Costs for remodeling video departments, lighting upgrades and relocation of five superstores helped drive fiscal third-quarter earnings into the red at Circuit City Stores, with continuing operations generating a loss of $21.3 million in the period, compared with earnings of $9.2 million in the year-ago three months.
Third-quarter expenses included $11.4 million for remodeling and relocation costs, compared with the $2.2 million for the same costs in last year's third quarter.
At the same time, changes in merchandise mix plus the impact of promotional pricing across a broad range of products, reduced Circuit City's third-quarter gross profit margin by a hefty 180 basis points, down to 22.6 percent, from 24.4 percent in the same period last year.
"While our traffic-driving initiatives have been successful in improving foot traffic in our stores," said Alan McCollough, chairman/CEO, "increased sales of entertainment software, entry-level products and PCs, together with weaker sales of higher profit wireless communications and digital satellite systems, lowered gross profit margins.
"Continuing competitive pressures across a wide range of categories increased the amount of promotional sales throughout the quarter," McCollough continued. "This is a promotional environment, more aggressive than a year ago," he said in an analyst conference call last week.
"Gross margins are under pressure, at lower levels than we historically have enjoyed. We have had to decide to compete or not, then get costs in line to do this," he told analysts. "We expect competition in the marketplace to be the same in the fourth quarter. We have to react to the competitive realities, not to lead the market down, but to compete."
Circuit City posted a 7 percent increase in third quarter sales — to $2.4 billion, up from $2.3 billion in the same quarter in 2001. Comp-store sales increased 6 percent, compared with a 4 percent decline year-over-year.
The retailer enjoyed solid growth in big-screen televisions, mainly digital TVs, as well as LCD and plasma types. Digital imaging and mobile audio products also posted strong third quarter sales growth, while solid growth was generated by PC hardware. Entertainment software and competitively priced entry-level products, such as DVD players, helped drive traffic into the stores.
Weaker sales in the third quarter were attributed to two strong-margin categories — wireless communications and digital satellite systems — as industry wide slowdowns in new customer acquisitions for these categories led to increasing price competition.
Inventories increased by $225.2 million in the third quarter, ending November 30, representing a more narrow year-over-year increase than was registered in this year's second quarter. "This year's higher inventory balance reflects our improved rate of sales and illustrates our commitment to customer service, which embraces broader and deeper assortments in select categories and better in-stock positions," said McCollough.
Third quarter earnings from discontinued operations reached $3.6 million this year, representing results for one month from the now separate CarMax auto superstore business. The former wholly-owned Circuit City subsidiary went on its own last October 1. Earnings from discontinued operations were $18.4 million in last year's third quarter.
Net loss in the third quarter, which includes the CarMax results, reached $17.8 million, compared with net income of $27.7 million, including CarMax, in the same three months a year ago.