Circuit City Says Retooling Stalled Q2 Sales
By Alan Wolf -- TWICE, 9/20/2007
Richmond, Va. — Circuit City executives told analysts today that a second-quarter loss and sales decline were attributable to massive structural and procedural changes that disrupted operations during the first half.
Net sales at the No. 2 CE chain slipped 6.2 percent to $2.6 billion for the three-month period, ended Aug. 31, while same-store sales fell nearly 8 percent against strong year-ago comparisons.
Net loss for the quarter was $63 million and its gross profit margin fell 313 basis points. The chain attributed the latter to a decrease in merchandise margins stemming from a 38 percent drop in extended warranty sales and a greater mix of PC hardware revenue amid margin declines in computers and TVs.
“While we are not satisfied with the financial performance for the quarter, we made solid progress on our multiyear turnaround plan to increase productivity and to improve the customer experience,” CEO Phil Schoonover said. “We expected the changes to be disruptive in the near-term, but necessary to deliver long-term profitable growth through our four areas of strategic focus — home entertainment, new store openings, multichannel and digital home services.”
 Circuit City reported single-digit declines in sales and earnings for its second fiscal quarter, ended Aug. 31. |
The last two areas appear to be gaining traction, with direct-channel sales, including Web- and call-center-originated sales, increasing 20 percent during the quarter on top of a 100-percent increase last year, while PC services and home theater installation revenues grew 22 percent year-over-year within the United States to $63.6 million.
In a conference call with analysts today, Schoonover described the Internet as “the new front door to CE retail,” with 75 percent of big-ticket purchases by tech-savvy consumers originating online.
To further fuel on- and off-line sales, a new 20,000-square-foot concept store format was developed that “makes it easy for consumers to swing by and pick up” their online purchases, Schoonover said. The format, which also provides enhanced levels of customer service, is the fruit of hundreds of “experiments” at Boston and Florida lab stores aimed at improving the shopping experience. The first concept store opened recently in Norfolk, Va., and the company plans to open 25 more during the first half of fiscal 2008.
“We’re not tied to the legacy of brick-and-mortar as we upgrade this fleet,” he said.
Sales results by category for the quarter are as follows:
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In video, net sales fell 11 percent to $948.2 million, representing 37.8 percent of total volume, and comp-store sales fell by the double digits. Flat-panel comps increased by double digits and total television comps decreased by double digits, as significant same-store sales declines in projection and tube TVs more than offset the flat panel gains. Comp sales of digital imaging products and accessories decreased by a low single digit. Comp sales of camcorders and DVD hardware declined by double digits.
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In IT, net sales rose 4 percent to $774.7 million, representing 30.8 percent of total volume, and comps grew by the low single digits. Comp sales of notebook computers increased by double digits while desktop computers comps declined by a low single digit.
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In audio, net sales fell 16 percent to $325.8 million, representing 13 percent of total volume, with double-digit comp-store declines. Comp sales of navigation products increased by strong double digits, while comp sales of portable digital audio, mobile, home audio and digital satellite radio products declined by double digits.
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In entertainment, net sales rose 10 percent to $267.1 million, representing 7.8 percent of total sales, with comps growing by the high single digits. Results reflect a strong double-digit comp increase in video gaming products and double-digit growth in PC software. Comp sales of video software and music declined by double digits.
Net sales of extended warranties within the United States fell 38 percent to $67 million, representing 2.7 percent of domestic segment net sales, down from 4 percent last year.
During the quarter the company opened nine new stores, relocated four, and implemented new standard operating procedures within more than 650 locations. “It absolutely affected us,” said Danny Clark, multichannel sales executive VP. “We essentially had 40,000 people learning a new job.”
Nevertheless, domestic comps and flat panel TV sales increased each month, Schoonover said. “This improvement and the results from the 65 learning center stores that are used to roll out our transformation changes, all of which have completed the implementation of the new operating platform, lead us to believe that the store-level changes are having a positive impact on the customer experience.”
The retailer is also addressing margin shortfalls by improving its pricing, sourcing and mark-down management functions while focusing on a solution selling approach that emphasizes a complete basket of devices, content, sources and payment programs. The company is utilizing cross functional marketing, merchandising and services teams to develop and implement the changes.
Although Circuit City took most of its transitional lumps in the first half, management still anticipates continued weakness in the third quarter. However, net losses will lessen as the pace of change slows in the stores and performance levels stabilize. The company expects to deliver a net profit for the fourth quarter and a full-year net loss from continuing operations.
Circuit City said it is still looking to open 60 to 65 new and relocated domestic segment superstores in fiscal 2008, although recently installed CFO Bruce Besanko told analysts the company may curtail its buildout plans. About two-thirds of the openings are slated to be in a 20,000-square-foot format, including the new concept stores.
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How long will investors allow CC to continue to make every mistake a retailer can make before there is a rebellion? I can tell you as one of the lucky 3400 from this March that CC''s layoff was the best thing that ever happened to me. Yes, I am making less money, but I feel welcomed by my current employer and a feel I have a future. I am watching the death of a major retailor and the sadness comes from the realization that the fatal blows are self-inflicted. Oh, but the way, how will CC reintigate Majaps into this enviornment of poorly paid, undertrained, and most importantly, under-staffed stores?
Larry Purvis - 2007-21-9 20:41:00 EDT -
Looks like Circuit is finding out the hard way that you get what you pay for. Eliminating higher paid staff for lower paid has = in lower sales and to try to drive customers into stores lower profits. The BB idea of eliminating mail in rebates makes it easier and less expensive up front to the end user like myself. The growth, if it does occur, could increase volume, however comp store sales will probably continue to decline should there be no changes or incentives to the sales floor. I would hate to see CC get caught growing too fast and then imploding, leaving us BB/Walmart/Target scenario for consumer electronics.
MARK HOTHEM - 2007-20-9 22:06:00 EDT -
Tsk, tsk. Too bad about the CC sales drop. Hmmm....Best Buy had a 1.7% same-store sales increase vs. an 8% same-store sales decrease. Is that because salespeople at CC are poorly trained, poorly paid and poorly motivated? But if that's the case, then shouldn't operating expenses be lower, not higher?
I doubt that the company will even come close to its goal of opening 60-65 new stores. Let's look at some facts: Only 1 store opened in the first quarter, 5 in the second. That would mean CC needs to open ten times as many stores in the next half year as it did in the first half of the year. Since the company is predicting lower sales and higher losses for the third quarter, with only the 4th quarter showing any profits, where will they get the money to do that?
And one more thing, that seems like the shape of things to come: This 20,000 s.f. "consept store" to allow people to pick up their online orders. They should just convert all the existing stores to that model, and then the profit-margin bonus numbers would kick in for the senior execs.
Bye bye, CC. Good riddance.
Bill Penn - 2007-20-9 15:33:00 EDT -
Interesting to see the excuses coming from the Circuit City Execs. relative to their plummeting sales. Let''''s see, first they get rid of all their commissioned salesmen (always the most highly motivated and highest sales volume people on the floor) and put everybody on straight (and low) salary. Top commissioned salesmen leave the chain and go to work for someone else. Next they take their ''''veteran'''' salaried employees (the people who train and mentor all new employees) and force them to take a substantial pay cut or leave the chain. Result, these people leave or completely loose their motivation. So, ultimately Circuit City is left with a bunch of poorly paid, unmotivated and poorly trained salesmen with no loyalty and no compelling reason to try to advance up through the company. Now that''''s what I call top flight management!!
I am not a disgruntled ex-Circuit City employee, but I am a 30+ year veteran in the consumer electronics business. I have worked retail, (straight commission) as a Manufacturers Representative and at the VP level of a number of multinational consumer electronic companies. I have seen the Circuit City approach to managing their sales force tried at a number of retailers stretching back into the 1970''''s. In all cases (remember Federated Group, Pacific Stereo, University Stereo) it was a dismal failure. Regretfully Circuit City will have to learn the same sad (and expensive) lesson.
Douglas Booth - 2007-20-9 14:12:00 EDT
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