Circuit City Braces for Continued Losses

After record losses in fiscal 2008, Circuit City expects to lose millions of dollars in the first half of fiscal 2009.
After record losses in fiscal 2008, Circuit City expects to lose millions of dollars in the first half of fiscal 2009. (By Stephan Savoia -- Associated Press)
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By Ylan Q. Mui
Washington Post Staff Writer
Thursday, April 10, 2008

Circuit City said yesterday that it expects to lose millions of dollars through the first half of its fiscal year as the beleaguered company struggles to win back customers while fending off an increasingly hostile minority investor.

The nation's second-largest electronics retailer lost a record $319.9 million dollars during fiscal 2008. Chief executive Philip Schoonover blamed the weakening economy as one reason for Circuit City's poor performance but cited growth in warranty sales, home theater installation and tech help services as causes for optimism. Fourth-quarter earnings were higher than expected at $4.9 million, compared with a loss of $4.3 million in the comparable period last year.

"We remain confident that we are on the right track," Schoonover said yesterday during an analyst conference call. "We are implementing the right strategies with the right talent and process to lead us to a successful turnaround."

But patience with management's strategy may be wearing thin. Mark Wattles, an activist investor whose company owns a 6.5 percent stake in Circuit City, has been engaged in a heated proxy battle with executives and board members. After several months of tense exchanges, the sides are planning to meet for the first time tomorrow in New York to discuss Wattles' calls to overhaul management.

"We were encouraged to hear them acknowledge that the decline in gross margin is attributable to Circuit City's own missteps and that they believe they can restore it," Alex Bond, managing director of Wattles Capital Management, said in an e-mail yesterday. "If they can, shareholder value would increase substantially."

Circuit City estimated it will lose $180 million to $195 million before taxes during the first quarter of fiscal 2009. To fix its business, the company should focus on revamping as many as 60 percent of its stores that have the wrong format or location, wrote Daniel Binder, an analyst with Jefferies & Co., in a recent research note. It must also stabilize sales and boost profitability -- tough challenges in the midst of a gloomy economy and strong competition.

"We remain concerned about continued profit fallout from overwhelming changes to operations this past year as well as poor employee morale, management turnover and vendor support," Binder wrote.

In a letter to Circuit City's board of directors last week, Wattles sought Schoonover's replacement and suggested the company consider putting itself on the auction block. He chastised management for searching for a "silver bullet" for the company's woes rather than focusing on selling merchandise. Some of the sweeping changes the company has instituted over the past year include firing 3,400 of its highest-paid employees, changing operating procedures and inaugurating a smaller store format called The City.

"Circuit City's so-called 'turnaround' has adversely impacted the company's operating performance, destroying billions of dollars of stockholder value in the process," Wattles wrote. "While we cannot say whether a turnaround was needed at Circuit City two years ago, it is quite clear to us that one is needed now."

Earlier this year, Wattles called for an overthrow of the company's board of directors and nominated five replacements, including Elliott Wahle, who has worked in management with Toys R Us, and Don Kornstein, a consultant and chairman of Bally Total Fitness Holding, the gym operator that emerged from bankruptcy protection in October. Wattles rejected a request by the company to interview his nominees, saying he would not acquiesce unless the board agreed to nominate them as well. The annual shareholders meeting is scheduled for June.

Circuit City spokesman Bill Cimino declined to comment on Wattles or his proposals.

Wattles disclosed he had acquired a significant minority stake in the company in January with the intent to shake up management. Wattles was a co-founder and chief executive of video rental service Hollywood Video but left the company after a failed attempt to take it private in 2005. That same year, he purchased the Colorado consumer electronics chain Ultimate Electronics for $47 million. In a letter to Circuit City, he cited similarities between the two retailers: both competed directly against giant Best Buy and suffered from poor merchandising, inconsistent pricing and high employee turnover.

As chief executive, Wattles has returned Ultimate Electronics to profitability. But industry experts said it remains to be seen whether his aggressive ideas will gain traction at Circuit City.

"It's easy to lay blame, but what's the alternative?" said David Urban, professor of marketing at Virginia Commonwealth University in Richmond, where Circuit City is based. "Who's going to come in and do a better job than they're doing now? I don't see it as realistic."

Shares closed yesterday at $4.45, down 8 cents.


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