The Q1 SG&A expenses were 27.8% of consolidated net sales versus 26.1% in the same period last year.
- This represents an increase of 173 basis points.
- The domestic segment’s expense-to-sales ratio rose 162 basis points from the last year rate.
- The increase reflects the overall de-leveraging impact of lower sales.
- The increase was also helped by a rise of 124 basis points in expenses related to the 65 domestic segment Superstores that have opened during the past twelve months.
- Partially offsetting these increases was a decrease of 81 basis points in compensation costs resulting from the company’s reduction initiatives.
- The international segment’s SG&A expense-to-sales ratio increased 171 basis points due to a $7.5 million recovery related to a former subsidiary that was recorded in 2008.
- The recovery, not repeated in fiscal 2009, negatively impacted the expense-to-sales ratio increase by 691 basis points of international segment net sales.
The company recorded an income tax expense of $3 million primarily related to discrete items.
- Due to the company’s valuation allowance against the deferred tax assets of its U.S. operations, the company does not expect to incur income tax expense or benefit, excluding discrete items, associated with the domestic segment during fiscal 2009.
At quarter end, the company had cash, cash equivalents and short-term investments of $92.2 million.
- This compares with $364.1 million for the same period last year.
- The $271.9 million year-over-year decline in the cash position primarily reflects purchases of property and equipment and cash used in operations.
The merchandise inventory decreased 3.4% to $1.69 billion from $1.75 billion last year.
- The decrease was fueled by continued focus on matching inventory levels to sales trends.
- Merchandise payable increased 1.1% to $933.2 million from $923 million.
- The consolidated and domestic segment net-owned inventory eased by $69.8 million and $83.6 million respectively from the previous year.
The company had $72.6 million in long-term debt as at the en of the quarter.
- This was primarily related to capital leases.
- The company had $55 million in short-term debt under the asset-based credit facility.
- The Q1 CapEX, net of landlord reimbursements, totaled $38.1 million.
- The company did not repurchase stock during the quarter and $233.7 million remained available under the current authorization as at the end of the quarter.
Second Quarter Fiscal 2009 Guidance:
- The company expects to record a loss from continuing operations before income taxes of $170 million to $185 million.
- This is in comparison with a loss of $128.2 million in the last year second quarter.
- While the expected loss is larger than the prior year period, the year-over-year increase in the loss is significantly smaller than the increase in the Q1 loss.
- The primary driver of the difference in expected Q2 results from actual Q1 results is higher expenses associated with more store openings.
- As a result of operating improvements, traction against current sales and gross margin driving initiatives, and more favorable year-over-year comparisons, the company expects a gradual recovery in the second half of fiscal 2009.
- The company believes that it has adequate cash and borrowing capacity to complete the next phase of the turnaround plan.
Full Year 2009 Guidance:
- The consolidated net sales are forecast to be unchanged from the prior year.
- The management expects a mid-single digit domestic segment comparable store sales decline.
- The company expects improvement in earnings from continuing operations before income taxes as a percentage of consolidated net sales of 50 basis points to 100 basis points.
- There management expects no tax expense or benefit, excluding discrete items, associated with the domestic segment.
- The company anticipates a reduction in domestic segment net-owned inventory from February 29, 2008 to February 28, 2009 of $50 million to $100 million.
- The management forecasts 40 to 45 domestic segment Superstore openings, including six to eight relocations.
- The company updated its forecast for CapEx, net of landlord reimbursements, to $120 million to $140 million, down from $130 million to $150 million.
Key questions and answers from the first quarter fiscal 2008 earnings call conducted by Circuit City Stores on June 19, 2009.
Christopher Horvers (J.P. Morgan): Can you talk about guidance and what you saw as a lift from the stimulus checks and why you think you show a lesser loss in the third quarter year-over-year?
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