Circuit City stock plunges on grim losses report

NEW YORK (MarketWatch) — Circuit City Stores Inc. on Friday saw its shares take their biggest plunge in five years after the company posted a wider-than-expected third-quarter loss from lower sales and price cuts on flat-panel televisions.

In a sign of continuing struggle and market share loss, the No. 2 U.S. electronics chain
also said it may post an unexpected fourth-quarter loss. Fourth quarter is usually when many retailers, including electronics chains, reaped their biggest profit for the year.

Shares tumbled $1.91, or 29%, to $4.75, their biggest decline since February 2002.

Circuit City’s net loss widened to $207.3 million, or $1.26 a share, from $20.4 million, or 12 cents a share, a year earlier. Sales in the quarter ended Nov. 30 fell to $2.94 billion from $3.06 billion, the Richmond, Va.-based company said.

Excluding a valuation allowance charge of 62 cents a share, Circuit City would have lost 64 cents. On that basis, analysts, on average, estimated a loss of 31 cents a share on sales of $3 billion, according to Thomson Financial.

Sales at stores open at least a year declined 5.6% after lower sales of traditional tube and projection televisions, camcorders and DVD players. The company’s aggressive Black Friday promotions, while driving sales and traffic on the day after Thanksgiving, could not be an ongoing strategy, analysts said. Profit also was hurt by price cuts on flat-panel televisions and weakness in sales of its more profitable warranty services.

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As part of its strategy to improve results, Circuit City said next year, it’s opening as many as 60 The City, its new store concept, to help bolster demand and improve customer experience. See full story.

‘Best Buy is nimble and responsive. You just don’t see that in Circuit City.’

— Stacy Widlitz, Pali Research

Circuit City has lost traffic and sales to larger rival Best Buy Co.
which this week raised its full-year profit forecast after reporting a better than expected 52% rise in its third-quarter profit, analysts said.

“It’s pretty shocking they are not going to make money in the fourth quarter,” said Pali Research analyst Stacey Widlitz, who said the expected loss in the fourth-quarter would be Circuit City’s first in at least five years. “It’s a mess. Best Buy is nimble and responsive. You just don’t see that in Circuit City.”

Assuming current sales and margin trends continue for the rest of the year, Circuit City expects a “modest loss” from continuing operations before income taxes for the fourth quarter. Analysts had been estimating a profit of 56 cents a share for the quarter, according to Thomson Financial.

“There’s progress being made, but frankly, with an overabundance of caution on my part,” said Chief Financial Officer Bruce Besanko on a conference call with analysts.

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The company said it would slow the rate of change in its business after its announcement in March to eliminate 3,400 highly paid workers who investors said were better at pushing higher margin sales and services.

“We are very dissatisfied with our third-quarter results,” said Chief Executive Philip Schoonover in a statement. The company’s problems “are primarily self-induced and are within our control to improve.”

While Best Buy opened up more registers when store managers noticed a big line, Circuit City would have just one register open even if there was a line of customers waiting, Widlitz noted from her store tours. Circuit City was also late compared to Best Buy to have a standard procedure to train its employees on how to sell higher-margin warranty services, she said.

Gross margins, or the percentage of sales left after subtracting the cost of goods sold, narrowed to 19.1% from 22.1%, also missing analysts’ estimates.

U.S. extended warranty sales fell to 2.4% of U.S. segment sales from 3.6% a year earlier.

Comparable-store sales, a retail industry performance measure that excludes results from new and closed locations, dropped 5.8% in the U.S., after declines also in desktop computers. They fell 1.1% excluding the impact of currency translations in the international markets.

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Circuit City said in a regulatory filing Wednesday that its board approved a special cash retention award program for its top executives including Chief Financial Officer Bruce Besanko and a long-term incentive plan for CEO Schoonover and other top executives.

“It seems like the top executives are paid more for poor performance,” Merrill Lynch analyst Danielle Fox posed the question for management on the call. She asked what kind of incentive plans the company had for its rank and file employees instead.

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