August 05, 2006

Business Review: Circuit City

Circuit City shares (NYSE: CC) have tumbled by more than twenty percent in the past three months, though some pundits feel Circuit City is in the midst of a financial turnaround.

In the three months ended May 31, 2006, Circuit City posted a pre-tax profit of $7.8 million on net sales of $2.6 billion, yielding an approximate pre-tax profit rate of 3%. A year earlier, Circuit City lost $19.2 million on sales of $2.2 billion. This helps defend pundit opinions that Circuit City is improving their business.

Circuit Cirty SEC filings indicate that their US-based business is performing better than their international business. International business, primarily in Canada, generated an after-tax loss of $4.3 million, whereas the US-based business generated an after-tax profit of $9.3 million.

Multichannel statistics are interesting. Comp-store sales in the first quarter grew by 14.5%. However, online sales are included in comp store sales. Therefore, retail comps were greatly influenced by an 85% increase in web-originated sales verses last year. This should make multichannel pundits happy. Circuit City is continually lauded for its "buy online, pickup in store" program. The increases should also make Circuit City executives happy. Given that Internet Retailer estimated that online sales were 7% of total Circuit City sales in 2005, an 85% increase in online sales contributes about five of the 14.5% point increase in comp store sales. Reporting online sales in comp store sales overstates overall comp store productivity.

Circuit City operates four divisions. Video represented 44% of first quarter sales, and produced double-digit increases in the first quarter. Information Technology, representing 29% of first quarter sales, experienced a low-double-digit increase, led by notebook computers and printers. Audio, representing 16% of the business, experienced a double-digit comp store sales increase. The entertainment division, 11% of the business in first quarter, experienced a single digit comp store sales increase. The company expects continued growth in flat-panel televisions, portable digital audio, and notebook computers.

Circuit City offered guidance that it expects to achieve net sales growth of between seven and eleven percent, and earnings before taxes of between 2.0% and 2.4%. The company also states that it will continue to invest in multichannel activities.

The results indicate that Circuit City is very dependent upon driving comp store sales increases to achieve profitability. Had comp store sales been below ten percent last quarter, it is unlikely that Circuit City would have generated a quarterly profit. The online channel is clearly contributing to the success of the business, in the first quarter.

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