This summary is based on the second quarter fiscal 2009 earnings call conducted by Circuit City Stores, Inc. (CC) on September 29, 2008.
Management:
Director, Corporate Communications: Bill Cimino
Acting President & CEO: James Marcum
EVP & COO: John Harlow
EVP & CFO : Bruce Besanko
Key Investors Issues
- EPS were a loss of $1.45 a share compared to 38 cents last year.
- Net income loss widened to $239.2 million from $62.8 million a year earlier.
- Sales fell to $2.39 billion from $2.64 billion a year ago.
Second Quarter Highlights
Net sales decreased 9.6% to $2.4 billion.
- - Domestic segment sales declined 10.6% to $2.2 billion. The domestic sales decline was primarily driven by comparable sales decline of 14.4%.
From a product perspective large LCD televisions continue to be largest sales driver. Digital television converter box sales are strong and so are social gaming products. Offsetting these areas of strength was broad based weakness across most other categories.
- Close rate trend improved sequentially though it declined by a low single-digit percentage to last year’s rate. Average ticket was nearly flat to last year which is an improvement in trend.
- The largest driver of performance was a double-digit decline in traffic from last year.
- The company continues to see strong increases in traffic while average ticket declined on a year-over-year basis.
International segment sales increased 11.2% primarily reflecting a comparable store sales increase of 11.2% in local currency as well as the favorable impact of foreign currency exchange rates partially offset by the impact of 28 net store closings in the last 12 months.
- Sales growth was strongest in navigation, video game and computers and related software and wireless. Consolidated gross profit margin increased by 63 basis points from last year. On the domestic side gross margin rate increased 74 basis points. Year-over-year change in the domestic gross margin rate was the first year-over-year increase in 10 quarters. The increase was driven by improvements in the product margins of televisions and related products and PC hardware.
- Warranty had positive contribution to gross margin as sales were flat to last year on a percentage to sales basis and the company took costs out to improve margin. Also contributing to the improvement was a decrease in shrink at 12 basis points. In the fourth quarter of last year the company saw an uptick in shrink above historical levels. This hurt gross margin disproportionately in the fourth quarter as the company recorded the higher rate for the quarter and some catch-up for earlier periods.
- The company adjusted accrual rate down by about 20% for the first six months of fiscal 2009. The impact of the second quarter includes a benefit from that first quarter catch-up. In the second quarter the company also saw some benefits from improved pricing governance and reduced markdowns as well as clearance and open box discounts.
- International segment gross profit margin decreased 408 basis points. The decrease primarily resulted from margin rate declines in commoditizing categories such as tech related media and navigation products, a mix shift reflecting stronger sales growth in the lower margin categories such as video gaming, navigation and computers, and targeted clearance activities particularly in the end of life computers and portable audio.
- Consolidated SG&A expenses as a percentage of sales increased by 230 basis points while SG&A expenses in dollars declined from last year. The domestic segments expense to sales ratio increased 271 basis points compared with last year. The increase primarily reflects the overall deleveraging impact of lower sales, 182 basis point increase in expenses related to the 76 new and relocated Superstores that have opened during the past 12 months, and a 67 basis point increase in marketing expense.
- The increase was partially offset by a 26 basis point decrease in consulting and other professional services. The international segment SG&A expense to sales ratio decreased 583 basis points from the prior year’s rate primarily due to a benefit of $4.3 million related to goodwill and the leveraging impact of higher sales.
- This segment also had lower advertising and consulting expenses.
The company recorded $73 million of non-cash asset impairment charges.
- Due to financial performance and initiation of the comprehensive review of business the company was required to test long lived assets for impairment under GAAP as of the end of the quarter.
- Based on information available at August 31, 2008 the company has evaluated the carrying value of each of stores’ property and equipment which would include things like fixtures, equipment and leasehold improvements. The company determined that the carrying value of the fixed assets at some of domestic segment Superstores would likely not be recovered through the estimated future cash flows considering assumptions about the lives of those assets.
- Adjusted pre-tax loss of $162.7 million excludes the non-cash asset impairment charges. On a GAAP basis the company had a consolidated loss from continuing operations before income taxes of $235.7 million compared to $128 million in the prior year.
- The adjusted results exceeded guidance which didn’t anticipate the non-cash asset impairment charges do the better gross margin performance and also additional SG&A expense controls and reductions. The net loss from continuing operations was $1 per share excluding the non-cash impairment charges and $1.45 per share on a GAAP basis compared with 38 cents per share last year.
- Cash, cash equivalent and short-term investments were $92.5 million quarter-end. As compared to the same period last year, cash declined by $331.9 million principally driven by the net loss in purchases of property and equipment. These declines were partially offset by net proceeds from short-term borrowings.
- The company ended the quarter with $215 million in borrowings under amended credit facility. Borrowings were higher then expected due primarily to higher then expected net owned inventory.
- Consolidated merchandising inventories declined 17.7% from last year compared with the consolidated sales decline of nearly 10%. Domestically inventory and supply chain teams and merchants kept inventories roughly in line with sales trends.
- Sales softness experienced slowed turns leaving the higher net owned inventory and a decrease in payables.
Key questions from the second quarter earnings call conducted by Circuit City Stores, Inc. on September 29, 2008.
Colin McGranahan (Sanford Bernstein & Co.):
Could you talk about initiatives to drive traffic, and what you think you can do to try to change the brand relevance perception in the near to medium term?
Bruce Besanko: Traffic is indeed a problem. We had low double-digit declines this quarter which are somewhat worse then what we saw in the first quarter. We need to continue to improve the customer experience in the stores. We do intend to launch a new marketing campaign relatively shortly that we believe will help bring some relevance back to the brand, but you are right we are challenged with the relevancy of the brand.
John Harlow: The marketing plans that we have for the back half of the year will create important distinctions in terms of offerings that are much more customer-relevant as a starting point and candidly we know that from an execution perspective we have not done a strong enough job calling out what we do well. So in addition to the 24-24 promise and guarantees that we have, two-day home theater installation, all of the value propositions that we offer to customers, we know we have not called them out as meaningfully and my belief is as we do that, and marry that up with a different customer experience, customers will notice that and that will help hedge against some of the economic headwinds that are out there.
