Circuit City Posts Wider Loss
Tuesday, September 30, 2008
Circuit City reported yesterday that its losses more than tripled to $240 million during the second quarter, its cash flow dwindled and it was withdrawing its annual forecast. The company's stock dropped 21 percent.
Newly instated chief executive James A. Marcum, who inherited the struggling retailer last week after the ouster of Philip J. Schoonover, said he has begun a comprehensive review of the company. The nation's second-largest electronics retailer does not plan to open new stores in the coming fiscal year and may even close some locations. Marcum also said it will "focus internally" to operate as a "standalone business," suggesting that the retailer is no longer on the auction block.
"We realize the performance of this company is unacceptable to all of our stakeholders and that it is imperative that we take the right steps to accelerate our turnaround," Marcum said in a conference call with analysts.
Total sales at the Richmond-based company dropped nearly 10 percent to $2.4 billion during the second quarter compared with the same period last year. Sales at stores open at least a year -- a key measure of a retailer's health -- were down 14 percent.
"They're burning through cash. You have a tough economy, you spend money on a turnaround that doesn't work," said David Schick, an analyst with Stifel Nicolaus. "This is what happens."
Circuit City's $240 million loss included a $73 million non-cash impairment charge and is more than triple the loss recorded during the same quarter last year. That has drained cash flow to $92.5 million at the end of the quarter from $424 million last year, down 78 percent. Still, company spokesman Bill Cimino said it has enough cash on hand and access to credit to sustain its business.
Marcum outlined four areas of concentration in the company's attempt to rebuild its name: customer experience, execution, service culture and stores. For the crucial upcoming holiday season, Circuit City is launching a training camp for employees, working to improve in-stock levels on key products, and changing signs and merchandising to communicate value.
Marcum said some changes are already underway and disruption to stores would be minimal.
"We've also tried to implement too many disparate initiatives and at times have not focused on the right things," he said in the call. "In many cases, we believe our past actions have impacted our business negatively."
Circuit City began its freefall two years ago when prices for flat-panel TVs began to drop quickly. The retailer was forced to slash prices at the same time it faced increased competition from rivals Best Buy and Wal-Mart. To save money, the company fired 3,400 of its highest-paid workers, decimating customer service and employee morale. Circuit City has struggled to recover ever since.
Earlier this year, activist investor Mark Wattles sparked a proxy battle when he called for the removal of then-chief executive Schoonover and the sale of the company. In April, Blockbuster made an unsolicited bid for the retailer but pulled out a few months later as the economy continued to curdle. Marcum's comments yesterday seemed to quell speculation that the company was still up for grabs.
Circuit City's "strategy options appear limited," Deutsche Bank analyst Mike Baker wrote in a note to clients yesterday. "We read this as a lack of buyers."
Marcum was nominated by Wattles, a longtime business associate, to the board of directors and approved by shareholders in June. He replaced Schoonover Sept. 22.
"We must get back to the basics," he said.
The stock closed at $1.08, down 21 percent or 29 cents.