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Reaction Mixed To Schoonover's Ouster

9/29/2008 02:00:00 AM Eastern

Opinion was mixed over what effect last week's departure of former Circuit City chief executive Phil Schoonover would have on the ailing chain's fortunes.

Investors gave the move a thumb's down by selling off its stock following an initial rally, suggesting that the retailer's woes go well beyond any one individual.

Circuit City's share price, already down 80 percent from a year ago, fell nearly 9 percent to $1.55 at the close of trading the day after the announcement.

But Banc of America Securities retail analyst David Strasser saw Schoonover's resignation as a positive. Although Schoonover inherited the company's biggest missteps — dropping appliances and ending commissioned sales — Strasser holds him accountable for firing the chain's most experienced sales clerks in a cost-saving move, and for not shutting more unproductive stores, he said in a research note.

Goldman Sachs analyst Matthew Fassler believes the management change will propel Circuit City more quickly toward one of two endgames: a successful turnaround, which would be difficult at best in the current economy, or a significant number of store closings.

Schoonover's relationship with — and support from — the vendor community, culled over a long history in the industry, could prove to be the only short-term consequence of his departure, Fassler said in a research note.

Certain to be pleased with the change is activist investor Mark Wattles, who long agitated for Schoonover's removal. Wattles, whose Wattles Capital Management investment vehicle controls about 6.5 percent of Circuit City shares, making him one of the company's largest independent investors, has been waging a public battle to oust Schoonover since early this year.

In an April letter to Circuit's board of directors, Wattles cited management's “poor decision-making and poor execution” during a two-year-long turnaround effort that has cost investors “billions of dollars in stockholder value.” The Schoonover-led restructuring followed a ruinous 2006 holiday selling season, when excess flat-panel inventory and excessive promotions gutted earnings for many CE dealers.

Schoonover's interim successor, recently appointed vice chairman James Marcum, is expected to address the company's go-forward strategy today during a scheduled second quarter earnings conference call.

Banc of America's Strasser suggested that Marcum aggressively shut old or poorly located stores and at least temporarily withdraw from entire markets where Circuit has lost significant share. He also urged the company to re-establish a commissioned sales force, which would help differentiate it from Best Buy and Wal-Mart.

It is also unclear whether Marcum will continue to pursue a buyout or merger. The board had long resisted that path, until pressured to open the company's books to Blockbuster, which ultimately passed on a proposed acquisition.

Marcum himself is the former chief financial officer of Hollywood Entertainment, the video-rental chain founded by Wattles. Wattles' threatened proxy battle with Circuit City's directors succeeded in landing Marcum and two other hand-picked associates on the company's board.

Marcum also sits on the board's executive committee, which is tasked with weighing strategic alternatives for the struggling CE chain.

Marcum had previously been tapped by Wattles to help restructure and operate Ultimate Electronics after Wattles wrested control of the CE chain in 2005.

Succeeding Schoonover as chairman is former Universal chairman Allen B. King, who has sat on Circuit's board since 2003 and has been its independent lead director since June. Commenting on the ouster, King said in a statement that “A change in leadership at the chief executive officer level is always a difficult decision, and Circuit City appreciates Phil's efforts over the past four years. It is important to note that Phil has made many significant contributions during his tenure, including expanding our multichannel capabilities, enhancing our services offering and developing the Firedog brand. We thank him for his leadership and we wish him well with his future endeavors.”

Schoonover, a former senior executive at Sony and Tops Appliance City, joined Circuit from Best Buy in 2004 as chief merchandising officer. He later succeeded Alan McCollough as president/CEO and had served as chairman since 2006.

Of his new interim role at Circuit's helm, Marcum said, “Circuit City has a long history of being a leader in the consumer electronics industry. We believe that by fine-tuning our focus and strategies we will be able to leverage this history and build a stronger future for the company. Since joining the team, I have been impressed by the passion and energy of our associates and their desire to direct that energy towards improving our operations and strengthening our market position in order to accelerate our turnaround and deliver improved results for all of our key stakeholders.”

— Additional reporting by Colleen Bohen and Lisa Johnston

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