Struggling Circuit City adopts sharper focus

RICHMOND, Va. — Dressed in jeans and black T-shirts and armed with touch-screen laptops, Generation Y employees at "The City" help customers choose the latest gadgets.

Far from its old "stack 'em high, watch 'em fly" approach, struggling electronics-retailer Circuit City hopes its smaller concept stores, widespread cost-cutting and new support services will spark a turnaround despite increasing competition and the faltering economy.

"We have a difficult economy, we have fierce competition and we're in the middle of some of the most difficult, deepest work in the transformation," Chief Executive Philip Schoonover said.

Circuit City hasn't seen a quarterly profit since the second quarter of 2007, and it lost more than it had expected in the third quarter of its fiscal 2008, which ended Nov. 30. Now, it expects to report a "modest loss" in the fourth quarter, which included most of the crucial holiday-shopping season.

The nation's No. 2 electronics retailer is not faring well compared with No. 1 Best Buy, which reported a 52 percent jump in profits in the quarter ending Dec. 1. Circuit City has rejected takeover bids and seen several key executives leave over the past year.

Then, late last month, a major shareholder proposed a clean sweep of the company's board.

Circuit City already has doubled its credit line to $1.3 billion, which Schoonover said gives it the liquidity to continue the turnaround "even if the economy doesn't support us or if competition gets tougher for a period."

The credit also puts the company's large vendors at ease, he said.

Vendor relationships are critical because continued sluggish sales could lead vendors to tighten ordering terms or even demand cash from the company upfront, analyst Scot Ciccarelli of RBC Capital Markets wrote in a note to investors.

"The cash is used up and sales mathematically decline because there just isn't as much to sell," he wrote. "This is how even big retailers go out of business."

The biggest challenge now is to stand out in a highly competitive field, analysts said.

Playing catch-up

Circuit City has been "trying to play catch-up and [find] a way to be something that Best Buy isn't," said Stephen Baker, an analyst with market researcher NPD Group.

"If you can buy an iPod at Wal-Mart, Target, Amazon, Best Buy and Circuit City, there's no way to differentiate," analyst Chris Horvers, of Bear Stearns, said.

He predicted the new stores will produce higher returns because of their smaller size, which reveals the company's recognition that the smaller electronics of the future will need less selling space, especially as online content replaces DVDs, CDs and video games sold in stores.

Schoonover said changes in the television market — the Federal Communications Commission has mandated all broadcasters switch digital formats by next February — also will help drive sales.

"It's going to be a good year for our industry," Schoonover said, calling the switch to digital broadcasting the biggest growth opportunity since he went into consumer electronics 25 years ago. He came to Circuit City in 2004 from Best Buy, where he was executive vice president of customer segments.

Wattles Capital Management, which holds 6.5 percent of the company's stock, is not so sure. Wattles wants to nominate five members for Circuit City's 12-member board and oust all the current directors.

Mark Wattles, founder of the Hollywood Entertainment video-rental chain, sees little good coming of Circuit City's restructuring and turnaround attempts.

The company's losses ballooned to $207.3 million for the three months ended Nov. 30, compared with $20.4 million a year before. Its shares have traded between $3.47 and $19.90 in the past 12 months.

A slowing economy led Best Buy to cut its 2008 outlook last month. But its profit was $228 million in the most recent quarter.

Analysts seem to side with Wattles.

"This is a good shake-up," Horvers said. "It gets the management team as focused as they possibly can be, and having an outside voice is a positive."

While electronics have become necessities rather than luxury items, Baker said selling them remains difficult.

"Even when you're well-run, it's difficult to always be spot-on," he said. "It's never an easy business no matter how well you're doing."

Schoonover said the company has dealt with its core problems, and he points, in particular, to its installation business, called Firedog. The high-margin service has generated $300 million in sales since its inception in September 2006, four years after Best Buy purchased the similar Geek Squad service.

Feel of "The City"

The 22 current "The City" stores, which represent the chain's attempt to follow a different drummer from Best Buy, feature special fixtures and lighting, streamlined product selection and a new feel — as well as being about two-thirds as big as Circuit City's traditional 30,000-plus-square-foot stores.

Circuit City, which operates more than 680 stores nationwide, plans to open or relocate 50 to 60 stores during fiscal 2009, which began this month — virtually all of them in the new "The City" format.

"This is better than what they had," 55-year-old Greg Duggan, of Richmond, said on a recent visit to the concept store here to upgrade his home computer network.

"The old store felt more like Wal-Mart than it did an electronics store," Duggan said. "Frankly, I like it better than Best Buy."