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Circuit City Implements Turnaround Strategy

Posted on: Monday, 10 March 2008, 15:05 CDT

Besieged electronics retailer Circuit City is revamping its business to include smaller concept stores, extensive cost-cutting measures and new support services, in an attempt generate a turnaround amid increasing competition and a weak economy.

"We have a difficult economy, we have fierce competition and we're in the middle of some of the most difficult, deepest work in the transformation," Chief Executive Philip J. Schoonover said in an interview with The Associated Press.

At one of its new concept stores, renamed simply “The City”, young employees carrying touch-screen laptops dressed in jeans and black T-shirts assist customers in selecting among the latest electronic gadgets. The new "The City" stores feature special fixtures and lighting, updated product selection and a new ambiance. The stores are about two-thirds the size of traditional Circuit City locations, and represent the retailer’s attempt to differentiate itself from main rival Best Buy. 
Circuit City currently operates more than 680 stores throughout the country, including 22 “The City” stores. The nation’s No. 2 retailer hasn't produced a quarterly profit since the second quarter of 2007, and had higher than expected losses during the third quarter of its fiscal 2008 ending Nov. 30.  

The company said it is expecting a "modest loss" in the fourth quarter, which includes most of the critical holiday shopping season. These results show a sharp contrast to those of Best Buy Co., the country’s top electronics retailer, which reported a 52 percent jump in profits in the quarter ending Dec. 1.

The retailer has doubled its credit line to $1.3 billion, which Schoonover said provides the liquidity the company needs to fund the turnaround "even if the economy doesn't support us or if competition gets tougher for a period." The credit also puts the company's suppliers at ease, he said.

Relationships with suppliers are critical because continued slow sales could cause vendors to tighten ordering terms or even require upfront cash for purchases, according to an investor note written by analyst Scot Ciccarelli of RBC Capital Markets.

"The cash is used up and sales mathematically decline because there just isn't as much to sell," he wrote. "This is how even big retailers go out of business."

The biggest challenge for the company now is to differentiate itself in a highly competitive industry, analysts say.

Circuit City has been "trying to play catch-up and (find) a way to be something that Best Buy isn't," said Stephen Baker, an analyst with market researcher NPD Group, in an Associated Press report.

"If you can buy an iPod at Wal-Mart, Target, Amazon, Best Buy and Circuit City, there's no way to differentiate," analyst Chris Horvers of Bear Stearns told AP.

Horvers expects the new stores will produce higher returns because of their smaller size, since smaller electronics require less selling space, especially as online content replaces DVDs, CDs and video games sold in retail stores.

Schoonover said major upcoming changes in the television market, such as the FCC mandated switch to digital formats by next February, would also help drive sales.

"It's going to be a good year for our industry," Schoonover said, referring to the upcoming digital mandate, calling it the biggest growth opportunity in the past 25 years. 

Schoonover came to Circuit City in 2004 from Best Buy, where he was executive vice president of customer segments.

Over the past year, the company has rejected takeover bids and lost several of its key executives, prompting a major shareholder to propose a clean sweep of the company's board.

Mark J. Wattles, founder of the Hollywood Entertainment video-rental chain, has little faith in Circuit City's restructuring and turnaround attempts.   Wattles Capital Management, which holds 6.5 percent of the Circuit City’s stock, wants to nominate five members for Circuit City’s 12-member board and oust all of the current directors.  

Circuit City’s losses grew significantly to $207.3 million for the three months ending Nov. 30, compared with $20.4 million a year before. Shares of the company’s stock have traded between $3.47 and $19.60 over the past 12 months.  Last month, Best Buy cut its outlook for the year amid concerns of a slowing economy, but posted a $228 million profit in the most recent quarter.

Analysts agree with Wattles.

"This is a good shake-up," said Horvers. "It gets the management team as focused as they possibly can be, and having an outside voice is a positive."

Baker said that although electronics have become necessities rather than luxury items, selling them remains challenging.

"Even when you're well run, it's difficult to always be spot on," he said. "It's never an easy business no matter how well you're doing."

Schoonover said the company has dealt with its core problems, citing in particular its high-margin installation business, called Firedog. The service has generated $300 million in revenue since its start in September 2006, four years after Best Buy purchased the similar Geek Squad service. 

Circuit City surrendered its position as the nation’s top consumer electronics retailer to Best Buy during the 1990s, when Best Buy built bigger stores in better locations and achieved greater economies of scale.

Circuit City plans to open or relocate 50 to 60 stores during fiscal 2009, which began this month.  Nearly all of them will be in the new "The City" format.

"This is better than what they had," 55-year-old Greg Duggan of Richmond told AP, speaking of a recent visit to the concept store.

"The old store felt more like Wal-Mart than it did an electronics store," Duggan said. "Frankly, I like it better than Best Buy."

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Source: redOrbit Staff and Wire Reports

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