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Video Spurs Circuit City’s Quarterly Sales

6/16/2004 09:53:00 AM Eastern

By Jeff Malester

Richmond, Va. — Driven by movement out the door of new-technology televisions, the video category at Circuit City Stores registered an upper-single-digit comp-store sales increase in the retailer’s fiscal first quarter. This helped video increase its overall share of company sales to a chain leading 42 percent for the three months, up from 40 percent year-on-year.

Stimulated by the positive sales scenario for video, total Circuit City first quarter sales jumped 6.9 percent, hitting $2.1 billion, up from $1.9 billion in the year-ago period. Chain comp-store sales increased 6.4 percent.

The quarter also saw a shuffling of senior merchants that began with the April departure of chief merchandising officer Kim Maguire, and continued last month with the reassignment of senior VP/general merchandise manager Ron Baime to a new role as assistant to chairman/CEO Alan McCollough for special projects. Baime was succeeded by former Western division president and senior VP Douglas Moore, who in turn was succeeded by regional VP Bob Walker. Clif Denney continues as senior VP/merchandise manager for software, with added responsibilities for mobile electronics, a company spokesman said. An executive search for Maguire's successor continues both inside and outside the company.

Video category sales reflect double-digit growth in digital TVs and triple-digit growth in plasma and LCD units. Double-digit comp-store sales growth in DVD players and in digital imaging products also further contributed to the video category’s comp-store sales climb.

At the same time, video category sales growth in the first three months, ended May 31, was partially offset by a double-digit decline in tube TV sales and a slight drop in camcorder sales.

However, the strong first quarter comp-store numbers were tempered, in part, by comparison with the “soft performance in last year’s first quarter, when we produced our weakest comparable store sales performance of that year,” said Alan McCollough. In the first fiscal quarter of 2003, chain comp-store sales were off 10 percent and total sales dropped 9 percent.

McCollough also recognized the retailer’s “ongoing improvements in execution achieved by our store operations group” and continued strong growth in online sales. “Year-over-year improvements in the average ticket size and the close ratio, despite relatively unchanged levels of traffic, demonstrate the increased focus on execution in our stores.”

Circuit City reduced its net loss from continuing operations to $5.2 million in the first quarter, down from a net loss from continuing operations of $28.1 million in the same three months in 2003. The first quarter net loss includes costs of about $4 million related to the disposition of the company’s private-label finance operation.

Net loss for the first three months was narrowed to $5.9 million, compared with a net loss of $46.7 million year-on-year.

Gross profit margin in the first quarter remained steady at 23.2 percent, compared with the same period last year. Increased efficiency in the retailer’s product service organization was a primary reason for margin improvement, offset by promotional pricing in a number of product categories.

Expenses in the first quarter were reduced to 23.6 percent of sales, compared with 25.6 percent year-over-year. This improvement was primarily driven by lower rent and occupancy costs as a percent of sales, largely resulting from the closure of 19 under-performing stores in February and leverage generated by comp-store sales growth. Other reasons for lower expenses were a reduction in relocation and remodel expenses, and improvements in payroll costs.

Circuit City also continues to benefit from attractive returns due to relocated stores. When considering 39 relocated stores that generated fair time-frame comparisons over the past few years, the retailer said these locations averaged sales changes that were about 27 percentage points better than the sales pace of the remainder of the store base during the comparative period.

Considering its remaining product categories, Circuit City’s information technology sector, the chain’s second largest, remained at a 33 percent share of overall merchandise sales for the first quarter, enjoying an upper-single-digit comp-store sales increase in the three months. This jump was led by a double-digit comp-store sales hike in PC hardware, double-digit comp-store sales growth in notebooks and monitors, and single-digit growth in desktop computers. These increases were partially offset by double-digit comp-store sales declines in printers.

The audio category, which gave up a one-percentage-point share of overall sales in the first quarter, down to 13 percent from 14 percent, registered a low-single-digit comp-store sales increase in the three months. This includes single-digit comp-store sales growth in mobile audio products and double-digit comp-store sales growth in portable audio. Home audio had a double-digit sales decline.

Circuit City’s total first quarter revenue includes sales of $21.5 million for Canadian-based retailer InterTan, which the retailer acquired in May. These sales were generated from May 12 to the end of the quarter. InterTan did not have a material impact on the chain’s net loss from continuing operations.

The retailer incurred about 4 percent of anticipated remodel and relocation expenses in the first quarter and expects the remainder to be spread about evenly across the remaining three-quarters of the current fiscal year.

In a conference call, McCollough said he was heartened by a number of performance improvements including higher close rates, increased ticket size and warranty attachment rates that are returning to the levels enjoyed when Circuit City had a commissioned sales staff. He said those improvements will be further spurred by better forecasting, better mark down planning tools, and better coordination between merchants and store-level operations. The latter will allow sales staff to provide consumers with complete solutions and more incentives for add-on buys over and above their core purchases.

He also emphasized the importance of the company’s growing private-label program, which, leveraging InterTan’s direct sourcing expertise, will be found in categories throughout the store, as well as a forthcoming comprehensive marketing campaign from Circuit City’s new advertising agency that should reach multiple consumer “touch points” this fall.

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