Circuit City Reports $44M Fiscal Q1 Loss

By Jeff Malester On Jun 23 2003 - 6:00am

Hurt by the double-barreled effects of declining average retails and ongoing economic weakness early in the financial reporting period, Circuit City Stores reported a $43.9 million loss in its first fiscal quarter.

The retailer's loss from continuing operations in the three months, ended May 31, compared with a loss of $1.3 million in the year-ago period. As reported, sales dropped to $1.9 billion in the first quarter, down 9 percent from the $2.1 billion recorded in the same period last year (TWICE, June 9, p. 1). Comp-store sales for the three months decreased 10 percent.

Looking at the brighter side of a dismal quarter, Circuit City CEO Alan McCollough said, "We were encouraged that the sales pace improved in May when we faced our toughest prior-year comparable-store sales comparison. Nevertheless, we recognize that we must continue our efforts to improve the shopping experience for Circuit City customers."

Circuit City's credit finance operation, a major stumbling block in the retailer's struggle to turn around, produced a pretax loss of $22.1 million in the first quarter, vs. a pretax profit of $20.4 million in last year's first three months. This loss, which Circuit City reported earlier in June, involves financing of $500 million in private-label credit card receivables and a separate $550 million in bank card receivables.

Pummeled by competitive pricing, the reduction in extended-warranty sales that carry above-average gross profit margins and shifts in merchandise mix, first quarter gross profit margin slid 100 basis points, to 23.2 percent, down from 24.2 percent in the same three months in 2002.

Extended-warranty revenue in the first quarter dropped to 3.7 percent of sales, compared with 4.2 percent year-on-year. The primary drivers behind the decrease were drops in average retails, which resulted in consumers purchasing warranty contracts on fewer products, and the shift in sales mix to include more products such as entertainment software for which warranty contracts are not sold.

Although Circuit City has switched from commissioned sales people to hourly employees, the retailer continued to be dogged by rising selling, general and administrative expenses (SG&A). These climbed 40 basis points in the first quarter, reaching 25.7 percent of sales, compared with 25.3 percent in the first quarter a year ago. This year's expenses include $16.5 million in remodeling and relocation costs, compared with $8 million year over year.

"Obviously, the decline in sales results in a loss of expense leverage," said McCollough. "The largest contributor to expense reduction was improvement in store payroll, which reflects the change to a single hourly compensation structure from the mix of commissioned and hourly."

He added, "A reduction in advertising expense, which largely reflects a shift in advertising expenditures to later quarters, also was a significant contributor to expense savings. These savings were partly offset by increases in rent and occupancy related to new and relocated stores."

Although Circuit City was understaffed in some locations going into the first quarter, McCollough said, by the end of the three months the company had reached the targeted staffing levels outlined when it made the compensation change in February.

By mid-June, the vast majority of Circuit City product specialists had been re-certified in the product categories they sell and had completed a refresher-training program, he said. "We also continue our remodeling and relocation program, which will put virtually all products in our stores out on the sales floor for easy customer access, add shopping carts and improve product adjacencies by placing accessories and peripherals closer to related products," McCollough said.

During the first quarter, Circuit City put new fixtures in nine stores, remodeled one, and relocated three other. Beginning in the third quarter, all new locations will resemble the company's "learning laboratory" store in Colonial Heights, Va. The prototype features improved adjacencies and a wholesale club feel, thanks to a greatly expanded take-with offering that encompasses virtually every in-store SKU save for the largest big-screen TV and audio speakers and caged high-shrinkage items.

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