Circuit City Explains ’07, Sets ’08 Goals, Plans

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Richmond, Va. — Circuit City Stores, which announced it would replace its highest-paid sales associates among other cost-cutting moves last week, faced financial analysts Wednesday to go over its plans for the year and its disappointing fourth-quarter and fiscal year results.

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. These figures are down considerably from last year when Circuit recorded a fourth-quarter net profit of $141.4 million along with a net profit of $139.7 million profit for the year. For the quarter, comp-store sales fell 0.5 percent, but were up for the year by 5.8 percent.

In fact, 2008 looks difficult for the chain. Circuit City indicated 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 the chain 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 [profit] opportunity. 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. We identified this earlier, but had other priorities first and didn’t get to it fast enough.”

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.

“Our basket of products and services should increase. To grow based on flat panel you need add-on sales. There will be accountability on the store level concerning that,” noted.

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.

While faced with challenges in the marketplace and making internal changes, Circuit City still plans to open more stores. 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.

He said with the new store model, “We need to get ‘right-sized’ and provide better value to allow consumers to pick up online purchases. We know that packaged media is under siege so we need less space for that. We need less space for flat screens” because they are thinner than tube TVs and “we need space for Firedog services.”

For the 2008 holiday season he will rely on that aforementioned flat-screen TV “basket” of accessories and services for growth, MP3, video games, notebook computers and digital imaging. “We see growth in our Web sales, Firedog and our call center.”

But Schoonover cautioned that external economic factors such as “higher energy costs, the sub-prime lending problems, slower housing sales” could hurt. — Additional reporting by Doug Olenick


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