Circuit City Fiscal Q4 Profit Cut In Half

RICHMOND, VA.— Already hit with a 5 percent decrease in sales for the fourth quarter, announced early in March, Circuit City Stores earnings for the three-month period, ended Feb. 28, also took it on the chin.

Net earnings for the fiscal fourth quarter dropped to $75.4 million, down from $159.3 million in the same period a year earlier. Factoring in $18.4 million in net earnings from discontinued operations in the fourth quarter of 2002, net earnings from continuing operations for this period was $140.9 million.

Total sales for the fourth quarter decreased 5 percent, to $3.2 billion, down from $3.4 billion in the year-ago period. Comp-store sales declined 6 percent.

Net earnings for the 12 months were more than cut in half, dropping to $106.1 million, down from $218.8 million a year earlier. Add in $64.5 million in net earnings from discontinued operations in the 12 months just past and net earnings from continuing operations slid to $41.6 million. Net earnings from discontinued operations in 2002 were $90.8 million, which brings net earnings from continuing operations for the earlier year down to $128 million.

Sales for the fiscal year climbed 5 percent, reaching nearly $10 billion, up from $9.5 billion in the year-ago 12 months. Comp-store sales for the period increased 4 percent.

"Our fiscal 2003 sales reflect the benefits of traffic-driving initiatives and strategic merchandising shifts," said Alan McCollough, chairman/CEO. "However, we faced declining average retails across many product categories throughout the year and, in the fourth quarter, significantly tougher comparisons against the previous year's results as well as lingering economic and national security concerns."

Circuit City enjoyed strong sales results throughout the year from big-screen televisions, mainly digital types, as well as DVD movies and video games. Strong in the fourth quarter was portable audio and mobile electronics.

Sales of digital satellite systems and wireless phones, which carry higher-than-average margins, declined in the second half. In the first half, PC sales were driven by notebooks and a more competitive promotional stance than 2002. However, even as notebook and desktop average retails declined, the PC sales pace slowed in the fourth quarter.

Circuit City also noted the percentage of sales represented by extended warranty revenue dropped to 3.1 percent in the fourth quarter, compared with 3.6 percent year-on-year. For the 12 months, extended warranty sales were 3.6 percent of sales, down from 3.9 percent the previous year.

In a conference call, McCollough attributed the warranty decline to the slowdown in PC sales, and to an expected short-term disruption during February's transition to a completely non-commissioned sales force. He added that warranty attachment rates returned to pre-transition levels in March, and that the company "can't find any discernable difference" in overall sales performance since the changeover.

In the fourth quarter, gross profit margin slid 40 basis points, to 23.9 percent, down from 24.3 percent in the same quarter a year earlier. "The decrease in fourth quarter gross profit margin reflects changes in merchandise mix and a more promotional pricing environment," said McCollough.

"Weaker sales of wireless communications, digital satellite systems and extended warranties, and stronger sales of entertainment software and other traffic-driving items, contributed to the reduced gross margins. The gross margin decline was offset in part by solid sales growth of fully featured products such as big-screen televisions," he said.

For the 12 months, gross profit margin declined to 23.6 percent, down 90 basis points from the 24.5 percent posted in 2002.

Selling, General and Administrative (SG&A) expenses for the fourth quarter jumped 170 basis points, to 20.3 percent, compared with 18.6 percent in the year-ago three months. For the 12 months, SG&A expenses edged up 20 basis points, to 23.6 percent, compared with 23.4 percent year over year.

Looking to the near-term, McCollough said Circuit City saw a softening in mid-March sales that was "directly concurrent with the onset of war" with Iraq, although it is "too early to understand the impact these events may have on the results for the first quarter."