Circuit City Tries Retooling After Gloomy Q4, Year

By Steve Smith On Apr 9 2007 - 6:00am

Circuit City Stores reviewed its disappointing fiscal fourth-quarter and annual results with financial analysts last Wednesday and plans to wring more costs out of the chain and launch a new store format. All this a week after it said it would replace its highest-paid sales associates.

The main culprit for the poor performance was the ever-deteriorating prices of flat-panel TVs. In its fiscal fourth quarter, ended Feb. 28, Circuit City posted a net loss of $12.2 million on sales of $3.9 billion, and $11.8 million on annual sales of $12.4 billion. Net sales did increase for both periods, growing 1.2 percent for the quarter and 7.9 percent for the year. (See chart at right.)

In fact, fiscal year 2008 looks difficult with the chain indicating that it assumes a pretax loss of $40 million to $50 million in the first half "with a strong recovery in the second half." Phil Schoonover, chairman, president/CEO, said Circuit City will "use the first half to stabilize business for the important second half" in terms of layoff expenses and the like.

Schoonover was candid with analysts about the need to make changes and the events of last year. "Flat-panel pricing declined a year faster than we expected" and impacted its second-half performance. "We have to look to increasing our gross margin rate to rebuild our [profits]. Changes in the TV business have changed CE retailing."

Still Schoonover noted that during the fourth quarter, "We put our stake in the ground" with flat panel and gained market share month by month last year. Overall TVs sales, which include traditional tube and projection TVs, did not do as well.

Due to flat-panel pricing and the chain's decision to "run lean in PCs during the quarter" because of Vista operating system delays, Schoonover said Circuit City's "transformation plan had to be accelerated," hence the decision to replace 3,400 of its highest-paid sales associates.

"We had to work to improve a lack of discipline in pay rates at retail. This was difficult and painful to those impacted ... but we were not competitive. We had to make the change," he explained. "We were honest as to why we did it, provided them with respect and provided severance," and Schoonover added that the cost cutting includes "reducing layers of management to empower our associates" as well as cutting expenses on travel, eliminating overlapping responsibilities and the like. Circuit City has also reduced its sales regions from 10, to eight.

Schoonover said that all of these moves were "part of our transformation, the need to have a competitive cost structure and pay the appropriate range for the job being done."

George Clark, executive VP/multichannel services, said that all stores will be fully staffed by May 1, and as of April 4, "We are fully staffed except for 159 stores." He added that 60 percent of those employees replaced had "customer-facing positions" while the rest were warehouse or delivery personnel, and all the new employees are undergoing "accelerated training."

Schoonover said the chain "must increase sales, margins, reduce SG&A," provide improved training for sales associates and "deliver seamless multichannel services" to online, in-store and call-in customers.

In describing a wide-ranging "transformation" plan, Schoonover said that home entertainment will provide a "great opportunity" due to "significant unit growth in TVs." But to do it profitably Circuit City will have to give consumers "a complete solution, with Firedog [installation], digital cable and satellite, accessories, furniture and brackets ... to increase sales and profits."

Firedog has generated $200 million in sales from "nothing two years ago" when it started, he noted, and the installation and service operation provides "significant profit" opportunities.

Concerning flat-panel TV pricing this year, Schoonover said that "vendors were not happy" and with the traditional tube and projection TV business sliding, "This will lead to more rational behavior from the largest suppliers. But for the second half, I'm not sure. You have 96 TV suppliers selling in the U.S. and if a few brands from China have a different marketing strategy it could make for a competitive period."

Circuit City's 50-store pilot program to test a new operating model has had "sustainable results in six months" with the locations selling "bigger baskets" per sale, Clark said, which include Firedog, accessories and warranty sales.

Circuit City still plans to open more stores even after some store closings announced in February (TWICE, Feb. 12, p. 1). Schoonover said, "We fell behind in our footprint," opening 35 stores last year. Plans call for 65 during 2007 and 100 more in 2008. One-third will be replacement stores while the balance will be in new locations. — Additional reporting by Doug Olenick

Circuit At A Glance
Fiscal Year ResultsQ4 2007Q4 2006
Net Sales$3.93B$3.88B
Net Earnings-$12.2M$141.4M
Comp-Store Sales-0.5%
Year 2007Year 2006
Net Sales$12.4B$11.5B
Net Earnings-$11.8M$139.7M
Comp-Store Sales+5.8%
For more on Circuit City's financials, see "Circuit City Sees Q4, Year-End Loss" at
Source: Circuit City ©TWICE 2007

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