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Tale Of Two Retailers: Circuit City & Wal-Mart

While it is always good news when a company posts a quarterly profit, sometimes it doesn’t tell the entire story.

Such is the case of Circuit City, which yesterday reported that for the first time in several quarters it posted $4.5 million in net earnings for its fiscal fourth quarter, ended Feb. 29. The chain posted a profit by lowering expenses, reducing capital expenditures and an improved performance of its Canadian operation InterTAN

That’s good news for the chain, which has been pounded by stockholders such as Ultimate Electronics’ and Wattles Capital Expenditures’ boss Mark Wattles, among others, for poor performance in the market and financially.

The bad news was that for the same-quarter sales were down 5.5 percent and same-store sales were down 10.4 percent. In Circuit City’s flagship stores in the United States, net sales were down 8.8 percent with same-store sales down 11.3 percent. The company said it has to “rebuild the selling culture” at Circuit City.

That’s a tall order, especially in consumer electronics retail and when the economy is in a downturn … maybe even a recession.

What has to be more ominous for Circuit City, and for the CE industry as a whole, is the performance of national chains, especially Wal-Mart and Sam’s Club.

In our March retail sales report both Wal-Mart and Sam’s Club reported sales gains with the former citing flat-panel TVs, GPS, laptop PCs, video games and digital cameras as growth areas, while the latter said video games helped boost sales. Eduardo Castro-Wright, Wal-Mart Stores U.S. president/CEO, bragged in his statement today, “Our initiatives in electronics have improved customer access to leading brands and made Wal-Mart the retailer of choice for entertainment products.”

Even if that’s half true, that’s bad news for all stripes of CE retailers, from independents up to nationals the size of Circuit City and Best Buy, and not good for suppliers either.

If Wal-Mart becomes more dominant in CE retailing, one supplier said to me the other day, “They will call the shots and no one will make much money in this business.”

And of Circuit City, one competitor noted recently that the industry “can’t afford to have Circuit City go away. If it does, most of its sales will go to national chains and, of course, Wal-Mart.”

Bleak predictions are usually made during downturns, but the ongoing saga of Circuit City and Wal-Mart’s CE fixation bear close watching.