This summary is based on the second quarter fiscal 2008 earnings call conducted by Circuit City Stores, Inc. (CC: chart) on September 20, 2007.
Chairman of the Board, President, and CEO: Philip J. Schoonover
President of Retail: Danny Clark
Executive V.P - Merchandising, Services and Marketing: David L. Mathews
Chief Financial Officer, Executive Vice President: Bruce H. Besanko
Director, Corporate Communications: Bill Cimino
Key Investors Issues
- Net loss totaled $62.8 million.
- The Retail Point of Sale System has been rolled out to 134 stores.
- The company opened nine new and four relocated stores.
- On InterTan, a new leadership team was put in place in Canada.
Second Quarter Highlights
Net sales decreased 6.2% to $2.64 billion from $2.82 billion in the prior year as domestic and international segment sales slumped 6.3% and 3.9%, respectively.
The fall in domestic sales was driven by comparable store sales decline of 8% though the comparable store sales change improved in each successive period across most regions. Regional sales were weak in the Southeast region and California.
- The information technology and entertainment categories had positive comparables, as did the web channel. The international segment sales were down 3.9%, reflecting the impact of the year-over-year net decrease of 57 locations and a comparable store sales decline of 4.4%.
Net loss totaled $62.8 million, or 38 cents a share, compared with net earnings of $10 million, or 6 cents a share in 2007.
- Gross profit margin was 20.7%, down from 23.8% in the prior year as domestic segment gross profit margin decreased 331 basis points driven by a decrease in domestic segment extended warranty net sales and a greater mix of PC hardware sales as well as a decrease in PC hardware and television margins.
- Planned initiatives in pricing, sourcing, promotional effectiveness and solution selling are expected to benefit the domestic gross margin rate in the upcoming quarters.
- SG&A expenses increased 3% to $677.9 million following the overall de-leveraging impact of lower sales, increases in occupancy costs due to store openings, and foundational improvements and information technology and services.
- The firm took action to reduce SG&A expenses by $150 million and an estimated $200 million in the next fiscal year given the structural changes to the flat panel television business.
The balance sheet was strong with cash and short-term investments of $424 million and only $59 million of long-term debt related to capital leases.
The cash and short-term investments position decreased by $175 million from the prior year due to cash used to purchase PP&E of $320 million, and $194 million used to repurchase stock and to pay dividends.
Merchandising inventories were down marginally from $1.85 billion in fiscal 2007 to $1.83 billion as a result of a reduction in inventories in the international segment.
- The firm did not buy back any shares, however, shares repurchased to date total 60 million worth $966 million. The current board authorization for future share repurchases amount to $234 million for future share repurchases under current board authorization.
- The company successfully opened nine new and four relocated stores, including an entirely new concept for the 20K stores, and finalized plans to open 45 total stores, 25 of which will be the latest retail concept in the second half.
The multi-year turnaround:
- Strategy entails transforming retail experience into a true multi-channel experience, resulting in a strong web and call center presence, building loyalty and providing detailed information about products and services.
- Firedog associates will be expected to complete the experience with a suite of services in stores or online, or even in the customer’s home.
- New procedures were rolled to more than 650 stores.
- Existing liquidity from current cash flows as well as a $500 million revolving credit facility is considered adequate to fund the multi-year turnaround.
- The real estate strategy will be evaluated, including the timing of store openings, prioritizing relocations over incremental store openings, and looking at the total quantity of new stores.
Update on InterTAN:
- New leadership team in place in Canada and gaining traction on its transformation efforts.
- Improved pretax profit performance despite lower sales.
- The firm continues to explore strategic options to maximize shareholder value but current challenges in the credit markets limit any action.
Retail Transformation Work
- The early stages of retail transformation were complex requiring a significant amount of retail management time to implement, however transformation-specific activities are on schedule.
- The amount of change created a series of distractions in the stores, leading to a year-over-year decline in conversion and attachment rates, including extended warranties but also impacting other areas of the basket.
- The overall purpose of the transformation has been to reallocate labor in order to improve the customer experience, improve sales and margins, and improve labor productivity through the following fundamental changes:
