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Circuit City Sees Red Over Flat-Panel Pricing

12/19/2006 01:34:00 PM Eastern

Richmond, Va. — Circuit City’s profits plummeted in its fiscal third quarter as the No. 2 electronics chain succumbed to the flat-panel margin pressures that are roiling the CE industry.

The company reported a net loss of $16 million for the three months, ended Nov. 30, nearly matching that of Tweeter Home Entertainment Group. Best Buy’s net earnings were up 8.7 percent for the period but still came in below projections.

“The third quarter was volatile for the company … as manufacturers and retailers competed aggressively for market share and [flat-panel] prices fell to unanticipated levels,” said Phil Schoonover, Circuit City’s president/CEO.

The quarter started out strong, with September results tracking ahead of plan, but deteriorated as the period progressed and pricing cratered, he said.

In a conference call, Schoonover said the magnitude and the velocity of the price declines were “unprecedented” in all his years in the industry, and described the situation as a “sea change” in flat panel. He traced the volatility to a plasma TV vendor with excess inventory, and to defensive responses by two LCD vendors that viewed the price moves as grab for market share.

With flat-panel TV representing the lynchpin of Circuit City’s growth strategy, Schoonover said the company had no choice but to participate in the free-for-all. “Our strategy to hold the hill was important,” he told analysts. “We gained new customers in home entertainment, and we are not prepared to give them back to our competitors.”

The price compression had the opposite affect on the top line, as domestic revenue rose 7.3 percent to $2.9 billion and same-store sales grew 5.5 percent on top of last year’s 13.1 percent gain. But “the increase in television units and associated attachment sales did not produce the gross profit dollar results necessary to offset these price declines,” Schoonover said.

Also adding to the chain’s nearly 2 percentage-point decline in gross margins were slimmer markups on PC hardware and entertainment software; “strong” notebook PC out-of-stocks following the back-to-school period; and a 1.3 percent decrease in sales of extended warranties, to $103.3 million.

Executives said the earnings loss was exacerbated by poor in-store execution, which they attributed to their inability to keep up with “hyper-accelerated” changes in the marketplace, and to disruptions from store remodels and merchandise resets during the quarter.

Schoonover took solace in Circuit City’s strong performance in home entertainment, services and multichannel retailing, which he described as the pillars of the company’s growth strategy. Unit sales of flat-panel TVs increased by strong double digits and gained momentum with each passing month; revenue from firedog services and call centers grew 72 percent and 84 percent, respectively; and Web-originated sales grew 67 percent year-over-year, aided by improved online check-out and solution selling. The chain also opened eight new stores, relocated four, remodeled one and opened five outlet centers over the three months.

What’s more, SG&A expenses declined 43 basis points despite heavy investment spending in IT, multichannel capabilities and “innovation activities,” and inventory decreased 5 percent to $2.5 billion while in-stocks generally improved, thanks to better supply chain and inventory management execution, the company said. Net-owned inventory also decreased, by $363 million.

“The progress we have made with the pillars of our growth strategy is encouraging,” Schoonover said. “While we are disappointed with our profit performance this quarter, we continue to see evidence that we are on the right long-term path to sustainable growth.”

He added that the company is “just getting started” with new initiatives like home installation services and assortment, pricing and markdown optimization systems, which should enhance margins in the long term while lowering costs.

Same-store sales results by product category for the quarter included:

  • Digital imaging and accessories: Up double digits

  • Camcorders: Down single digits

  • DVD players: Down double digits

  • Video software: Down mid-single digits

  • Music software: Down double digits

  • Notebook computers: Up high single digits

  • Desktop computers: Down double digits

  • PC software: Up double digits

  • Navigation products: Up triple digits

  • Home audio: Down high single digits

  • Satellite radio: Down double digits

  • MP3 players: flat

  • MP3 accessories: Up high single digits

  • Video gaming: Up strong double digits

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