Circuit City Swings to Loss

Lower price tags for flat panel TVs and computer hardware hurt sales and earnings for Circuit City, while Best Buy's earnings grew

Circuit City Stores (CC) swung to a loss during the fiscal fourth quarter ended Feb. 28, even as its rival Best Buy (BBY) grew earnings. While the two consumer electronics giants battled for customers during recent months, Circuit City has been going through tumultuous changes in an effort to trim costs.

Richmond (Va.)-based Circuit City suffered a $12.2 million loss during the February quarter, compared to earnings of $141.4 million during the same period of 2006. Results include $144.6 million of hits related to business restructuring activities such as store and facility closures.

Also, Circuit City continued to suffer from the retail industry's decision to slash prices on some products to lure customers. "During the quarter, flat panel television average selling prices were well below the prior year, and our PC hardware business experienced volatility around the Microsoft Windows Vista operating system transition," explained CEO Philip J. Schoonover in a statement Apr. 4. Sales at stores open more than a year dropped by 0.5%, compared to an 11.6% gain during the same period last year. This dented net sales, which gained 1.2% year over year to $3.93 billion during the February quarter.

Circuit City has been trying to fight back by cutting costs. The company announced Mar. 28 that it's planning to lay off around 3,400 store employees - and then it will hire again at lower wages. Circuit City will also outsource its information technology department and possibly sell its Canadian unit InterTAN. The company hopes it can slash expenses by around $110 million during fiscal 2008 and at least $140 million beginning in fiscal 2009.

Even as it grapples with these painful changes, Circuit City thinks it will be able to grow sales of products including flat panel televisions, video game hardware, notebook computers, digital imaging and portable digital audio players during the coming year. The company, which says it will have growth between 3% and 5% at U.S. stores open more than a year during fiscal 2008, is assuming it will suffer a pre-tax loss of $40 million to $50 million for the first half of the fiscal year, but will then enjoy a strong recovery in the second half. The company has yet to reap the benefits of its cost cutting efforts.

Not that every problem will eventually go away. Circuit City said it isn't expecting the competitive environment in its industry to change during the coming year.

Meanwhile, rival Best Buy's net earnings rose to $763 million during the fiscal fourth quarter ended Mar. 3, up 18.5% compared to the same period last year. The Minneapolis company's revenue increased 21% year-over-year to $12.9 billion during the period. Sales at stores open more than a year improved by 5.9%, boosted by factors like an extra week of business and the addition of 231 stores during the past year in part through acquisition. The company also had higher revenue from its sales of products like flat-panel televisions, video gaming hardware and notebook computers.

Best Buy has been pushing for growth. The company opened its first Best Buy China store in Shanghai on Dec. 28, 2006. "We plan to continue to invest in acquisitions and capabilities that will help us serve customers better and boost results from our current business model as we continue to generate new growth opportunities," Best Buy CFO Darren Jackson said in a statement Apr. 4.

The company expects its results to keep improving. After earning $2.79 per share during the fiscal year 2007 ended Mar. 3, Best Buy says EPS will range between $3.10 and $3.25 during fiscal 2008. The consensus forecast had been for $2.76 in fiscal 2007 and $3.18 in fiscal 2008.

Best Buy shares fell 1.7% to $48.30 on the New York Stock Exchange Apr. 4, while Circuit City's stock fell 1.6% to $17.99.

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