Circuit City Addressing TV Margin Declines

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Richmond, Va. — Circuit City has taken a series of actions to bolster TV profits amid the weak pricing environment.

The measures, outlined this week to Wall Street analysts and touched on last week during an earnings conference call, include boosting attachment sales through new merchandising practices and renegotiating contracts with vendors and suppliers to better prepare the chain for future price drops.

According to a research note by Goldman Sachs retail analyst Matthew Fassler, Circuit City renegotiated deals with its vendors following the fourth-quarter free-fall in flat-panel pricing. The new agreements call for improved communication of planned price cuts and more reliable price protection.

The No. 2 CE chain also reworked terms with its key extended service plan provider to enable faster renegotiation of warranty prices, and to provide contingency plans should TV price drops reaccelerate. Management indicated that Circuit City’s inability to adjust warranty pricing to match price point declines during the holiday selling season was a mitigating factor in last quarter’s earnings shortfall, Fassler said.

Going forward, the company is expanding a new operating model designed to improve the building of a TV “basket” that includes such add-on sales as accessories, extended warranties and Firedog installation services. The pilot program was successfully tested in 50 stores in Texas and is being rolled out chain-wide, enabling Circuit City to offer its customers a “basket of goods” at a variety of price points come next holiday season, according to Bank of America analyst David Strasser.

The chain is also implementing new store operating procedures (SOP) which will eliminate many redundant tasks and allow sales associates to focus exclusively on selling during store hours, Strasser related in a research note. The retailer is also implementing a best practices strategy of establishing one laboratory store within each of its districts.

Looking back, Circuit City said it cut expenses during its fiscal fourth quarter, ended Feb. 28, to help offset the margin loss in TV. But the cuts — affecting TV advertising, no-interest financing, and store labor — weakened sales and ceded significant share to Best Buy.

Looking ahead, Circuit City — and the analysts — believe that tier-one TV vendors will be more rational this year, although secondary and tertiary players will continue to disrupt the market with what Strasser described as “outrageously low price points” due to overcapacity. The long anticipated shakeout of tier-two brands won’t occur before 2008, he projected.

Strasser largely lauded Circuit City for its turnaround plans, although he believes that its aggressive store opening strategy (65 new stores this year and 100 next), coupled with the restructuring of nearly every aspect of its business, greatly increases execution risk. He also believes the recent round of store level layoffs, coupled with “many more to come,” could further disrupt continuity and morale.


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