Circuit City's Loss Widens In Fiscal Q2

By Jeff Malester On Sep 29 2003 - 6:00am

Reflecting significant drops in average retails and slight declines in store traffic during the first two months of its fiscal second quarter, Circuit City reported a $124.2 million loss from continuing operations, compared with an $11.2 million loss from continuing operations in the year-ago period.

The net loss from continuing operations in the second three months, ended Aug. 31, includes the impact of pretax charges of $148 million. This is the amount cited to reduce the carrying value of the retailer's retained interest in its bankcard portfolio, to reflect the estimated net proceeds from the planned sale of its bankcard operation.

The loss also includes pretax expenses of $18.2 million related to store remodeling and refixturing and $4 million in pretax relocation expenses.

The company reported a net loss of $124.2 million in this year's second quarter and $20.5 million in net earnings in the same three months in 2002.

As Circuit City entered the back-to-school season in its second quarter, it noted an improvement in its sales pace and comparable store sales growth in August despite a challenging comparison from the previous year's second three months.

Total sales in the second quarter dipped 3 percent, as reported, to $2.16 billion, down from $2.22 billion year-on-year. Comp-store sales declined 5 percent.

"Throughout the quarter, we saw sales growth in new video technologies, including digital big screens and LCD and plasma thin-screen products, digital imaging and DVD movie titles," said chairman/CEO Alan McCollough. "Personal computer sales, including both desktops and laptops, grew strongly during the final month of the quarter."

In a conference call with Wall Street analysts, Circuit City pinpointed its flat panel television business as the hot button for the upcoming holiday season, with the chain covering all likely price points, especially what it calls the sales driving price points. It has increased its breadth of assortment for LCD models from seven to 20, with some stores showing 24 units. Price points range from $400 for small screen sizes to $5,000 to $6,000 for the 32-inch size.

In plasma TVs, Circuit City has expanded its selection to six models, from two. The majority of the business is expected in the 42-inch size. Retails in the 42-inch size range from $3,000 for standard definition to $8,000 for high definition. Price points for the 50-inch go up from there.

McCollough told analysts the day before he had attended a Samsung event where he was shown a 50-inch plasma TV that receives its signal from a wireless transmitter, eliminating the need for professional installation.

McCollough also praised Circuit City's store relocation program, citing results from 18 locations open for more than six months. Although the limited number of relocations shades overall results, "in their first full six months following grand opening, these stores are producing an average sales lift that is approximately 28 percentage points higher than the remainder of the store base in that time period," said McCollough. "These are producing an internal rate of return of approximately 20 percent.

"Although we anticipate that these averages may go down as we relocate additional stores, we believe that bringing a more contemporary Circuit City shopping experience to our customers remains the best way to drive sales and earnings growth," he said.

Competitive pricing and shifts in merchandise mix within major product categories did much to lower Circuit City's profit margin during the second quarter. Profit margin dropped to 22.6 percent in the three months, down from 23.7 percent year over year. Other factors contributing to margin erosion included increased inventory shrink as the chain moved more products onto the sales floor and the reduction in extended warranty sales, which carry above-average gross profit margins.

Circuit City's extended warranty revenue was 3.6 percent of sales in the second three months, 20 basis points below the 3.8 percent recorded in the same period a year earlier. The dip was due to decreases in average retails, which result in consumers purchasing warranty contracts on fewer products.

Expenses improved in the second quarter to 25.4 percent, compared with 25.6 percent in the year-ago three months. Circuit City said reductions in its payroll and fringes were the largest contributors to the second quarter expense reduction. For the six months, expenses held firm at 25.5 percent, compared with the same six months a year ago.

Circuit City, which announced plans in August to sell its ailing bankcard operation, now expects to complete the sale before the end of the calendar year.

The retailer now expects to incur an after-tax loss of about $105 million on the sale of the bankcard operation, compared with a mid-August estimate of $200 million. Of the total estimated after-tax impact, $95 million has been reflected in the second quarter. The remaining $10 million includes lease termination and severance costs.

"We expect the sale of the bankcard operation to generate approximately $295 million in cash, compared with our estimate of in excess of $190 million in mid-August," said McCollough.

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