Is Circuit City Up for Sale?

The electronics retailer reports a slim profit but is rumored to have hired Goldman Sachs to look into possible deals

After initially turning a deaf ear to calls for change, Circuit City (CC) suddenly seems to be working double-time to respond to pressure from activist shareholder Mark Wattles.

Wattles, who has built up a 6.5% stake in the company over the past six months, started out calling for a change in the board of directors. But he has stepped up his rhetoric and in recent weeks called for an ouster of CEO Philip Schoonover as well as the entire board. Wattles also suggested that the company hire an investment bank to evaluate the possibility of a takeover offer since the company's turnaround plan (, 2/29/08) has been "disastrous."

Sure enough, rumors swirled on Apr. 7 that Circuit City, the nation's No. 2 electronics retailer, with 677 stores, has hired the investment bank Goldman Sachs (GS) to pursue opportunities for a sale. Neither Circuit City nor Goldman Sachs would comment on that. The speculation followed a letter on Friday from Circuit City's lead director, Mikael Salovaara, to Wattles, in which Salovaara said he would schedule a meeting with Wattles, who heads up Wattles Capital Management. "I like any outcome that will benefit shareholders—whether it's achieved through a management change or by finding a buyer who will turn the company around, that's up to the board," says Wattles.

Shakeup Wanted

What everyone agrees on is that Circuit City needs some kind of jolt. Persistent cost cutting helped the beleaguered Richmond (Va.) company report a profit on Apr. 9 of $4.9 million for its fiscal fourth quarter ended Feb. 29. This ended a streak of five consecutive quarterly losses for the company as it battles increased competition from chief rival Best Buy (BBY), discount retailer Wal-Mart Stores (WMT), and warehouse club operators such as Costco (COST) in an environment where consumers are being very selective with their purchases. Even though the slim profit surprised Wall Street, it's clear the company is struggling to grow and revenue fell 8% to $3.65 billion. Sales at stores open at least a year, a key gauge of a retailer's performance, fell 10.4% in the quarter.

Wattles says he believes that Circuit City has woken up to the fact that a great number of shareholders are bristling for change and that Wattles isn't alone. Recently, other activist shareholders have moved in to acquire big stakes in the company: HBK Investments owns 9.2% of the shares, and D.E. Shaw owns 3%.

At a third-quarter conference call with analysts in December, Schoonover laid out a strategic plan for fiscal year 2009. Rather than a growth strategy, his plan includes "fixing" at least three lines of business. "We remain committed to a strategy that leads to improved sales and profitability in the near and long term," he said in the call. The only growth areas Schoonover was able to cite were the company's Firedog service—which handles computer repairs, home theater installations, and tech support—and its direct-channel business, which includes sales that originate with Circuit City's Web site and call centers. But those areas combined make up less than 20% of the company's overall sales. Circuit City's shares are now trading at 4.43, down 75% in the past year.

Layoffs Hurt Sales

The consumer electronics chain is also feeling the impact of laying off 3,400 highly paid workers, including some of its most experienced salespeople. Items that require more sales-floor expertise, such as higher-margin home theater systems and warranties, subsequently suffered a decline in sales.

Now Circuit City is under pressure to turn around its sales performance at a time when consumers have closed their wallets (, 3/26/08) to big-ticket items and most discretionary spending. Its annual shareholder meeting takes place in June, at which Wattles will have a chance to place his slate of five new directors up for a vote. "Unless their performance changes between now and June, Circuit City knows that there will be material change at the executive or board level," says Wattles.

Goldman Sachs analyst Matthew Fassler says in a recent report that he's encouraged by Wattles' continued activism. Still, he expects Circuit City will have a tough time in a "bleak" environment where consumer spending is weak, TV prices are declining, and there is strong competition from all sides.

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