Circuit City recorded strong double-digit growth in sales and earnings for both its third-quarter and nine-month fiscal periods ended November 30, despite somewhat lower margins and sharply higher interest expenses. Circuit City’s net for the quarter rose 10.6% to $31.5 million as sales increased 26.8% to $1.78 billion. Nine-month net of $97.3 million was up 15.6% on a 30% sales growth to $4.78 billion. But comparable-store sales edged up just 3% for the quarter and were up 7% for the full nine months.
“During the third quarter, we produced significant earnings growth despite an intense promotional environment” on a sales growth driven primarily by store expansion, said president Richard Sharp. A 1.2-point drop to 22.7% of sales in the quarter’s gross margin reflected increased PC and music sales, “promotional pricing, and additional sales from CarMax,” Sharp said. For the full period Circuit City’s margin declined to 22.9% from the year-earlier 24.8%. The chain lowered its overhead expense-to-sales ratio for both periods, which just about offset its margin declines, but its interest expense nearly doubled to $8.6 million for the quarter and almost tripled to $16.6 million for nine months.
For fiscal 1996, Circuit City said, it has an expansion plan that calls for opening 60 to 65 new superstores and replacing 15 to 20 outlets with larger ones. The expansion will enter into some major new markets, including Detroit and Pittsburgh, and the chain plans to open up a number of smaller markets. Circuit City currently operates 408 outlets, including 366 superstores.
Thomson Is Buying Interest In StarSight
Plans call for joint consumer promotions
StarSight is getting a much needed financial shot in the arm from Thomson, which has agreed to purchase a 13% stake for $25 million. StarSight, developer of an onscreen program-navigation system, has been struggling financially since startup and is still short of the number of service subscribers it needs to break even. Plans are to use part of Thomson’s cash infusion for promotions aimed to raise consumer awareness and subscriptions, which now number “in the tens of thousands,” StarSight president Larry Wangberg said.
The company has derived most of its revenue to date from licensing royalties paid by manufacturers putting system chipsets into TVs, VCRs, TV/VCRs, cable-TV converters and satellite IRDs.
Additionally, Thomson and Sony have gotten rights to parts of the technology, such as one-button menu recording, for their own onscreen guides used in satellite receivers, and several cable systems now use the service. The buy-in agreement lets Thomson purchase a million additional StarSight shares over two years at $7.50 each, and a million more over three years at $10 each. Thomson said it will “aggressively incorporate and promote StarSight technology and related services” in selected products, and noted that it will “be compensated for its marketing efforts and will share in StarSight revenues” from consumer electronics. Thomson said the agreement provides for “a joint marketing fund to be established to promote the StarSight-capable products.”
Meanwhile, Philips — which now markets the only StarSight set-top adapter — is linking with Gemstar to be the first to market TVs, VCRs and TV/VCR combos equipped to receive the competing TV Guide Plus onscreen program guide. Developed by Gemstar in a joint effort with TV Guide, the TV Guide Plus is to be transmitted along with the signals of ABC owned and affiliated TV stations. Although it will only offer listings for the next 48 hours of TV programming, against StarSight’s seven days, the Gemstar service will be free, while StarSight and the now fully operational Video Guide services charge subscription fees.
Sales Up, Profits Flat For Best Buy In 3rd Quarter
Best Buy reported strong sales growth for its fiscal third-quarter and nine-month periods, but the fact that nearly half its sales gains stemmed from sales of low-margin PCs cut into its margins and earnings. For the three months to November 25, the Minneapolis power retailer had a net of $17.8 million, up just 0.6% from the same 1994 period, while total sales jumped 42.2% to $1.93 billion. For nine months its net dropped 4.6% to $28.2 million, as sales increased 48.2% to $4.64 billion. Comparable-store sales were up 11% for the quarter and 8% for the full period.
Best Buy said its gross margin dropped a full point to 12.6% of sales in the quarter and declined a half-point to 13.4% for nine months. It attributed the slippages to the increase of computer products in its sales mix and generally more competitive market conditions. For the nine-month period, Best Buy’s sales of computers jumped 71% to more than $733 million. That represented nearly 49% of its overall $1.5 billion sales growth and indicates that PC products accounted for virtually all the year-over-year sales gains at comparable stores. The retailer said the PC market “continues to be highly promotional, with deferred consumer financing and free peripheral equipment offers pressuring the gross profit realized on computer sales.” Also impacting results, Best Buy said, was higher interest expense from debt incurred to finance expansion. The increased cost in that area offset the benefits of lower overhead expenses and improved operating income. Through the fiscal nine-month period Best Buy opened 47 new stores, 27 during the third quarter, to raise its outlet count to 251 from 202 during the same time in 1994.
Demand for blank video cassettes continued to rise in the third quarter, but manufacturers got little benefit from that growth because average prices continued to fall despite the price increases the industry supposedly imposed last spring. According to data compiled by EIA and released by the Consumer Electronics Manufacturers Association, the total factory-level value of blank video and audio cassettes sold for retail distribution declined 1.1% in the quarter to $271.8 million, though unit shipments edged up 1.1% to 214.9 million. All the unit growth came in video cassettes, which had a total increase of 3.6% to 85.3 million, paced by a 15.9% jump for compact formats (VHS-C and 8mm combined) to 12.4 million, while sales of full-size VHS cassettes increased 2% to 85.3 million. Audio cassette sales, however, slipped 0.8% to 117.2 million.
The overall value of video cassette shipments edged up 0.7% to $181.4 million, as a 10.1% rise for the value of compact cassette shipments to $39.3 million more than offset the effect of the 1.7% decline for VHS to $142.1 million. The value of audio cassette sales dropped 4.5% to $90.4 million.
Compared to the third quarter of last year, average factory selling prices dropped across the board, with VHS cassettes showing a 3.6% decline to $1.67, compacts a 5% fall to $3.17, and audio a 3.7% drop to 77. Perhaps more significantly, compared to the average pricing for the second quarter of this year the third-quarter average price for a full-size VHS cassette was down 0.5%, and the average for a compact cassette was off 1.5%. However, for that same period audio cassettes staged something of a pricing comeback, coming in up by 3, or 4.1%, from the second quarter. That rise presumably stems from increased demand for the high-performance audio cassettes needed to make quality recordings from CDs.
Roberds Results Up For ’95, But 4th Qtr. Sluggish
Roberds says that although its report for 1995 will show new full-year sales and earnings records, it will also show a significant growth slowdown in the fourth quarter. Citing “continued sluggish activity in the fourth quarter, paralleling the rest of the retail industry,” Roberds indicated that it expects to post fourth-quarter earnings of $2.6 million to $2.8 million, which would be up around 13% to 21% from last year, against the 31% earnings increase recorded in the first nine months.
Roberds chairman Kenneth Fletcher expects total sales for the year to be up about 16% to around $300 million, which indicates an expectation of an increase of only about 8% in fourth-quarter volume to $85 million. Through the first nine months, Roberds’ sales were up by 19%.
President of Minneapolis-based Audio King, commented, “It’s a so-so Christmas. What’s selling is home audio components for home theater, DSS is doing well, cellular phones, and portable audio.”
Big-screen TV sales were good, he noted, “but the TV business in general didn’t do too much.”
Anthony Campo, president of Campo Electronics, Appliances & Computers, admitted that “sales are soft. It’s pretty evident in the industry and in retailing in general that there is some softness in the market.” He theorized that “higher consumer debt and the shutdown of the federal government may also be affecting sales.” Still there were some bright spots during the season, Campo said. “Computer and appliance sales are still strong, as well as big-screen TVs.”
New York metropolitan area retailer Tops Appliance City had “an OK Christmas season,” according to chairman Robert Gross. “We had a poor Christmas up until the final weekend — Friday, Saturday and Sunday were tremendous. But overall, we were not satisfied.” For Tops, computer sales were strong, he said, “and we did fairly well with personal electronics. They are inexpensive gift items, and they sold well.” But sales of big-ticket items such as big-screen TVs were disappointing. “There is a lot of economic uncertainty out there,” Gross said. “If you’re a stockbroker you probably had a great year, but plenty of other consumers are worried and are carrying a lot of debt.”
Larry Wien, VP-general manager of the 24-store Al & Ed’s Autosound, based in Monterey Park, Calif., said his chain had to “scramble” for sales this Christmas. “I’ve never worked this hard,” Wien stated. “We’re making last-minute adjustments every day.” Among the changes Al & Ed’s made this Christmas to adding an extensive radio advertising campaign and a stepped-up print effort in both the Los Angeles Times and the Orange County Register. Wien said the best-selling Christmas gifts this year at his chain were car audio systems and security products. Cellular phones, however, “have really taken a hit.” “Car audio and security have grown by 30% to 40% this year, and our gross profit margins on those products are up,” he said, “but with cellular phones, what we used to sell for $149 is only $1 now. This year you need to move a lot more boxes just to stay afloat.”
Tan Duong, president of AudioVideo City, with two outlets in Los Angeles, said holiday shoppers didn’t come out in force until the last week before Christmas. “Christmas came late this year,” he said. “People held onto their money until the very end.” Like many retailers, Duong said big-screen and projection TVs were big-sellers during the holiday. Also hot were CD changers and home theater systems. “I can’t really complain because big-ticket items are really selling well,” he added. “We did very well with the Sony 60″ projection TV, Pioneer Elite, and Proton’s 35″ TVs.”
Dave Gracey, general manager of the four-store 21st Century chain in Phoenix, Ariz., said security products and FM-modulated CD changers both sold very well during the holiday season. “Alarms are really popular,” he said. “A lot of people give car alarms for Christmas, which makes for excellent installation business in January.” Gracey said sales this Christmas season were “good, but not great. I’d call this an average Christmas. It won’t be up there with the great ones, but it wasn’t awful either.”
Ed McCluskey, chairman of the Pompano Beach, Fla.-based Standard Brands chain, said, “Our holiday sales were pretty good this year — we were up over last year, in the high single digits.” Top sellers for Standard Brands were 31″-and-larger big-screen color TVs, VCRs and home audio.
“But this holiday season was tough. It was a real grind getting people to part with their money,” he said. “We spent about the same amount of money on advertising this year as last year, but wound up with higher volume, however, so it worked out OK.” McCluskey noted that major appliance sales were “a big disappointment. They’re never particularly strong in December, but this year our appliance sales were not that good compared to last year. Both laundry and refrigeration were off, and I don’t know why.”
–Jill Bilzi, Cathy Ciccolella, Amy Gilroy and Steve Smith contributed to this report.
1994-95 Video And Audio Cassette Market
(Factory Sales, Units And $ Value In 1,000s)
Units Units % $ Value $ Value %
1995 1994 Change 1995 1994 Change
Total Tape 214,900 212,500 1.1 271,800 274,900 -1.1
Total Video 97,700 94,300 3.6 181,400 180,200 0.7
VHS 85,300 83,600 2.0 142,100 144,500 -1.7
Compact* 12,400 10,700 15.9 39,300 35,700 10.1
Audio 117,200 118,200 -0.8 90,400 94,700 -4.5
Units Units % $ Value $ Value %
1995 1994 Change 1995 1994 Change
Total Tape 592,000 593,300 -0.2 747,900 786,400 -4.9
Total Video 268,000 275,600 -2.8 500,400 527,700 -5.2
VHS 235,400 246,900 -4.7 395,800 430,500 -8.1
Compact* 32,600 28,700 13.6 104,600 97,200 7.6
Audio 324,000 317,700 2.0 247,500 258,700 -4.3
*Includes VHS-C and 8mm