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Circuit City Sees Profits Beyond Majaps

Richmond, Va. -- Under Circuit City's three-year plan to strategically reposition itself as a consumer electronics and home office products retailer exclusively, virtually all 573 superstores will be remodeled to accommodate a much greater selection of "take-with" merchandise.

Floor space previously devoted to major appliances will be used to display the expanded CE and home office assortments and create what the company calls "more flexible selling space."

As an interim step to the major remodeling - a process that has already begun in the Central and South Florida markets - the chain will reformat all its stores over the next three months. It will supplant appliances with a wider selection of PCs, peripherals, digital cameras, imaging products, games and computer software. The merchandise will be directly accessible to shoppers, and cash registers will be added to provide easy checkout.

According to president/CEO Alan McCollough, the first steps toward a broader selection and improved product accessibility were taken two years ago. The result, he said, was that "these initiatives increase sales volumes by generating additional store traffic and speeding the transaction for the consumer, especially during the peak selling season."

How much will all this cost? In order to pull the plug on appliances, the chain will shut six distribution centers this year, two more over the next 12 months, and will shave 1,000 employees from its roster at a price tag of $30 million. The one-time pre-tax charge, which includes distribution center lease terminations, employee severance, fixed asset impairment and the write-off of service parts, will be taken in Circuit City's second fiscal quarter.

The company will take an additional $15 million hit during the period to cover the cost of its Florida store remodeling.

During the third quarter, Circuit City expects to incur $30 million in pretax expenses to cover the cost of reformatting all its stores before the holiday selling season. On average, the interim renovations will cost about $90,000 per unit, of which $55,000 will be expensed.

In addition, Circuit City will take a $15 million hit in the third quarter to cover the excess retail markdowns it needs to rapidly exit the white-goods business, plus a $10 million drop in pre-tax earnings that represents lost majap sales.

As the three-year-plan progresses, the chain will spend about $2.5 million per store to complete the full renovations, with about $500,000 of that being expensed in the quarter in which the construction occurs.

Despite the initial impact on earnings, McCollough expects to see the first fruits of his labors by the fourth quarter, when benefits from the store changeover and the end of related costs begin to accrue. Indeed, the company anticipates that it will end its fiscal year essentially flat relative to 1999 earnings.

Going forward, the fully remodeled stores are expected to generate per unit sales increases of nearly 30 percent from current levels and after-tax returns of about 30 percent on the incremental investment.