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Credit Cards Drove Circuit’s Profits Last Year

Some 51 percent of Circuit City stores’ operating profit was derived from its private-label credit card program last year, up from 40 percent in fiscal 2001 and 20 percent the year prior, the company revealed earlier this month.

The degree to which the retailer’s finance operations drove pre-tax earnings last year surprised analysts and suggested that the chain’s core CE business was less profitable during fiscal 2002 (ended Feb. 28) than previously thought.

Nevertheless, Wall Street remained bullish on the company’s CE stores thanks to escalating sales, progress with its remodeling program and new marketing and sales force initiatives.

The disclosure marked the first time that Circuit City broke out the contribution to earnings of credit operations for both its CE retail and Carmax used car businesses. The company said it would continue to do so on a quarterly and annual basis.

The move was precipitated by shareholder requests for greater credit transparency, and linked to the launch of a new Circuit City-branded Visa credit card, which will ultimately replace the chain’s current private label plastic. Like that program, the Circuit City PLUS Visa card allows holders to participate in zero-percent financing and other credit promotions. But unlike its predecessor, the card can also be used beyond Circuit City stores at millions of locations worldwide.

In a research note, UBS Warburg retail analyst Aram Rubinson said that the switch to Visa is less an effort by Circuit City to grow its credit operations than a way to provide a more flexible alternative to the private label card. Moreover, while he had estimated that the amount that the card contributed to earnings was “significant,” he was “not displeased” with the results given last year’s peak credit spreads.

Indeed, pointing to the consistent annual dollar amount generated by Circuit City’s finance operations, a company spokesman acknowledged that last year’s 51 percent contribution to earnings reflected significantly depressed CE sales early in 2001 rather than a strategic decision to expand the company’s credit business.

Deutche Bank analyst Dan Wewer was also unperturbed by what he deemed an “unusually large contribution” to fiscal 2002 profits from the finance operations. “If Circuit City continues to efficiently manage the finance business as the core CE business improves,” he observed, “the long-term prospect for earnings growth is very favorable.”

In a separate report, Rubinson said he was also encouraged by Circuit City’s effort at making itself “more customer-centric,” and by the sense that the company is “executing its business well and that sales are trending favorably as a result.” (See story below.)

Both analysts agreed that the clearer credit reporting would benefit the company this year as core retail profits begin to reaccelerate.

Separately, Sears chairman/CEO Alan Lacy revealed during questioning at the company’s recent annual shareholders meeting that some 60 percent of its operating profit is derived from finance operations, and that the figure, even under ideal circumstances, would likely remain around 50 percent.