Circuit City Tumbles as TV Prices Tank

Electronics Rival Best Buy Rides Flat-Panel Sales to Profit and Revenue Gains

Richmond-based Circuit City reported a full-year loss of $11.8 million compared with a profit of $139.7 million in 2005. The retailer lost $12.2 million in the fourth quarter, which it blamed on a drop in the retail price of flat-panel TVs. (By Steven Senne -- Associated Press)

Circuit City of Richmond lost $12.2 million during its fourth quarter, losing ground to rival Best Buy, which reported an 18 percent jump in profit.

Both consumer electronics retailers cited flat-panel television sales in discussing their results. Circuit City, which fired 3,400 workers last week, blamed an unexpected drop in the retail price of the televisions in recent months along with increased competition from other retailers for its bleak results. But Best Buy credited flat-panel TVs for a boost in sales at stores open at least a year, a key measure in retail.

The differences in perspective -- not to mention financial results -- reflect the two companies' divergent business models. Circuit City has traditionally focused on big-ticket items such as TVs, home audio systems and computers to drive sales, making it more vulnerable to falling prices in those categories. Best Buy, meanwhile, has diversified its assortment to also emphasize accessories and services, such as the Geek Squad.

In addition, Best Buy's selling, general and administrative expenses -- which include labor -- totaled about 19 percent of its sales last year, down from about 20 percent the preceding year. At Circuit City, those costs were 22.9 percent of 2007 revenue, up from 22.5 percent in 2006. That left the retailer with few options when falling flat-panel-TV prices began to endanger its profit, said Timothy Allen of Jefferies & Co.

Circuit City has "done a lot of things to try to narrow their focus, and they just haven't been able to catch up," said Stephen Baker, an analyst with consulting firm NPD Group.

The retailer's loss contrasts with last year's fourth-quarter earnings of $141.4 million. Circuit City said it also suffered from restructuring charges, including store closures, that totaled $144.6 million. Total sales for the quarter ended Feb. 28 were $3.93 billion, up 1 percent from the comparable period a year earlier, driven by new store openings. Sales at stores open at least 12 months dipped 0.5 percent, compared with a jump of 11.6 percent in the previous fiscal fourth quarter.

"We are disappointed in our financial performance," said Philip J. Schoonover, chief executive of Circuit City.

For the fiscal year, Circuit City reported a loss of $11.8 million, down from a profit of $139.7 million the previous year. Total sales were $12.43 billion, an 8 percent increase. Same-store sales grew 5.8 percent.

When Circuit City fired thousands of store employees across the country last week, it said they were making too much money and would be replaced by lower-paid workers. Yesterday, the company said it was fully staffed in 483 of its 642 stores and has ramped up training.

"We identified a lack of discipline in managing our wages and rates," Schoonover said in a conference call with analysts. "I acknowledge that this decision was difficult and painful to the people who were impacted."

Schoonover said the restructuring is part of a transformation that began 2 1/2 years ago to focus on home entertainment, services, multi-channel retailing and real estate. He said the drop in flat-panel-TV prices has prompted an acceleration of those plans.

Best Buy reported earnings of $763 million during its fourth quarter, ended March 3, up 18 percent. Total sales grew 21 percent, to $12.9 billion from $10.69 billion. The company said same-store sales were stronger than expected, growing 5.9 percent.

Total sales for its fiscal year were $35.93 billion, a jump of 16 percent. Full-year earnings were $1.38 billion, up 21 percent from $1.14 billion.

"Clearly, Best Buy is more innovative," said Allen, the Jefferies analyst. "I think the culture's more fun."

Allen said the company has led the way with the Geek Squad, which Circuit City recently matched with its service department called Firedog, and has invested in keeping its stores new and fresh. He said sales per square foot at Best Buy stores average almost double Circuit City's.

Schoonover said Circuit City could not be competitive without the change to employee wages. Still, the move was criticized by labor groups who worried about the "Wal-Martization" of the economy.

"Big-box retailers like Wal-Mart and Circuit City see their workforce not as an asset but as an expense to be cut," said Stuart Appelbaum, president of the Retail, Wholesale and Department Store union, an arm of the United Food and Commercial Workers. "People are competing to see how little they can pay. There is no bottom line to that."