised of 100 percent of its CE store earnings and about 64 percent of its CarMax earnings. The other 36 percent of automotive earnings are applied to a CarMax tracking stock. In recent years, CarMax's strong performance has helped offset losses in the CE retail division.

Separately, McCollough projected earnings for the fourth quarter ending Feb. 28 would narrowly miss analyst estimates due to the cost of store remodels and the termination of warehouse and service center leases following Circuit City's exit from the major appliance business in 2000.

The company spent about $52 million last year on remodeling and store relocations, and plans to spend another $130 million on upgrades this year. The latest expenditures are mostly earmarked for a 300-store rollout of a newly redesigned video department that better showcases digital and big-screen TVs. The chain also plans a lighting upgrade in most of those stores, and will relocate nine units to better locations within their markets.

McCollough noted that sales for January and February, averaging in the low single digits, are running below expectations due to product shortages in key categories like camcorders. He attributed the inventory shortfalls to an exceptionally strong December and curtailed production by manufacturers who anticipated a falloff in demand following Sept. 11.

Looking ahead, McCollough sited a number of initiatives to help shore up business, including:

a sales counselor certification program to ensure better trained and motivated store personnel;
greater inventory availability;
increased advertising expenditures and competitive promotions;
and improved warehouse management systems and inventory forecasting.

Circuit City shares fell more than 30 percent, or $7.24 per share, to $16.35 within hours of the Feb. 22 announcements.