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Circuit City's Q1 Losses Widen

6/19/2008 09:40:00 AM Eastern

Richmond, Va. — Circuit City reported a net loss of nearly $165 million for its first fiscal quarter, compared with a net loss of $55 million for the year-ago period.

Net sales fell 7.4 percent to $3.2 billion for the three months ended May 31 while same store sales fell 11.3 percent, the No. 2 CE chain said.


Earnings were impacted by a 186-basis-point drop in domestic gross profit margin, attributed to unfavorable shifts in product mix, a decline in extended-warranty revenue, shrinkage, and higher expenses due to new store openings and the de-leveraging effect of lower sales.

Domestic sales decreased 8.8 percent to $2.2 billion, including a 3 percent gain in online and call-center sales, while same-store sales fell 12.2 percent, reflecting declines in TVs, PCs, extended warranties and Firedog services.

The company is projecting a second-quarter loss from continuing operations of $170 million to $185 million before taxes, but expects a “gradual recovery” in the second half of its fiscal year.

CEO Phil Schoonover said Circuit City’s board is continuing to explore strategic alternatives and has not yet decided on a course of action. The company has also filed a shelf registration statement with the Securities and Exchange Commission “to give us greater flexibility to respond to strategic opportunities as they arise,” he said. The move will allow Circuit City to issue new stock quickly by fulfilling the registration process in advance.

Schoonover said the company is sufficiently liquid to fund its turnaround, but has nevertheless suspended future dividend payments and cut capital expenditures by $10 million to conserve capital.

Despite the losses, Schoonover said the company continued to see operational improvements in every measurable metric during the quarter, and is on track with its retail turnaround. “We have seen improved trends in our store close rate and in our services and accessories attachments, and we are delivering a better customer experience in our stores as evidenced by the upward trends in our third-party mystery shop scores.

“In short,” he said, “the quarter represented improved execution and solid, steady progress towards our goals.”

During a conference call, COO John Harlow and chief merchandising officer John Kelly attributed the improved close rates to store-level initiatives within the core home entertainment department. Measures include financial incentives for attachment sales, the introduction of dedicated home entertainment sales managers, and a quadrupling in the level of associate sales training.

Harlow said customers should also begin to experience improved and friendlier service storewide, including quicker greet times and faster checkouts. The stores themselves will be cleaner and easier to shop, with improved in-stocks and better product presentation, he said.

Nevertheless, average ticket was flat during the quarter and store traffic declined. Chief financial officer Bruce Besanko attributed the latter to the weak economy and the decline of packaged media, a traditional traffic driver. The company is experimenting instead with commodity flash media to drive traffic, Kelly said.

On the product front, margins were squeezed by clearance sales and negative mix shifts within imaging and notebook computers, as well as an increase in the mix of notebook sales.

The company saw improved performance in the television category, however, driven by assortment and promotional mix shifts and better retail execution.

Overall, Circuit City saw sales strength in large-screen LCD TVs, gaming and digital-to-analog converter boxes and experienced “broad-based weakness across all other categories,” Besanko said.

Specifically, comp-store sales of flat-panel TVs increased by a high single digit during the quarter, although total TV comps fell by a single digit, reflecting “significant” declines in projection and tube TV, the company said.

Circuit City also experienced double-digit comp-sale declines in camcorders and digital imaging products and accessories.

In IT, Circuit City experienced a high- single-digit comp sales decrease, comprised of a double-digit decline in desktop comps and a low-single digit gain in notebooks, attributable to less aggressive promotions, Schoonover said.

In the entertainment category, Circuit City reported a high-single-digit comp sales decrease, comprised of a double-digit gain in video gaming products and a double-digit decline in packaged movies and music.

Elsewhere, audio comps declined by double-digits, navigation comps increased by a low-single digit, and comp sales of portable digital audio, mobile and home audio products declined by “strong” double digits, the company said.

Extended warranty net sales declined 37 percent to $53.8 million, reflecting lower service-plan pricing, while revenue from Firedog PC services and home theater installation decreased 16 percent to $54.3 million, attributable to tough year-over-year comparisons, the company said.

Circuit City opened five new stores domestically during the quarter — including three within the new The City format — and closed two. The company currently operates 25 The City stores and is continuing to refine the concept and improve the operating model, Schoonover said.

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