Las Vegas — Activist shareholder Mark Wattles, through his investment vehicle Wattles Capital Management, has formally submitted a proxy statement urging Circuit City stockholders to elect his four hand-picked nominees to the company’s board and remove its current directors.
In the proxy statement, Wattles, who controls a 6.5 percent stake in the CE chain, reiterated his rationale for the actions, which center on the company’s poor performance under present management. He also reduced his directors slate from five to four nominees, in accordance with Circuit City's bylaws. Results of the proxy fight are expected to be announced at the retailer's annual meeting on June 24.
Excerpts from Wattles' filing follow:
“As significant shareholders of Circuit City, we have one simple goal — to maximize the value of the shares for all shareholders.”
“We do not believe that the existing board has served the best interests of the company’s shareholders. We question the willingness of the existing board to hold senior management accountable for the company’s poor operating performance and the adverse impact it has had on shareholder value. Without change to the existing board, we fear that the company’s intrinsic value will continue to erode further.
“Circuit City’s stock performance has declined precipitously over the past 16 months. In fact, the company’s current stock price is down approximately 84 percent compared to where the stock price was on March 1, 2006 when Phillip Schoonover, the company’s current chairman, president and CEO, became CEO.
“We are deeply concerned with the company’s deteriorating operating performance, particularly over the past fiscal year.On the fiscal 2008 fourth quarter conference call, Mr. Schoonover himself, admitted, ‘Financially, fiscal year 2008 was a very disappointing year.’”
“Circuit City’s net income was approximately $140 million in fiscal 2006, declining to a loss of more than $8 million in fiscal 2007, and then ballooning to a loss of $320 million in fiscal 2008. By contrast, Circuit City’s primary competitor, Best Buy, had net income of $1.1 billion in fiscal 2006, increasing to $1.3 billion in fiscal 2007, and then increasing to $1.4 billion for fiscal 2008.
“Circuit City’s revenue decreased 5.5 percent from $12.4 billion in fiscal 2007 to $11.7 billion in fiscal 2008, with a decrease in domestic segment comparable store sales of 8.1 percent. By contrast, Best Buy, who operates in the same industry and macro-environment, increased revenue 11.4 percent from $35.9 billion in fiscal 2007 to $40 billion in fiscal 2008, with an increase in domestic segment comparable store sales of 4.1 percent.
“We question how the company’s operational performance could decline so precipitously given the relatively strong performance of its most direct industry competitor and despite the company’s significant competitive advantages, including:
· Its powerful brand with a long history and enormous reach across a wide range of demographic groups;
· National advertising capabilities;
· A store base that has been and still has the ability to be very productive; and
· Its strong cash position, minimal debt and access to a newly-expanded line of credit.
“The company’s turnaround efforts led by Mr. Schoonover and his senior management team have resulted in a substantial decline in the company’s operating performance and significant loss of shareholder value. Approximately two years ago, after what turned out to be a temporary industry-wide oversupply of flat-panel TVs, Circuit City’s senior management initiated a ‘turnaround’ to address what it perceived as a permanent reset to a lower level of gross margins in the industry. Since then, the competition’s gross margins have essentially recovered, but Circuit City’s have further deteriorated, resulting in a ‘turnaround’ that has unfortunately gone in the wrong direction.
“Circuit City has focused on cost-cutting measures with what appears to be very little, if any, consideration for their negative impact on revenue and gross profit. Circuit City’s senior management has repeatedly touted the fact that they have cut $200 million of annualized selling, general and administrative expenses while ignoring the fact that approximately $500 million of gross profit has been wiped-out.
“We believe the failure of the ‘turnaround’ to date has also been due, in part, to senior management searching for a ‘silver bullet’ rather than focusing on basic retail execution, such as having the right products for sale, priced strategically, displayed well, and sold by the right people. As a result, Circuit City’s performance is now significantly worse than when the turnaround first began. Through a combination of poor decision-making and poor execution, Circuit City’s so-called ‘turnaround’ has adversely impacted the company's operating performance.
“On three separate occasions in the last five years, the existing board has rejected what appeared to be legitimate interest in acquiring the company … We question whether the existing members of the board are fulfilling their fiduciary duties to act in the best interests of shareholders when they continue to refuse to negotiate potential transactions with bona fide third party bidders that could maximize shareholder value.
“We believe that an acquisition [by Blockbuster] for between $6 and $8 per share is in the best interest of Circuit City shareholders. There are several reasons why this offer should be taken seriously and why Circuit City should immediately provide access to due diligence information and commence good-faith negotiations:
· Blockbuster is not a competitor of Circuit City so providing such information poses no competitive threat;
· Blockbuster’s board fully supports the offer;
· Carl Icahn, or an affiliate, appears willing to and capable of helping to finance the offer;
· Cooperating with Blockbuster’s request to perform “a very short due diligence process immediately” is necessary to answer the very transaction financing questions the Company has cited in its effort to thwart Blockbuster;
· Blockbuster could raise a significant portion of the financing from Circuit City’s own balance sheet, including, but not limited to, excess cash on hand, a multi-million dollar tax refund due to the Company this summer and proceeds from a potential sale of the Company’s international InterTAN subsidiary;
· James Keyes, Blockbuster’s chairman and CEO, stated in a letter to Phil Schoonover that the Blockbuster offer is ‘conditioned upon timely commencement of the due diligence process,’ and has subsequently indicated to the media that Blockbuster is unlikely to pursue a hostile bid for Circuit City; and
· If Blockbuster withdraws its offer because of a lack of cooperation by the board, we believe Circuit City shareholders will be immediately and substantially damaged.
“If elected, our nominees will explore all strategic alternatives to maximize shareholder value, including seeking to put in place a world class chief executive officer and a senior management team committed to successfully implementing the right plan to turnaround the company and unlock shareholder value … Our plans for change at Circuit City include:
· Replace the current Chairman, President and CEO with a seasoned executive capable of restoring credibility with employees, vendors and shareholders;
· Focus on the “customer experience” and strategies for making the current stores more productive;
· Begin addressing the actual issues facing the company with an emphasis on driving store traffic and increasing revenue;
· Focus on the most immediate and least capital-intensive opportunities to improve the health of the business; and
· Develop and articulate a deliverable promise for the new “The City” brand that works within the realities of the current store footprints.
“Many of the same operational issues currently plaguing Circuit City were also adversely affecting Ultimate Electronics when WCM [Wattles Capital Management] first became involved, including poor assortment planning and in-store merchandising, suboptimal and inconsistent pricing, ineffective promotional strategies, and high store-level employee turnover coupled with low morale.
“To improve Ultimate Electronics, WCM assembled a new management team and worked with them to formulate and implement a company-wide plan to build sales while increasing gross margin, and in the process restore the health of the business. This was accomplished by focusing on increasing revenue through solid retail execution, including improving the product assortment and in-store merchandising, rationalizing and integrating pricing with the promotional strategy, and rebuilding the stores’ sales culture and employee morale.
“As a result, Ultimate Electronics stores today have positive same store sales, increasing gross margins and increasing EBITDA. We believe that our nominees can help accomplish the same turnaround success with Circuit City.”