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Circuit City Replacing 3,400 Sales Assistants

3/28/2007 10:05:00 AM Eastern

Richmond, Va. — Circuit City laid off 3,400 of its highest-paid sales associates last month and may put its Canadian operation on the auction block as part of an ongoing restructuring aimed at lowering costs and improving its financial performance.

The No. 2 CE chain said it plans to replace the employees, who were paid “well above the market-based salary range for their roles,” with new hires who will be compensated at the current market range for those jobs.

The company also announced that it had reduced the number of operating regions from 10 to eight in February in order to streamline responsibilities, reduce field leadership costs, improve communication and provide clear lines of accountability with a minimal impact on headcount.

As part of the cost-cutting effort, Circuit City has also outsourced its information technology infrastructure operations to IBM, resulting in pink slips for another 130 workers, although 50 will remain on site as IBM employees.

The chain expects greater sales volatility during the next six months due to the “significant nature” of the changes, but said it has plans in place to quickly rebuild and improve its level of execution prior to the holiday selling season.

The company has also hired Goldman Sachs to help it explore “strategic alternatives” for its InterTAN Canadian operation, which could include its divestiture. Circuit City acquired the business for $284 million in 2004 when it operated 1,280 stores, mostly under the RadioShack name. RadioShack successfully argued that the acquisition voided its licensing agreement with InterTAN, and the stores were later renamed The Source By Circuit City. Circuit City closed 55 locations last month and plans to close 10 more over the next six months as part of the restructuring.

In a prepared statement, president/CEO Phil Schoonover said, “We are taking a number of aggressive actions to improve our cost and expense structure, which will better position us for improved and sustainable returns in today’s marketplace. These actions represent the execution phase of the work initiated this winter to accelerate Circuit City’s transformation. We expect to deliver improvements in our selling, general and administrative expense rate while maintaining appropriate investments to drive our key strategic initiatives such as digital home services, multichannel and home entertainment.”

He continued, “We are continuing to challenge all aspects of our SG&A expense. We are reviewing our organizational structures to ensure that they are efficient and promote productivity; evaluating spans of control and layers of management to ensure that our front-line associates are empowered; instituting more discipline and controls around expense management; identifying overlapping functions that can be combined to drive efficiency; outsourcing functions where appropriate; and eliminating entire pieces of non-value added work. Unfortunately, a number of associates are directly impacted by the actions, but we are making Circuit City stronger for the long term.”

Circuit City will take $144 million in charges for the just completed fiscal fourth quarter, but will shave expenses by $110 million this year and $140 million annually beginning next year as a result of the restructuring, the company said.

The first leg of the restructuring was announced in February when the company streamlined its corporate structure and announced the closing of seven U.S. stores and a distribution center in Louisville, Ky.

In a research note, Lehman Brothers retail analyst Alan Rifkin reflected that the layoffs, which affect about 8.5 percent of the workforce, could have long-term ramifications for Circuit City. “While we applaud the efforts to control cost,” he said, “ultimately, in a commoditized CE industry, knowledgeable store associates and high quality service are key differentiators.”

Bill Nylin, executive vice chairman of Conn’s, told analysts that the layoffs will provide his company with an opportunity to “pick up some quality sales associates.”

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