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Circuit City Q4 Earnings Up, But Posts 12-Mo. Loss

Richmond, Va. — Echoing the cry “not satisfied” following the announcement of fiscal fourth quarter earnings and sales, and promising to focus less on change and more on execution going forward, Circuit City posted higher year-over-year earnings for the three months, but a loss for the full fiscal year.

Circuit City reported an $89.3 million loss for the 12 months, compared with net earnings of $82.3 million year-on-year, while fourth quarter net earnings were $89.6 million, up from the $70.9 million reported in the same period last year.

Fourth quarter sales climbed 2 percent, hitting $3.25 billion percent, as reported earlier this month, compared with the $3.19 billion posted in the final quarter of last year. Revenue for the 12 months slipped 2 percent, to $9.7 billion, as reported, from nearly $10 billion a year earlier. Comp-store sales for the fourth quarter, ended Feb. 29, climbed 1 percent, while 12-month comps decreased 3 percent, as reported.

“Although we are pleased that, particularly in the fourth quarter, we made progress in our expense reduction efforts, we recognize that a key component of a sustained earnings turnaround will be strong sales growth,” said Alan McCollough, chairman, president and CEO.

In the fourth quarter, Circuit City said it enjoyed strong comp-store sales growth in digital imaging products and accessories, LCD and plasma display devices, digital TVs, notebook computers and traffic-driving movies and music software.

The retailer was happy with year-over-year extended warranty revenue, which hit 3.1 percent of sales in both the fourth quarter and previous three months. But the company is working to improve attachment rates through better store-level execution and ongoing tests to strike the optimum balance of product, price and term. For the year, extended warranty revenue reached 3.3 percent of sales, down from the 3.6 percent reported the previous fiscal year.

“We are pleased with the fourth quarter’s stable year-over-year extended warranty revenues,” said McCollough, “but we remain cautious in our expectations given potential shifts in the merchandise mix and the continued average retail declines in the industry.”

Gross profit margin slipped in the fourth quarter, down to 23.3 percent, compared with 23.9 percent in the same three months a year ago. The drop reflects heavy promotions on desktop personal computers, aggressive industry pricing on big-screen and advanced televisions and some shifts in merchandise mix to lower margin products, which more than offset the benefits received from reduced service and distribution costs and inventory shrinkage. In the 12 months, gross profit margin dipped to 22.9 percent, from 23.6 percent.

On the other hand, expenses in the fourth quarter came in at 18.8 percent of sales, compared with 20.2 percent in the same three months last year. This reflects lower store operating costs, mainly lower payroll and reduced advertising expenses. For the 12 months, expenses decreased to 22.8 percent of sales, down from 23.4 percent year-over-year.

CFO Michael Foss said Circuit City would continue to demonstrate a “maniacal focus” on cost cutting by consolidating field operations, trimming paper, freight, IT and service parts expenses, re-instituting stocking fees for select products, and conducting reverse auctions with suppliers.

In reference to widely varying comp-store sales through the past year, McCollough said Circuit City “made significant changes in our store format and operating model during the year, resulting in transition-related execution issues. “In the new fiscal year, we expect better execution at the store level as we focus intently on our new operating model,” continued McCollough.

Claiming to be pleased with the results from already relocated stores, Circuit City plans to open 60 to 70 new superstores in the current fiscal year, split evenly between new stores and relocations. The chain already has signed leases for 30 locations, and anticipates the vast majority of relocations will open in the second half, with about a third in the fourth quarter. Its commitment to opening only in superior locations will push some of the openings into the following fiscal year.

By contrast, the 222 stores re-designed last year have shown no “statistically significant” improvement in sales, McCollough said, although their new flexible store design will better facilitate assortment changes.

The company will also place greater emphasis on its e-commerce site, which has enjoyed exceptionally strong sales gains, McCollough noted. To that end, the site will receive a dramatic makeover this summer, with improved functionality and navigation, an outlet center, and music download capability.

Circuit City is also re-evaluating all of its marketing programs and processes, including a complete advertising agency review.

Circuit City, which recorded net earnings from continuing operations of $94.7 million in the fourth quarter, compared with $66.4 million in the year-ago period, said after-tax costs in the quarter reached $28.3 million, lower than the anticipated $35 million, and benefits $3.7 million. Net earnings from continuing operations for the fourth quarter of the previous year included after-tax costs of $6.2 million.

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