Circuit City Loses Money amid Price War

The shares skidded Tuesday after the retailer's profits vanished as rivals play hardball on items like flat panel TVs

Circuit City Stores (CC) lost money during the three months ended Nov. 30. Investors already knew that the consumer electronics retailer from Richmond, Va. has been battling cut-throat competition, but they had expected at least a little profit.

Consumer electronics retailers are frantically trying to beat each other to customers by slashing their prices on things like flat panel TVs, effectively crimping the entire industry's ability to make money (see, 12/13/06, "Static Ahead for Electronics Retailers"). At the same time, Circuit City's CEO Philip J. Schoonover has been forced to spend on new services his rivals already have.

The result was ugly this time around. Circuit City posted a loss of $15.6 million during the third quarter of fiscal 2007, compared with earnings of $10.2 million during the same period last year.

The mean analyst forecast on the third quarter results had amounted to 5 cents earnings per share, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial. But Circuit City lost 9 cents per share during the recent quarter, a sharp swing from the 6 cents EPS of a year earlier.

To be sure, Circuit City posted net sales of $3.1 billion during the quarter, up 6.9% compared to the prior year period. Sales at stores open more than a year gained 5.1%, even after having surged a healthy 13.1% during the prior year.

But the chain had problems anyway.

"The third quarter was volatile," for Circuit City, CEO Schoonover said in a press release Dec. 19. He said results had tracked ahead of plan during September, only to fall below expectations as the quarter progressed. Even as sales of flat panel TVs increased by the strong double digits, the company lost money. Circuit City's gross profit margin was 22.2% in the third quarter, compared with 24.1% in the same period last fiscal year.

News of the company's quarterly loss and shrinking margins sent investors to the exits. Circuit City's stock dove 18.6% to $18.53 per share in early afternoon trading Dec. 19 on the New York Stock Exchange.

Some analysts had been expressing trepidation since before the dawn of the holiday shopping season. J.P. Morgan analyst Stephen Chick, for example, said in a research note on Nov. 14 that Circuit City was struggling amid the flat panel TV price war. Circuit City gets most of its income during the holiday season and TVs likely represent over 25% of its total sales, JP Morgan had said.

Meanwhile CEO Schoonover is in the midst of bringing out new services his rivals already have, such as a new point-of-sale (POS) system that aims to reduce costs, improve store operations, and increase customer satisfaction by enabling things such as shorter lines.

"We think that margin pressure will continue throughout the holiday season and well into calendar '07," said Standard & Poor's equity analyst Michael Souers. (S&P, like, is owned by The McGraw-Hill Companies.) Souers cut fiscal year 2007 and fiscal year 2008 earnings estimates, bringing S&P's 12-month target price down to $23 from $30.

Circuit City isn't the only electronics chain disappointing the Street these days. Best Buy (BBY) said on Dec. 12 that its earnings climbed 8.7% year over year to $150 million during the fiscal third quarter ended on Nov. 25, but the Minneapolis retailer also profited less on its sales and shelled out more on holiday promotions.

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