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Circuit City Eyes Q1 Loss On Soft TV Sales

5/07/2007 02:00:00 AM Eastern

Circuit City now expects a first-quarter loss and withdrew its forecast for the first half based on disappointing flat-panel and projection TV sales.

The retailer reported last week "it experienced substantially below-plan sales, primarily related to the large flat-panel and projection television categories" and changed the forecast it reported in early April.

Due to this trend, the company now expects "a loss from continuing operations before income taxes of $80 million to $90 million for the first quarter of fiscal 2008. In light of uncertainties in the current operating environment, the company is withdrawing its previously issued guidance for the first half of fiscal year 2008."

In April, Circuit City indicated that it assumes a pretax loss of $40 million to $50 million in the first half, "with a strong recovery in the second half." Phil Schoonover, chairman, president/CEO, said the chain will "use the first half to stabilize business for the important second half" in terms of layoff expenses and the like.

In the statement issued last week, Circuit City said that assuming business trends improve and the transformation efforts are effective, the company forecasts fiscal 2008 earnings from continuing operations before income taxes (EBT) as a percentage of consolidated net sales at the low end of the company's previously guided range of 1.4 percent to 1.8 percent.

Analysts were disconcerted by the sales and earnings shortfall, which they believe is company-specific rather than indicative of a larger pullback in flat-panel demand or consumer spending. In separate research notes, CIBC analyst Vivian Ma partly attributed Circuit City's troubles to "ongoing mismanagement of pricing and promotions" amid sharper offers by Best Buy, while Goldman Sachs retail analyst Matthew Fassler cited Circuit's greater exposure to rear-projection sets and its decision to lay off its most experienced sales people as contributing factors.

"The company is in a strategic conundrum," Fassler observed, "with several key management departures or dismissals; disruptive layoffs; strategic investments, particularly in systems, it would like to maintain; and a desire to nonetheless hold share."

Going forward, Bank of America retail analyst David Strasser believes that Circuit City should withdraw from its weakest trading areas and begin building share back market by market while recent initiatives find traction. He also expects that the company will be buying more conservatively for the back half of the year, but will not likely resort to irrational pricing which "hurts, not helps, the longer term opportunity for a more substantial turnaround."

Circuit City said it expects to provide an updated fiscal 2008 forecast when it releases results for the first quarter of fiscal 2008 in June.

The company reported it would continue to take actions to support sales growth and margin improvements as well as reduce its cost and expense structure in order to compete more effectively in today's marketplace.

"We are moving with increased urgency to accelerate our transformation initiatives. Although the first half of the fiscal year will be volatile due to the change in the television business, we believe that our transformation efforts will yield positive results for the full fiscal year," Schoonover said. — Additional reporting by Alan Wolf