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Circuit City Says Retooling Stalled Q2 Sales

Circuit City executives told analysts that a second-quarter loss and sales decline were attributable to massive structural and procedural changes that disrupted operations.

Net sales at the No. 2 CE chain slipped 6.2 percent to $2.6 billion for the three-month period, ended Aug. 31, while same-store sales fell nearly 8 percent against strong year-ago comparisons.

Net loss for the quarter was $63 million and its gross profit margin fell 313 basis points. The chain attributed the latter to a decrease in merchandise margins stemming from a 38 percent drop in extended warranty sales and a greater mix of PC hardware revenue amid margin declines in computers and TVs.

“While we are not satisfied with the financial performance for the quarter, we made solid progress on our multiyear turnaround plan to increase productivity and to improve the customer experience,” CEO Phil Schoonover said. “We expected the changes to be disruptive in the near-term, but necessary to deliver long-term profitable growth through our four areas of strategic focus — home entertainment, new store openings, multichannel and digital home services.”

The last two areas appear to be gaining traction, with direct-channel sales, including Web- and call-center-originated sales, increasing 20 percent during the quarter on top of a 100-percent increase last year, while PC services and home theater installation revenues grew 22 percent year-over-year within the United States to $63.6 million.

In a conference call with analysts last week, Schoonover described the Internet as “the new front door to CE retail,” with 75 percent of big-ticket purchases by tech-savvy consumers originating online.

To further fuel on- and off-line sales, a new 20,000-square-foot concept store format was developed that “makes it easy for consumers to swing by and pick up” their online purchases, Schoonover said. The format, which also provides enhanced levels of customer service, is the fruit of hundreds of “experiments” at Boston and Florida lab stores aimed at improving the shopping experience. The first concept store opened recently in Norfolk, Va., and the company plans to open 25 more during the first half of fiscal 2008.

“We’re not tied to the legacy of brick-and-mortar as we upgrade this fleet,” he said.

Sales results by category for the quarter are as follows:

  • In video, net sales fell 11 percent to $948.2 million, representing 37.8 percent of total volume, and comp-store sales fell by the double digits. Flat-panel comps increased by double digits and total television comps decreased by double digits.
  • In IT, net sales rose 4 percent to $774.7 million, representing 30.8 percent of total volume, and comps grew by the low single digits. Comp sales of notebook computers increased by double digits while desktop computers comps declined by a low single digit.
  • In audio, net sales fell 16 percent to $325.8 million, representing 13 percent of total volume, with double-digit comp-store declines. Comp sales of navigation products increased by strong double digits, while comp sales of portable digital audio, mobile, home audio and digital satellite radio products declined by double digits.
  • In entertainment, net sales rose 10 percent to $267.1 million, representing 7.8 percent of total sales, with comps growing by the high single digits. Results reflect a strong double-digit comp increase in video gaming products and double-digit growth in PC software. Comp sales of video software and music declined by double digits.

Net sales of extended warranties within the United States fell 38 percent to $67 million, representing 2.7 percent of domestic segment net sales, down from 4 percent last year.

During the quarter the company opened nine new stores, relocated four and implemented new standard operating procedures within more than 650 locations. “It absolutely affected us,” said Danny Clark, multichannel sales executive VP. “We essentially had 40,000 people learning a new job.”

Nevertheless, domestic comps and flat panel TV sales increased each month, Schoonover said. “This improvement and the results from the 65 learning center stores that are used to roll out our transformation changes, all of which have completed the implementation of the new operating platform, lead us to believe that the store-level changes are having a positive impact on the customer experience.”

The retailer is also addressing margin shortfalls by improving its pricing, sourcing and mark-down management functions while focusing on a solution selling approach that emphasizes a complete basket of devices, content, sources and payment programs. The company is utilizing cross functional marketing, merchandising and services teams to develop and implement the changes.

Circuit City said it expects to open 60 to 65 new and relocated superstores in fiscal 2008, although recently installed CFO Bruce Besanko told analysts it may rein back the buildout. About two-thirds of the openings are slated to be in a 20,000-square-foot format, including the new concept stores.