Circuit City's Job Cuts Backfiring, Analysts Say

Circuit City expects to report a loss for the first quarter because of poor sales of expensive televisions, which often require experienced salespeople.
Circuit City expects to report a loss for the first quarter because of poor sales of expensive televisions, which often require experienced salespeople. (By Steve Helber -- Associated Press)
By Amy Joyce
Washington Post Staff Writer
Wednesday, May 2, 2007

Circuit City fired 3,400 of its highest-paid store employees in March, saying it needed to hire cheaper workers to shore up its bottom line. Now, the Richmond electronics retailer says it expects to post a first-quarter loss next month, and analysts are blaming the job cuts.

The company, which on Monday also revised its outlook for the first half of its fiscal year ending Feb. 29, 2008, cited poor sales of large flat-panel and projection televisions. Analysts said Circuit City had cast off some of its most experienced and successful people and was losing business to competitors who have better-trained employees.

"I think even though sales were soft in March, this is clearly why April sales were worse. They were replaced with less knowledgeable associates," said Tim Allen, an analyst with Jefferies & Co.

In particular, the televisions showing disappointing results are "intensive sales" requiring more informed employees, Allen said. "It's a big-ticket purchase for somebody. And if they feel like they're not getting the right advice or are being misled by someone who doesn't know, it would be definitely frustrating. They will take their business elsewhere."

Circuit City said in March that sales would be volatile for the next several months as the company adjusts to the changes. But yesterday the company said it was too early to tell whether the dismissals had caused any of the falloff in April sales.

"We will continue to monitor that," said Bill Cimino, a company spokesman. "Only two or three salespersons per store were impacted on average. Others were customer service representatives or warehouse employees," which would point to other factors for the drop in sales, he said.

About 60 percent of the people let go held in-store sales positions. Each of the company's almost 650 U.S. stores has about 50 salespeople per store, he said.

Cimino said Circuit City attributes the sales picture to a combination of economics and the company's poor forecasting and planning. "That's what we're working on right now," he said.

At the same time, however, the company has initiatives underway to keep employees on the sales floor, Cimino said. For one, employees who are often torn between helping customers and other store duties such as stocking shelves will be directed to confine their attention to customers when stores are open. The other duties are to be performed after or before store hours, he said. The practice is being piloted in several stores and will be expanded during the next few months.

Although the impact on Circuit City was "sudden and severe," there could be other reasons for slower television sales, including a "softening of consumer spending," Mike Baker, a research analyst with Deutsche Bank wrote in a report released yesterday. Best Buy is also "likely not immune," he wrote.

However, Baker also said Circuit City's situation is mostly a result of its loss of informed workers. Best Buy "will fare better because of market share gains driven by weakening customer service at Circuit City," he wrote. "We believe that Circuit City's store labor change . . . likely has had a worse than expected impact on Circuit City's service levels and has enabled [Best Buy] to take share."

Circuit City's prices and return policies are comparable to those of its competition, so what's left is the sales experience, said Samuel Culbert, professor of human resources and organization at the University of California at Los Angeles. "There is nothing more important than relationships in commerce."

The company said Monday that it expects a loss from continuing operations of $80 million to $90 million for the first quarter of its 2008 fiscal year because of "substantially below-plan sales," especially of televisions.

The firings, along with several other moves, were expected to reduce expenses for the electronics retailer by $110 million in fiscal 2008 and $140 million a year starting in fiscal 2009.

Circuit City shares fell 5.3 percent, or 93 cents, to $16.52 yesterday.

© 2007 The Washington Post Company