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Circuit City Reduces Q2 Loss

Richmond, Va. — Although Circuit City reported healthier fiscal second-quarter sales, comps, margin and expenses, the chain still recorded a net loss of $11.9 million.

However, this figure was substantially below the $129.6 million net loss reported in the same three months a year earlier. Circuit City’s international segment’s results for the second quarter, ended Aug. 31, reduced the period’s net loss from continuing operations by $3.4 million.

Gross profit margin in the second quarter reached 24.6 percent, compared with 22.6 percent in the same quarter in 2003. The inclusion of the international segment’s revenue and cost of sales, buying and warehousing contributed 0.77 percent of 1 percentage point to the current second quarter’s gross profit margin.

A positive change in gross profit margin for the chain’s domestic segment reflects an increase in extended warranty sales, increased efficiency of product service and distribution operations and inclusion of credit revenue in the company’s net sales and operating revenue.

Expenses in the second quarter dropped to 25 percent of total sales, down from a year-ago 25.3 percent. The upside was due to inclusion of the international segment’s revenue and expenses and the domestic segment’s leverage from comp-store sales growth, reduction in rent and occupancy costs due to the closure of 19 underperforming stores, improved efficiencies in product service and distribution, and lower relocation and remodel expenses. These savings were partially offset by increases in advertising expenses.

Circuit City’s second quarter sales increased 8.8 percent, hitting $2.3 billion, up from $2.2 billion in the year-ago period. Comp-store sales rose 2.9 percent (see TWICE, Sept. 20, p. 49). Domestic segment sales came in at $2.2 billion and the international segment sales reached $117.8 million in the second three months.

“We believe year-over-year improvements in average tickets and extended warranty penetration rates for key merchandise classes are indicative of better store-level execution,” said Alan McCollough, chairman/CEO. “During the first half of the year, we have continued to refine our store designs, merchandise offerings and store staffing.”

Improvements in in-store execution were attributed in part to a maturing sales force and significantly lower turnover following last year’s conversion to a non-commissioned selling floor. “We’re getting traction on the hourly wage model,” said chief operating officer John Froman in a conference call.

Net loss for the six months dropped from $176.3 million in the first half of last year to a loss of $17.9 million in the same period this year.

Total first-half sales increased 7.9 percent, hitting $4.4 billion, compared with $4.1 billion in the first six months of 2003. Comp-store sales increased 4.5 percent. The domestic segment accounted for $4.3 billion of the six-month revenue figure, and the international segment $139.5 million.

Extended warranty revenue for the second quarter reached $91.7 million, or 4.1 percent of total sales, compared with $77.8 million in the year-ago period, or 3.6 percent of total sales. For the six months, extended warranty revenue climbed to $169 million, up from $150.2 million in the first half of 2003. Percent of total sales rose to 4 percent for this year’s first half, compared with 3.7 percent a year earlier.

In all of the current fiscal year, Circuit City plans to open 60 stores, of which, slightly less than half would be relocations. About 30 of the stores will open in the third quarter and about 16 in the fourth. In the conference call, CFO Mike Foss noted that relocated stores “continue to generate attractive returns,” and that their improved locations and demographics help boost same store sales 25 percentage points higher during their first six months of operation than the average comps for the balance of the chain.

The retailer said capital expenditures will total about $155 million in the current fiscal year, and that expenses related to domestic store relocations and one remodel will total about $47 million in the next year’s fiscal period.

As Circuit City heads into the all-important holiday selling season, it plans to break a new marketing and advertising campaign, spearheaded by new chief marketing officer Ernie Speranza, that’s build around The Cars’ song “Just What I Needed.” The company will also launch a separate marketing effort targeting Hispanics, and will introduce a rewards-based program tied to its private label credit cards.

Also buoying holiday sales will be a new, improved Web site (see story, p. 19); the first proprietary “cool gadgets” sourced through the company’s new Canadian subsidiary InterTAN; and high demand for MP3 players, digital imaging products and flat-panel TVs, as falling prices for the latter render them “less aspirational and more attainable,” McCollough said.

Elsewhere, the talent search for a successor to former chief merchant Kim Maguire continues, and Circuit City has begun a test of in-store PC services including software and memory upgrades. The company will also begin replacing some accessories, such as printer paper and cases with direct-sourced, InterTAN-branded products, McCollough said.

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