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Circuit City U.S. Stores Post Smaller Q3 Ongoing Loss

Richmond, Va. — Emphasizing the positive results of fiscal third quarter continuing operations, Circuit City said the improvement there was due to achievements in store-level execution and overall efficiency of operations, and it would continue to seek operating improvements through reverse auctions, supply chain enhancements and tighter inventory controls.

The retailer reported a smaller loss from continuing operations for United States stores in the third quarter, but said it still was saddled with more than a doubled consolidated net loss. Loss from continuing operations before income taxes for U.S. locations dropped to $17.6 million in the three months, ended Nov. 30, down from a loss of $42.7 million a year earlier. The retailer’s consolidated net loss reached $5.9 million in the three months, more than twice the $2.5 million net loss recorded in the same period last year.

U.S. Circuit City store sales in the third quarter dropped 2.1 percent, to $2.35 billion, from a year-ago $2.41 billion, as reported (see TWICE, p. 1, Dec. 20). Comp-store sales decreased 4.3 percent. Alan McCollough, chairman/CEO, said in a conference call that the absence of broad Black Friday promotions, particularly on movie and music software, contributed to the sales declines but also made the holiday weekend more profitable for Circuit than last year.

“Throughout the past year, we have focused on improving store-level execution and the overall efficiency of our operations,” McCollough said. “The third quarter results from continuing operations reflect achievements in both these areas. Nevertheless, we were disappointed by our sales results and recognize that considerable opportunity remains for improvements throughout the company.”

Those areas — supply chain management, sourcing, execution, assortment, customer service and brand image — were addressed in the conference call by chief merchandising officer and retail wunderkind Phil Schoonover, who joined the company from Best Buy in October. “There’s room for multiple specialty players in the market,” he observed. “Customers want choice and vendors want balance. It’s clear that we can do better, but it’s also clear that consumers see Circuit City as an attractive place to shop.”

Schoonover said that supply chain improvements will yield better in-stocks, lower inventory levels, quicker turns and fewer markdowns, while sourcing opportunities in direct sourcing and reverse auctions will provide enhanced offerings and improved margins. He is also undertaking a strategic assessment and “re-rationalization” of Circuit City’s assortment, a task in which he’ll be aided by Randy Wick, a fellow Best Buy veteran who recently joined the company as VP/general merchandise manager for A/V.

Consolidated third quarter sales increased 3.8 percent, reaching $2.5 billion, up from $2.4 billion in the same three months in 2003.

Consolidated gross profit margin in the third quarter reached 25.1 percent, up from 22.2 percent in the same three months a year earlier. U.S. domestic stores, alone, notched more than a two-percentage-point margin improvement in the quarter, due mainly to an improvement in merchandise gross profit margins, an increase in extended warranty sales and continued increases in the efficiency of product service and distribution operations.

Consolidated expenses, however, increased to 25.2 percent in the period, compared with 23.8 percent year-on-year. U.S. store expenses rose nearly one percentage point, due mainly to the impact of the domestic total sales decrease, increased advertising expenses following the launch of a new branding campaign and higher relocation and remodel expenses.

Citing a general sales weakness in a more promotional market, particularly in the second half of the third quarter, McCollough emphasized Circuit’s continued progress in key areas, such as the extended warranty sales rate, which continue to improve quarter over quarter. In the conference call, he attributed higher attachment rates to “marketing the right warranties and learning how to manage a different sales force,” whether through repetition, training or use of on-floor management.

He also lauded the chain’s redesigned Web site; new products in its merchandise selection, including private-label novelty gadgets sourced from its Canadian InterTAN unit; a new branding campaign; and a new wireless sales model using Verizon-operated in-store shops that is expected to help build store traffic while providing added customer service.

Circuit’s inventory decreased to $2.46 billion at the end of the third quarter, compared with $2.65 at the end of the same period in 2003. Domestic inventory accounted for a $339 million decrease, offset by the addition of $147 million at the international store level. On a consolidated basis, the chain expects inventory at the end of the fourth quarter to be slightly above previous-year levels, with domestic inventory at that time slightly below year-ago levels.

In the next fiscal year, beginning this March, Circuit City plans to open 30 to 40 stores, down from 60 last year, with about half relocations. Stores relocated in the third quarter are operating 31 percentage points better than base stores, McCollough said. Five more will be opened in the first quarter. Capital expenditures for the year are anticipated at about $150 million, with about $28 million spent on store relocations.

In the conference call, senior executives cited pre-Christmas tightness in industry-wide supplies of MP3 players (particularly iPods) and plasma and LCD displays, but an overabundance of desktop and notebook PCs and digital cameras, resulting in deep, Internet-driven promotions in those categories by competitors.

For the nine months, Circuit’s U.S. store sales edged upward 2.1 percent, to $6.6 billion, from $6.5 billion in the same period last year. Comp-store sales rose 1.2 percent in domestic stores. Loss from continuing operations before income taxes for the domestic locations dropped to $49.9 million, down from a year-ago loss of $$150.3 million.

Consolidated sales for the nine months increased 6.3 percent, to $6.9 billion, from $6.5 billion year-over-year. Net loss decreased to $23.8 million, down from a year-ago net loss of $178.8 million.

Also see:
Best Buy U.S. Operating. Income Up 13%