Circuit Questions Linger After Blockbuster Exit

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New York — Blockbuster’s attempt to buy Circuit City ended quietly Tuesday night with the movie-rental chain pulling the plug on the deal.

But the main issue facing Circuit City with Blockbuster out of the running is the question of what the future holds for the CE chain, given its own financial challenges and a decidedly difficult retail environment

Even though activist Circuit City investor Mark Wattles won the battle to add three hand-picked members to the chain’s board, Circuit City’s management was never really a fan of this deal.

Last month, after the board was expanded, Wattles said the field of interested buyers also included two unnamed private equity firms and that a deal was to be announced shortly, according to a Richmond Times-Dispatch report.

As of this posting, there was no word on who those two private equity firms are and when a decision, if any, would be reached

In its prepared statement last night, Circuit City reiterated its intention to look at other “strategic alternatives” to enhance shareholder value, calling it “an active and ongoing process.”

Phil Schoonover, chairman, president and CEO of Circuit City, commented: “Our exploration of strategic alternatives is intended to serve the interests of our shareholders by considering every possible alternative to enhance shareholder value. The board's review was not dependent on Blockbuster's participation. The board has not established a deadline for completing the review.”

The chain does not intend to disclose further developments unless and until the board has approved a course of action. Calls placed to Circuit City on its statement have not yet been returned.

Blockbuster’s attempt to take over the CE giant received mixed reviews from Wall Street and the industry almost from the time they announced their intentions in April, with industry executives saying that Circuit City might have a better chance on its own.

To illustrate some of the CE industry’s sentiment, Stan Glasgow, president of Sony Electronics, told TWICE in an exclusive interview at last month’s Consumer Electronics Association CEO Summit in Mexico, “I think it is critical that this industry have a strong No. 2 in electronics. And the health of Circuit City is important to Sony and most manufacturers. We want Circuit City to be a strong company.” While acknowledging the challenges, Glasgow said he did like the chain’s new The City format.

Some observers saw potential synergies in Blockbuster’s plan of putting together content and technology in one chain, though many were skeptical of the movie-rental chain because, up until recently, it had some financial issues of its own. Many also doubted it could scrape up the $1 billion bid, even with the backing of financial maven and Blockbuster stockholder Carl Icahn.

In a brief prepared statement, Blockbuster chairman/CEO James Keyes blamed the demise of the deal on “market conditions,” and added, “It is not in the best interest of Blockbuster's shareholders to proceed with an acquisition of Circuit City."

He said, "We continue to believe in the strategic merits of a consumer retail proposition that would bring media content and electronic devices together under one brand. We will pursue this strategy through our Blockbuster stores as a way to diversify the business and better serve the entertainment retail segment.”

Blockbuster told TWICE it had no further details on its future CE plans.

Circuit City’s first fiscal-quarter net loss of $165 million may have contributed to Blockbuster’s decision.

At the time, Schoonover said that despite the loss, Circuit continued to see operational improvements in every measurable metric during the quarter and is on track with its retail turnaround. “We have seen improved trends in our store close rate and in our services and accessories attachments, and we are delivering a better customer experience in our stores ... In short, the quarter represented improved execution and solid, steady progress towards our goals.”

Still, the numbers are stark. Circuit’s net loss of nearly $165 million for its first fiscal quarter was $110 million higher than the year-ago period.

Net sales fell 7.4 percent to $3.2 billion for the three months, ended May 31, while same-store sales declined 11.3 percent.

Earnings were impacted by a drop in domestic gross profit margin, attributed to unfavorable shifts in product mix, a decline in extended-warranty revenue, shrinkage, and higher expenses due to new store openings and the de-leveraging effect of lower sales. And domestic sales were down 8.8 percent in the quarter to $2.2 billion.

Finally, the company is projecting a second-quarter loss from continuing operations of $170 million to $185 million before taxes, but expects a “gradual recovery” in the second half of its fiscal year.

If you have a retail or major appliances news tip please emailAlan Wolf.


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