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Circuit City Stores, Inc. (CC)

F3Q07 Earnings Call

December 19, 2006 11:00 am ET

Executives

Bill Cimino - Director, Corporate Communications

Phillip Schoonover - President, Chairman, Chief Executive Officer

Mike Foss - Chief Financial Officer

Doug Moore - Chief Merchandising Officer

Danny Clark - EVP, Retail Stores

Ron Cuthbertson - SVP, Supply Chain

Analysts

Matthew Fassler - Goldman Sachs

Bill Sims - Citigroup

Gary Balter - Credit Suisse

Danielle Fox - Merrill Lynch

Scott Ciccarelli - RBC Capital Markets

David Strasser - Banc of America Securities

Colin McGranahan - Sanford Bernstein

Daniel Binder - Buckingham Research

Brian Nagel - UBS

Mike Baker - Deutsche Bank

Mitch Kaiser - Piper Jaffray

Chris Horvers - Bear Stearns

Presentation

Operator

I would like to welcome everyone to the Circuit City third quarter results conference call. (Operator Instructions) I would now like to introduce your speaker, Mr. Bill Cimino, Director of Corporate Communications of Circuit City Stores. Mr. Cimino, you may begin you conference.

Bill Cimino

Thank you and good morning. We appreciate your participation in today's call. I need to remind you that during the call, we may make some forward-looking statements which are subject to risks and uncertainties. We refer you to today's release, the MD&A and our annual report on Form 10-K, and to our other SEC filings for additional discussions of these risks and uncertainties.

Speaking on this call are Phil Schoonover, Chairman, President and Chief Executive Officer, who will review third quarter performance and update you on the continuing efforts to improve the business; and Mike Foss, our Chief Financial Officer, who will review our financial performance and provide an update on several topics. We also have Danny Clark, Doug Moore, Peter Weedfald and Ron Cuthbertson to answer questions during Q&A.

With that, I'll turn the call over to Phil.

Phil Schoonover

Good morning. Thank you for joining us on the call today. The complexity of our turnaround has increased in the near term by the heightened volatility in our consumer electronics business, coupled with our efforts to drive this much change throughout the business. We remain committed to our strategic framework and running our business for long-term success. We are aggressively planning to accelerate our major transformation initiatives. Today, I'd like to talk about what we saw in the environment during the second quarter, what changed for us during the third quarter, what we have seen so far during December and what we are doing to create long term, sustainable growth.

Over the last three years, we have made significant progress, as evidenced by improved overall financial performance; sales growth in our strategic pillars of win in home entertainment, digital home services, and multi-channel retailing; we have improved our associate engagement; w We have a growing real estate pipeline, and we have continued investments in talent, processes, and IT systems.

A different set of challenges began unfolding late in the second quarter. As we told you on our last call, we saw volatility in our results and revenue growth moderated somewhat. Across the business, we are up against tougher comparisons from the prior year. We narrowed our focus in order to drive a very strong back-to-school season in the technology categories. The macro economic environment appeared volatile and the competitive environment was heating up. Despite these factors, the second quarter as a whole exceeded our revenue and profit plans. As we reported to you in our second quarter call, our business in September had improved; and in fact, was above plan.

A number of the internal and external factors negatively impacted our third quarter results. During the quarter, we were responsible for some of the slippage in our execution in the following areas: pricing and markdown management, our overall promotional effectiveness, and the prioritization and editing of the holiday preparation plan we asked our stores to execute.

We have learned from these and are doubling our efforts to improve these basic retail execution areas. Looking externally, the most significant change in our business in the third quarter has been the acceleration of the frequency of the price drops from our major vendors and the sea change in the amount of overall price declines in the flat panel television business.

Second, we saw a slight decline in store close rate, which was primarily due to a sales mix shift away from entertainment software, impacting our revenues. Third, we experienced significant notebook computer out of stocks in October, following our strong back-to-school performance, impacting revenues. Fourth, in PC hardware, we saw falling average selling prices and declining basket sizes in notebook and desktop computers, impacting revenues and margin. And fifth, along with the industry, we experienced a slowdown in the sale of digital satellite radio, which impacted both sales and margins.

Let me discuss specifically the flat panel television business. While we expected significant average selling price declines, the magnitude and velocity has been far more than we had anticipated. We did not expect that our three major vendors would enter into a fierce market share battle during the important holiday selling season. Our budgeted average selling prices in flat panel televisions factored in a shift to larger screen sizes and new technologies like 10-80-P.

In medium and large LCDs, the rate of price decline was 50% more than we had budgeted. An even greater impact was felt in plasma, as the rate of price decline was three times greater than we had budgeted. With all of these factors in play, our third quarter sales in flat panel TVs -- both in unit and dollar terms -- actually came in above our sales plan, and growth in flat panel TV sales was the primary driver of our sales growth during the quarter.

As we have stated, home entertainment is a stake in the ground category, and as such, we must remain competitive in this important category.

Fiscal 2007 merchandise margin were tracking fairly closely with prior year until October. Due to the competitive pressure, we expect merchandising margins to continue to trail last year's performance for the remainder of the year. This is due to several factors.

The declining average selling prices are resulting from vendor moves as well as competitive moves. These directly pressure margin rates and margin dollars at the time of sale. So at the time of sale, we are experiencing more competitive price matching in the store. After the sale, we have a 30-day price protection program; during this time of rapid price declines, customers are returning more often to get the price match. This also pressures margin dollar rates.

In addition, our per unit dollar attachments of accessories, services and other basket items typically adjust downward as the television price declines. As one would expect, we have seen total sales of attachments growing and margin rates on attachments steady; but the gross profit dollar increase has not been large enough to offset the declines in flat panel TV gross margin dollars. The simple math is that while units grew, the volume came at lower price points, and therefore lower gross profit dollars.

In total, our third quarter results came in significantly below plan.

With respect to December, we see a continuation of trends through December 18th. We have seen domestic comparable store sales in the mid single-digits and the gross margin pressures have continued. While we are taking action daily to minimize the margin impact, we expect these trends to persist through the fourth quarter. Therefore, we have revised downward our sales and profit guidance for the year. In a moment, Mike will talk more specifically about our guidance.

At our analyst conference in May 2006 we laid out a goal for earnings before taxes as a percentage of consolidated net sales of 5% in a three to five year timeframe, and we remain committed to achieving that goal. The path to this goal was through a series of initiatives that focused on improving sales and gross margin as well as improving the efficiency of our expense structure.

Most of the initiatives are the same large opportunities that we have discussed with you before, including: driving sales and profits through our pillars of win in home entertainment, services and multi-channel retailing; improving close rates through unleashing the capacity of our associates with our retail standard operating procedure work; improving margins by optimizing prices, assortments, inventory and marketing through our merchandising transformation work; and improving margin for the greater use of direct sourcing; improving revenues by transforming our real estate, including new formats; and finally, improving profitability by rationalizing our SG&A structure.

The difference is that we have efforts underway to accelerate this work, increasing our speed to benefit, and we expect to mine significant value from these initiatives over multiple years. With that being said, let me turn to the progress that we made to improve the business during this past quarter.

First, we saw significant improvements in our supply chain. We reduced consolidated net owned inventory from the prior year by $363 million by better aligning the receipt of product with the time of sale and reducing non-working inventory, reducing stock, all while providing improved customer encountered in-stock.

Second, turning to our systems transformation. During the quarter, we brought in Bill McCorey as our Chief Information Officer. As we reported during our second quarter call, we began the pilot of our replacement POS system in a few stores in a single market. The pilot stores met our expectations and we remain on track to begin a rollout after the holiday selling season, and to complete it by the middle of next fiscal year.

Regarding our merchandising systems transformation, during the quarter we launched the second business release. We are 16 months into our three-year journey, on schedule and on budget. This set of ReTech tools will further enable our transformation work. Also, as many of you have noticed, we are testing the versioning of our weekly newspaper inserts. We expect to have multiple versions of our inserts early next fiscal year. This will help us manage margins more effectively.

Third, let me speak to our multi-channel efforts. We saw continuing strong performance from Circuit City Direct. Web-originated sales increased 67% and call center sales increased 84%. We continue to add to our online assortment. We're providing a compelling value with competitive pricing and promotions online. We relaunched our website, CircuitCity.com, on November 7th. While we made many changes to the site, a major focus area for this new release was on solution selling. We unveiled a new mass test that emphasizes three ways to buy; we added perpetual shopping carts so the customer doesn't have to navigate through multiple pages to make their purchase; and, we enhanced solution offerings, including the addition of FireDog services. Selling the total solution is important to growing average ticket and improving profitability with our web-generated sales.

We continue to invest in talent and infrastructure and opened a new call center with state-of-the-art technology to support direct sales via the phone. The results of our multi-channel efforts are evident. According to TrackLine, overall CE hardware online market share data for the September calendar quarter showed our market share grew 77% from the same period the prior year, and we are tied for third with Amazon.com, behind Dell and Apple.

Finally, I'll touch briefly on services. We successfully launched our FireDog brand PC and home theater services, and saw another quarter of very strong revenue growth; 72%. We continued to build operational excellence in relation to recruiting, training, sales processes and a standard operating procedure, all focused on providing a complete customer experience while improving profitability. We also began experimenting with bundles to simplify the experience for both the associate and the customer, and enhance our profitability in services. We're preparing to capitalize on the transition to Microsoft Windows Vista and have more than 600 PC technicians who have received Microsoft-certified professional training and certification.

Mike will discuss real estate in greater detail, but we are pleased with the growth in our pipeline of new superstore locations and we are learning from our experiments with format size and space utilization.

Finally, regarding our retail holiday preparations, we completed the home entertainment department remodels. Including work we did in the second quarter, we touched more than 500 stores to upgrade our advanced TV presentation. We also certified more than 5,000 associates in home entertainment sales, including stringent knowledge and demonstration requirements, all focused on providing a superior customer experience in buying advanced televisions.

Finally, let me make an additional point. We forced many changes on our stores during October and November, which negatively impacted our store associates' ability to execute during the quarter; just one of our lessons learned for the past quarter. Before I turn the call over to Mike, I want to say, again, that we are aggressively preparing to accelerate our major initiatives and we remain committed to running our business for profitable, long-term success.

Finally, I would like to personally thank our 58,000 associates for their continued hard work and dedication during this turnaround.

Mike Foss

In the next few minutes, as usual, I'll provide a little more information about our third quarter performance as well as our updated fiscal 2007 guidance. First as Phil mentioned, this is a very volatile quarter characterized by a strong September performance and weak October/November performance. October and November were impacted by aggressive price reductions, particularly in the flat panel TV business which were heavily driven by a fight by several TV manufacturers for market share and compounded by strong competitive activity. This, combined with the internal execution issues Phil discussed, resulted in a very disappointing financial performance for the quarter.

We chose to remain competitive in our key stake in the ground categories, and while we did drive some reductions in expenses versus our forecast during the quarter, we were limited in the amount we could get out due to three factors: the timing of the price reductions; the relatively heavy investment spending we are doing in IT, Circuit City Direct innovation; and the firm belief that we did not want to negatively affect our business as we head into the all important holiday selling season.

Now turning to our third quarter performance, for the quarter, net sales increased nearly 7% to $3.1 billion. Our domestic segment sales grew more than 7%, due to a 5.5% comp store sales increase, partially driven by our growth in web-originated sales of 67% during the quarter and 15 net store openings since the same period last year. Now let me make two quick comments about sales on Thanksgiving as well as the Friday/Saturday/Sunday period after Thanksgiving.

On Thanksgiving Day, we set a record for sales on CircuitCity.com with sales growing more than 200% versus a very strong prior year. Also, domestic sales during the Friday/Saturday/Sunday after Thanksgiving were very strong, showing growth of approximately 17% over a very strong comparable weekend last year. Sales of promotional items, which were those reflected in our inserts for Friday and Saturday, grew substantially year to year. We wanted to build good traffic and sales momentum at the start of the holiday selling period. We fully accomplished that goal by significantly exceeding our sales plan for the three-day period.

Our international segment sales grew 0.6%; comparable store sales declined by 3.7% in local currency. This decrease was more than offset by the favorable impact of exchange rates, which added 4% to sales growth as well as growth in sales to our dealer channel. It's important to note that in the third quarter of last year, we spent over $8 million in rebranding expense, the bulk of which was for incremental advertising.

Consolidated gross margins declined 192 basis points from last year. Domestic gross margin declined 190 basis points due to declines in margin rates in flat panel televisions, PC hardware and movie software. As Phil discussed, flat panel televisions and PC hardware experienced sharp average selling price declines which pressured gross margin rates. We also continued our promotional pricing strategy in movies to help drive traffic into our stores. As a side note, approximately 70 basis points of this gross margin rate decline during the quarter can be attributed to the stronger sales and promotion activity during the Friday/Saturday/Sunday after Thanksgiving relative to the year earlier period.

International segment gross margins declined by 165 basis points but did not have a material impact on the consolidated gross margin. The decline resulted primarily from a sales mix shift to name brand computer hardware and iPods combined with clearance activity related to the assortment rationalization process that is taking place.

Consolidated SG&A expenses as a percentage of sales declined 43 basis points with improvement in both segments. In the domestic segment, which contributed 17 basis points to the decline, we had several puts and takes.

On the benefit side, advertising expense was down as we reallocated spend among the quarters, payroll improved as we saw good leverage on the sales growth we drove and we recognized a net benefit of $7 million in relocation expense in the quarter. This was driven by the reversal of lease termination charges for seven sites as we made the decision to reopen previously vacant locations as outlet stores, partially offset by the cost incurred by relocating four superstores during the quarter. On the negative side, we incurred approximately 120 basis points of net incremental spend primarily related to investments in IT, Circuit City Direct and innovation activities. Also, last year's results included a $9 million benefit from the Visa/MasterCard settlement.

International segment SG&A declined approximately 400 basis points due to the absence of the rebranding costs that impacted last year's result. Excluding those rebranding costs from last year's results, SG&A expense would have been up in dollars and as a percent of sales, driven primarily by the impact of foreign currency exchange rates and higher store counts.

Earnings before tax declined to a loss of 0.9% this year, compared with earnings of 0.6% last year. For the first nine months, earnings before tax percentages essentially breakeven for both years. The net result for the third quarter was a net loss from continuing operations of $16 million, or $0.09 per share, compared with net earnings of $10 million or $0.06 per share last year.

Turning to the balance sheet, at November 30 we had cash, cash equivalents and short-term investments of $898 million, up from $550 million as of November 30, 2005. The year-over-year change principally reflects cash flow from operations, primarily driven by significant decrease in net owned inventory. This was partially offset by capital expenditures and share repurchases. Consolidated merchandise inventories declined 5% compared with last year as we reduced non-working inventories while improving customer encountered in-stock levels.

We are satisfied with our inventory position and its quality as of quarter end. Our net-owned inventory decreased $363 million, $332 million of which was in the domestic segment. As Phil discussed, we are very pleased with this progress towards our long-term goal of reducing net-owned inventory to zero. We now expect that we will reduce fiscal year end domestic net-owned inventory by $75 million to $125 million. We do not expect a similar level of net-owned inventory reduction in the fourth quarter that we had in the third. The timing of our seasonal inventory build disproportionately affects our November 30 position.

Next, an update on our fiscal year '07 financial guidance. We provided a full list of fiscal 2007 expectations in this morning's press release. I'll provide a summary of the outlook. We expect consolidated net sales growth of 8% to 9%, down from 9% to 11%. Domestic segment comparable store sales growth of 6% to 7%, down from 7% to 9%. Incremental expenses in information technology, multi-channel capabilities and innovation activities, primarily related to expenses for investments that will total approximately 90 basis points as a percentage of consolidated sales, down from 100 basis points. Earnings from continuing operations before income tax as a percentage of consolidated sales of 1.0% to 1.4%, down from 2.0% to 2.4%. A reduction in net-owned inventory at year end of $75 million to $125 million. Our revised outlook for fiscal year '07 does not include any potential benefits or expenses from our work to accelerate our sales, gross margin and expense initiatives.

One additional item we should point out regarding our outlook. We continue to be very pleased with the success of our in-store pick-up option where our customer can order online and pick up in store. We have seen a significant sales mix shift in our online sales that is depressing the percentage of sales picked up in our store. Namely, we are selling more products for home delivery, such as flat panel televisions, as well as more products in our web-only extended assortment. Clearly both of these shifts are overall positive for our business and consistent with our strategy.

However, we now expect that more than half of our fiscal year '07 web-originated sales to be picked up in stores as the shift to more televisions in online only products continue. This is down from approximately 60% of web-originated sales in fiscal 2006 using our in-store pick-up capability. In addition, we continue to expect to generate $1 billion or more in web-originated sales during this fiscal year.

During the quarter, we bought back 0.7 million shares of stock, for approximately $20 million or an average cost of $27.19 per share. We have now bought back a total of 53 million shares for $820 million or an average cost of $15.51 per share. We have approximately $380 million for future share repurchases under our current board authorization.

Now just a quick discussion of our domestic real estate status. So far this year, we have opened 13 new superstores and relocated six stores and will meet our fiscal '07 goals. We have remodeled two stores, and we have completed the interior refresh work at approximately 20 stores and approximately ten more are scheduled. Exterior work has been completed on only about five of these refreshes, primarily due to permitting issues as well as store disruption concerns during the critical drive time for the company. Once the refresh work is complete, we will study the financial impact and decide whether we should extend the refresh work into other markets.

With respect to fiscal year '08, our real estate team is continuing to build a strong pipeline of approved new locations. Based on the current pipeline, we expect to open 60 to 65 new and relocated stores in fiscal year '08, with 15 to 20 of those being relocations. This clearly represents a significant acceleration from fiscal year '07 levels. We remain on track for the target that we first introduced at the may analyst conference of opening 75 to 100 new and relocated stores in fiscal year '09.

Now we'd like to open up the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Matthew Fassler - Goldman Sachs.

Matthew Fassler - Goldman Sachs

Thanks a lot, and good morning. I would like to get a little more detail on how the economics of the flat panel business are evolving. I was hoping if you could specifically address what you are seeing with your flat panel ASP, and how that compares to prior quarters? Also, what you are seeing evolve in terms of the relationship between gross margin rate and average ticket for flat panel?

Doug Moore

A couple comments on the ASPs for the quarter: as Phil indicated in his comments, we did not predict the drop in flat panel rates to be as significant as they were across plasma and LCD. It was a combination of factors between vendors and competitive pressures. We believe that business has rationalized over time and this has the opportunity to play out a little differently in the future.

If you would tell me the second question again that you had about the basket, is that what you're saying?

Matthew Fassler - Goldman Sachs

If I can go back to the first part. Can you tell us what the trend was for average selling prices? I guess we haven't heard clearly whether they were down for you; and if so, by what magnitude and how that compares to prior quarters?

Doug Moore

Versus our expectations in medium and large LCDs, the rate of decline was 50% more than we budgeted, and an even greater impact was felt in plasma where the price decline was three times greater than we budgeted in the quarter.

Matthew Fassler - Goldman Sachs

So are you willing to indicate whether the average flat panel TV price was up or down for you for the quarter?

Doug Moore

Clearly, it was down.

Matthew Fassler - Goldman Sachs

Okay. Fair enough. As for the second question, do your gross margins, by definition, need to change as prices fall? In other words, in a level competitive environment, does $1,000 TV by definition have a lower gross margin than a $1,500 TV? Or, was the margin pressure that you saw simply a function of the intensifying promotional activity that you saw?

Doug Moore

Matt, I think that will play out differently over time. What we have going on here is we have vendor movements within the marketplace as well as competitive pressure, so I don't think we're in a position to predict that at this point.

Matthew Fassler - Goldman Sachs

Just one final follow-up. You indicated that domestic comps are tracking in the mid-singles for December. Correct me if I'm wrong, it looks like the guidance that you gave for the quarter is based on the domestic comp of zero to two for the quarter overall. So first of all, am I right on that? Secondly, if so, can you reconcile your December observations with the full quarter guidance?

Mike Foss

Again, I think the, what we have given you is a month-to date view as of yesterday in domestic comp store sales and it's consistent kind of with our full-year guidance that we adjusted.

Matthew Fassler - Goldman Sachs

But if you think about this, it seems like if you just plug in the first nine months and then you look at the full year numbers, you would get a zero to two increase. Is the math wrong on that in your view?

Mike Foss

Again, we are early in the quarter. We have our best view of what we will drive for the full quarter reflected in that guidance, Matt.

Matthew Fassler - Goldman Sachs

Do the comparisons change in a meaningful way, if you could remind us, as you move through the quarter?

Mike Foss

I don't think we commented last year other than we gave you December sales. We didn't comment on January or February monthly data. .

Matthew Fassler - Goldman Sachs

Thanks so much.

Operator

Your next question comes from Bill Sims – Citigroup.

Bill Sims – Citigroup

Thank you. I just wanted to touch upon the long-term operating margin guidance. It seems a little aggressive to still provide that guidance if clearly we're seeing structural change take place in this business. Are you seeing something internally within these initiatives that if you are able to accelerate them, is something going better than you initially planned? Or it is just too early to really update that guidance range?

Phil Schoonover

We continue to see the increase in revenue in the TV business, but under the heading of accelerating, we really think that pricing, the promotional effectiveness, and the balance of sales within the TV business is our biggest opportunity for accelerating improvement. The goal of the 5% EBIT margins never predicted that one engine, simply the television engine, would get us there. We had a combination of using the television business to drive an overall profitable basket of services and accessories; the online growth, which gives us more leverage over our G&A and helps us grow our market share; and then finally, the industry growth overall of the $50 billion in CE growth on the revenue side. Then we had approximately 11 initiatives that attacked margins, revenue and SG&A sitting underneath that. Some of them are easier operational efforts, and some of them require systems and process and have to be phased. Deceleration efforts, frankly a lot of them are going to be aimed at our margin and SG&A activities.

Mike Foss

If I could add on to that one point. As Phil mentioned, we had a road map to get to the 5% in the three to five year timeframe. Our view of that has in fact changed a little bit in the sense that we believe gross margin rates will be lower than what we had assumed when we first laid that out, so what we are doing is trying to drive as part of these initiatives to offset that with an improved expense structure than what we originally modeled back in that timeframe. So we're reflecting that change and we're trying to offset it in the expense side of the equation. We believe we can do that in that three to five year horizon.

Bill Sims - Citigroup

Mike, of the warranty decline you saw year-over-year, how much of it was just as a result of lower average ticket on televisions, lower attachment rates versus an execution issue amongst your sales force?

Mike Foss

Yes, I think really both things are happening. Obviously as TV prices come down, the warranty moves somewhat in relation to it. That's one piece of the equation. We believe, as we talked there were some execution issues within the company that didn't drive the level of attachments in aggregate that we would have liked to have seen, so there's a number of issues related to that.

Phil Schoonover

Bill, remember fundamentally we're shifting to FireDog services and the overall basket as being the measurement over time. We think we will be less reliant on the sale of service plans, so in aggregate we look at services as one basket we actually made progress.

Bill Sims - Citigroup

Thank you, Phil. Finally, I don't know if you want to talk about it, but your cash position is building. Can we look for a more aggressive share buyback program in place in 2007?

Phil Schoonover

Yes, clearly, Bill, that's an option. Obviously, remember a big piece of the cash position increase was related to the improvements we made in net owned inventory, and as we pointed out, being north of a $300 million improvement year to year; we expected to be in the $75 to $125 million as we end the year. Clearly we want to continue to focus on that.

Secondly, we do have about $380 million left under our existing board authorization for the share repurchase so we do have the capability to accelerate clearly over the $20 million that we bought back this past quarter.

Bill Sims - Citigroup

Thank you very much. Good luck.

Operator

Your next question comes from Gary Balter - Credit Suisse.

Gary Balter - Credit Suisse

One question with two parts. As we look out, as we step back and we look at the company and we think about what happened this year, which is we finally got the TV cycle that we have been waiting for essentially for the last 15 or 20 years, Phil and we can't make any money at it. As an investor, what confidence should we have that as we go forward and it actually gets more commoditized, that we could actually get to the earnings that you're projecting out? Or is this sector just doomed to failure?

Part B of that is the Black Friday promotions that you do and Best Buy does, does that play into the hands of the discount stores? Have you thought about ways of being better on selling the service side of the business that you do so well versus just getting to the price gains each year? Thank you.

Phil Schoonover

Let's start with the size of the TV business, the growth opportunity. So we believe it's an unprecedented overall growth opportunity, and we're still very confident that will be the engine that drives many of our other strategic initiatives. So we expect the rate of decline to revert to a more normalized rate -- albeit rapid -- but it will be more normalized.

What actually happened in the quarter was that one of our largest vendors had excess inventory, more based on cosmetics than the value of the product, and they began to move prices. Unfortunately, they were supporting one type of business, the plasma business, and their two biggest competitors decided to come after the LCD business. That was unforeseen; frankly, in my experience over the years, unprecedented. We think that it was driven by more of a one-time event than inventory build-up of plasma TVs by one of our vendors, and we think there will be more rational behavior going forward.

With that said, we never said the TV business was our only cash cow. We said that we would grow our services business to dramatically enhance the profitability of our overall company and that we would continue to execute better in the stores with providing more customer solutions. Specifically, the basket of products and services that return profitability to the TV business.

Finally, we said that our direct business, the web call center, in-home sales would be a big growth engine to help us leverage expense and continue profitable growth. So we have several growth engines. They are in varying phases of execution, and obviously we have a long ways to go in all of them.

The other thing I would like to say here is we're not sure that the competitive dynamic is over yet. Cary specifically, we find that customers want delivery of larger flat panel televisions. We find they want installation of larger flat panel televisions, and then we also find on price points over a certain hurdle rate, that they need things like financing. So while it was not a pretty profit picture for this quarter, we think that our strategy to hold the hill in the larger flat panel televisions is important to our long-term relationship we have with customers, and we were not prepared to give our customers up to our competitors during this quarter.

Gary Balter - Credit Suisse

But what stops that from happening next Thanksgiving?

Phil Schoonover

I think the major changes that we see is that the price points that are out in the marketplace, elasticity should catch up with demand, and it happened so rapidly this year I don't know if consumers really understood how affordable flat panel televisions were. So we think that some of that elasticity will settle out. We also think that based on inventory levels and the realities of the financial pressure that this is putting on some of our vendor partners, that we expect some more rational behavior at this time. The jury is still out on how successful certain competitors were selling bigger TVs this holiday season. We expect that they were not as successful as they had hoped to be.

Gary Balter - Credit Suisse

Thank you.

Operator

Your next question comes from Danielle Fox - Merrill Lynch.

Danielle Fox - Merrill Lynch

I have two questions. I'm wondering if any of the IT enhancements will improve your ability to anticipate and respond to changes in the promotional environment? I know you went through what some of the systems will allow you to do, but if you could just provide a little bit more detail on whether or not they'll give you better visibility on price declines, particularly in TVs?

Doug Moore

The first two business releases were more foundational for the MFT system. They revolved around a data warehouse and then some forecasting capabilities. Later this year, we pick up capabilities that do allow us to track more closely promotional effectiveness, as well as allow us to put products in different assortments in different parts of the country and to monitor the financial performance of those assortments, so there will be progress against those infrastructure capabilities this year.

There's also a program called Connect3 that allows for actual promotional pricing to be different in different parts of the country. We currently are a bit restricted through brute force pricing promotionally which does not allow us the flexibility to be more or less competitive around the country and to move assortments around. So there will be some benefits that accrue in the upcoming year. The Connect3 stuff will be occurring within the middle part of the first quarter, and we are moving actively to make that a significant part about how we go to market.

Phil Schoonover

I might add some of our execution issues were not dependent on systems. They were dependent on process plus practice. We dropped the ball in a couple of areas, promotional planning being one, and then just with the rapid number of price changes that we saw in October and November, we lost some of our controls on just good, basic planning and merchandising. We have reinforced those efforts and going forward will double down on our focus and accountability in those areas.

Danielle Fox - Merrill Lynch

I have one other question. I'm just wondering if you felt like there was any tradeoff in the quarter between the gross margin and the payables terms? Because there was a pretty stark contrast between what happened to the gross margin and then your payables leverage, and you think of both of them as associated with vendor negotiations. So was there any trade off between the two?

Mike Foss

No, there was not a tradeoff. I mean, the narrow inventory improvement was driven by a couple of factors, the big one being the timing of when we took delivery of products. We took it later in the quarter than we had historically. As Phil mentioned, we reduced safety stocks and such, so that was the big driver. Remember, with this we actually improved in-stocks in the stores, even though net owned inventory went down pretty dramatically.

Phil Schoonover

So it wasn't a renegotiation of payment terms that traded off for margin, if that's specifically what you are asking.

Danielle Fox - Merrill Lynch

I was just wondering if maybe the decision to bring inventories under control gave you a little bit less buying clout with the vendors, just because you were being more careful about the build.

Mike Foss

No, it's just part of our overall improvement in our supply chain organization and processes within the company.

Danielle Fox - Merrill Lynch

Okay. Thank you.

Operator

Your next question comes from Scott Ciccarelli - RBC Capital Markets.

Scott Ciccarelli - RBC Capital Markets

I have a question similar to Matt's commentary. I'm also coming up with about a 2% comp for the fourth quarter based on your guidance, but the numbers you provide also seem to imply a nice bounceback in gross margin. Now, given your commentary regarding what you have seen so far in December, is it fair to assume you are going to be focusing a bit more on margin and a bit less on driving sales growth in the January/February timeframe?

Mike Foss

We want to drive everything, so it's not just we're going to pull back on sales. As we talked about in my part of the script, the whole Friday/Saturday/ Sunday after Thanksgiving that because of the activities we did, that cost us about 70 basis points in gross margin in the third quarter.

Scott Ciccarelli - RBC Capital Markets

All right. So just not expecting promotions to reach that kind of competitive level?

Mike Foss

We expect it to be very competitive. But I wanted to make one point: in our stake in the ground businesses, we are going to be competitive. We have to be. Strategically, it's critically important for us.

Scott Ciccarelli - RBC Capital Markets

Fair enough. It sounds like there was some clearance activity in the quarter. Is there any way to quantify the impact on the margin? Was that the regular course of doing business, or is there some stuff we might be able to look at as potentially one-time in nature as you cleaned up the inventory situation?

Mike Foss

If you are reflecting the comments we made in the script, it really was related to the international segment. There is a lot of work going on in assortment rationalization up in Canada in that we have too many SKUs in our stores and Steve Pappas and his team are doing a good job of really rationalizing the assortments. In the quarter, in essence, we did some clearance activities with that assortment rationalization, but that was an international segment statement.

Scott Ciccarelli - RBC Capital Markets

Okay, so not really a domestic impact. The last question is just regarding gift cards. What kind of trends did you see on that? What kind of impact do you believe that could have on the fourth quarter? Thanks, guys.

Mike Foss

Gift card sales have been up pretty strongly for the year. In terms of actual sales, during the year to date, we're up about 40%. In the third quarter, we're up about 55%. So clearly it will have some benefit in the fourth quarter, but I wouldn't want to try to quantify that.

Scott Ciccarelli - RBC Capital Markets

Thanks a lot, guys.

Operator

Your next question comes from David Strasser - Banc of America Securities.

David Strasser - Banc of America

On the attachment side, how much of the weakness do you think was seasonal and just the fact that it was on that Black Friday weekend where it was just so crowded in the store that it just made it hard to sell?

Danny Clark

I think more the weakness was driven off of a few factors. One is we drove a tremendous amount of change inside our stores this year related to remodels, resets, activities and stores were involved in getting the stores ready for the holiday. We expected seasonal pressure, more traffic for Black Friday, we worked very hard on those plans. The biggest thing that put pressure on our baskets is the downward trend in average selling price on the TVs and the PCs.

On the other side of that, we have had significant growth, as we mentioned, in the FireDog services brand and we felt good about that growth, but the pressure that we faced in the stores with the amount of change that we drove and the ASP declines did put pressure on the basket for the quarter.

David Strasser - Banc of America

One of the things we have been tracking is price per inch on the flat screens. I think over the last year or so, we have generally been told that the mass market, it hits the mass market in the mid-30s, and this year it has gone from the mid-60s per inch; a 42-inch plasma from the mid-60s to the mid-to high 30s, down about 40%. Assuming that's the base going into next year, do you think it gets more difficult to comp going from the mass market to a lower mass market area? Even if you get the same percentage.

I'm trying to understand how you can get that continued unit comp similar to what you got this year to offset that price decline, when we're at that more mass market area price point?

Doug Moore

As Phil mentioned in his comments, we had been skewing our mix towards 10-80-P, the traditional role that Circuit City has played. How it predicts out in buy-in spaces versus the mass market, I don't think we are in a position to make a guess on this call. Obviously, the activity in the last quarter is very much involved in how we think about the future but again, I don't think we're in a position to make a prediction like that. We're very excited by the 10-80-P growth and the screen size that are increasing as part of that mix.

Phil Schoonover

I'd just make two additional comments here. When you have this rapid of a price decline in this short of a period, preparing plans that the stores can execute well is a bit of a scramble and you lose some execution quality in that translation. So in other words, we planned a basket at X price and it goes to X minus 30% or X minus 50%, the basket may not make as much sense to the consumer or the associate. So just our ability to react this quickly during this peak holiday season cost us some execution. So on the margin side, I'd reinforce that we're just getting started in the home theater installation business. There's a huge opportunity to enhance our margins there, and there's operational effectiveness tools like promotional effectiveness, assortment optimization and markdown optimization that we're basically just beginning that work today.

So if you flip that over to the revenue side, we exceeded our revenue plan in television for the quarter with a limited amount of consumer awareness because the price drops were so extreme and in such a condensed period of time, I don't think the elasticity has caught up with the actual price drops.

So our point of view would be a bit more rational pricing going forward too from some of the largest producers of these televisions globally. I think with all of those moving parts, it's difficult to predict so we're going to take a conservative approach to revenue and margins and get to work on the cost side.

David Strasser - Banc of America

Thanks a lot.

Phil Schoonover

Thanks, David.

Operator

Your next question comes from Colin McGranahan – Sanford Bernstein.

Colin McGranahan - Sanford Bernstein

Good morning. First question on FireDog, 72% growth you pointed to, obviously very strong. Can you just aggregate that at all between the TV install business and the more core PC services business? More between in-store service revenues and at-home revenues?

Danny Clark

We had our largest revenue increases in the HTI, home theater installation, where we put significant amount of work in that over the quarter. The way we're thinking about the services business is that we can offer a single price to the customer with FireDog, both PC installations and home theater installations. We have been pleased with our progress, and we're pleased with the 72% growth for the quarter. We have over 600 people Microsoft certified and we continue to make progress in both of those areas.

Colin McGranahan - Sanford Bernstein

Second question for Phil. Phil, I think you said you were aggressively preparing to accelerate these major initiatives. You did provide a little insight into what those will be. How do we think about that in terms of the reinvestment with this year at 90 basis points versus previous guidance of 100? Does this mean that you have to spend a little bit more in fiscal '08 to start to get some of the benefits in fiscal '08 and in fiscal '09? So how do you think about the incremental reinvestment as you are accelerating these initiatives?

Mike Foss

Let me try and start with this. The investments that we made this year that we have been talking about, the 120 basis points in the third quarter, again, were related to IT infrastructure, specifically new point of sales system, the merchandising system transformation work and enterprise data warehouse in particular. Those three particular vehicles we rolled out or we piloted the RPAS work and started to amortize the significant investment we have had in there. So we're feeling pretty good about where that is, and we expect to have that rolled out by the middle part of the fiscal year.

The second was Circuit City Direct and that was just because the business was growing much faster than the consolidated sales growth and we are investing pretty heavily in that business to keep that engine state-of-the-art and growing strongly.

The third piece was innovation activity. So there will be continued activity there. Although that does touch on it, the initiatives that Phil has referenced are fundamentally different elements. They are things to drive revenue growth, things to drive significant margin improvement, i.e., through some of the pricing optimization work, supply chain enhancements, things like that that we have talked about for a while. We even talked to a lot of them back at the analyst conference back in May.

What we're talking about is just a rapid acceleration of a lot of these activities to try to mine the value sooner.

Phil Schoonover

Just where we're at on that journey, we have spent the time to reprioritize the key initiatives that will produce the best economic results, cost take outs, revenue growth, margin growth, and we have actually taken some things off the team's plate where they were less important or distracting. Right now we're putting the plans together to accelerate these initiatives, so we hope to have more news for you on our next conference call on exactly what to expect. This is not about accelerating expenses. It's about accelerating profitability.

Colin McGranahan - Sanford Bernstein

A final question on inventory, obviously impressive progress on net owned inventory. But given that dollar growth in TVs were above plan, obviously unit growth in TVs were dramatically above plan, given the large ASP declines; and the out-of-stock you experienced on laptops obviously following a strong back-to-school, how do you feel about the inventory situation? Do you think you are making the right decisions of trading off in-stocks versus out-of-stocks versus net owned inventory? How do I reconcile all of that? I guess more generally, how do you feel about your current inventory situation?

Ron Cuthbertson

I would challenge a little bit of the comments around trading off in-stocks. Foremost in our mind is serving the customers better than we have in times past. We actually have improved our in-stock position considerably year over year, and month to month continue to improve it. We see no risk in that.

Our intent in managing our inventory is to work collaboratively with our suppliers and our internal teams to make sure that the stores are able to have what they need just in time for the customer, and that we're not having inventory sitting, dwelling. The activities we have taken are around inventory that's at rest to make it in motion. As we continue forward, the plan to take us to a [no owned] inventory will just heighten those activities. You have heard much of that in the earlier dialogue around our innovation work and some of the things we're doing to accelerate change.

Colin McGranahan - Sanford Bernstein

Okay. So specifically you feel you have adequate TV unit inventory to fulfill demand through the fourth quarter?

Ron Cuthbertson

Yes, we do. At this point, I see no concern in forward inventory position.

Colin McGranahan - Sanford Bernstein

Thank you.

Operator

Your next question comes from Daniel Binder - Buckingham Research.

Daniel Binder - Buckingham Research

I guess just from a clarification standpoint, do you feel like you gained market share this quarter or do you think it was just flat or down a little bit?

Phil Schoonover

What we believe is that during the Black Friday weekend, we participated very competitively in the market across a number of key businesses. Market share information is still unclear for periods of time since then. Total TV share has been steady for us throughout this time period.

Daniel Binder - Buckingham Research

I meant TVs. That's what I was speaking about.

Phil Schoonover

We did make a very direct effort to hold the hill in large flat panel televisions, and all indications are that we have accomplished that.

Daniel Binder - Buckingham Research

Just reviewing here, it sounds like you have some expectation that the vendors are going to get a little bit more rational because of the activity, that they had this past quarter is just not sustainable. You have got Best Buy indicating that they think the environment is going to get a little bit easier. My guess is that some of the marginal players, post-holidays are probably going to back off a little bit. And yet, you are setting pretty conservative expectations.

I guess the one thing that a lot of us that have followed this group for a long time have realized is that it ebbs and flows in big swings and right now we're on the wrong side of it. What I'm trying to get is, do you see a permanent large reduction in the gross margin of this industry? Or is this something that you think plays out over time where over the next quarter or the next couple of months are maybe even tougher and then we see a bit of recovery in the spring?

Phil Schoonover

We have some historical context around this. The mass merchant channel tried to commoditize the PC business four to five years ago, ended up figuring out that it was a low end SKU at holiday and back-to-school business and there was some moderation on the competitive front in the PC business. We have seen one-time attempts to gain significant share by some of our vendors. A particular introduction was the DVD business where you have two camps competing against each other, LCD and plasma -- analog here that moderated over time.

Finally, our business model is not as reliant on the sale of the televisions as it is around the effective sale of accessories, services, installation, and other revenue streams that we're experimenting and have different phases of completion. So on a longer-term basis, we expected commoditization in the flat panel business. We still think this kind of overall industry revenue growth, $50 billion over a five-year period is unprecedented, and we think that we have significant opportunity to just manage our margins in our core business better. We're only at the beginning of that merchandising and operational effectiveness journey. So while we're building these new margin engines, we still have a lot of things to fix about the way Circuit City goes to market.

Daniel Binder - Buckingham Research

Did the December sales number that you gave us earlier adjust for the calendar benefit that we are getting from a later Christmas this year, or is that still in front of us? In other words, did you adjust the mid single-digit comp for that, or would we expect to still get the benefit of that?

Mike Foss

We're on a [Gregorian] calendar. So it's a like-for-like period.

Daniel Binder - Buckingham Research

But the consumer gains a little extra time here in the coming weekend.

Mike Foss

That's reflected in our full year comp store sales guidance that we have given you.

Daniel Binder - Buckingham Research

Okay, but not in the December to-date trends?

Mike Foss

Right.

Daniel Binder - Buckingham Research

And just on the gross margin a bit more, I suspect you are not sitting still with the vendors. What should we expect in terms of your vendor planning going forward? Is it going to be more rigorous? Are you getting some back-end money from them now in the fourth quarter?

On the warranties, it seemed like, based on just my observations in the stores, that you aren't as quick to take the pricing down on warranties as the prices on TVs came down. I'm just wondering if that resulted in the lower attachment rate, and has that been adjusted?

Doug Moore

When it comes to our relationships with our vendors, we're examining all issues as it relates to this business. Obviously, the volatility this fall requires us to do that and it's a prudent course for us, so we're working with each vendor to understand how we will go to market in the short and the long term. That's really our approach. Our negotiations obviously are confidential and vary based on the business conditions of each of those vendors.

Phil Schoonover

To answer the question more directly, we're examining every facet of the programs we have with our vendors and how this sort of hyper-competitive state has changed our business model. We're having dialogues with them daily about what our expectations are.

Daniel Binder - Buckingham Research

How much of the execution issues do you think were more just bad decisions versus more systemic in nature? Your ability to monitor what was going on and adjust the model for that? Clearly you are investing a lot in systems so it could be a potential opportunity, but I guess I'm just trying to understand the difference in what happened in the third quarter.

Danny Clark

I think we had control over many of those decisions, not all. The speed of change in the TV business, obviously affected our ability; you mentioned warranty earlier. We were obviously thinking about the baskets and how to make adjustments. We had a growing services business. But with all of that said, we drove a tremendous amount of change ourselves and those were our decisions. We remodeled 511 stores. We certified over 5,000 associates inside our stores. We did a merchandising reset late in the year. We thought we needed to make some additional improvements. Those are decisions that we controlled and we think we can do a better job in the future. We had some deep warnings around those. We think that we put the stores from a capacity standpoint on tilt as we got closer to the holiday season and we're going to take those leanings away and make corrections for the future.

Doug Moore

As we said, we believe in the pricing and markdown management we have opportunities to make improvements in the moment that are preceding our addition of system strengths and abilities as well as our promotional effectiveness. So again, we will be working towards improvement in pricing and markdowns and promotional effectiveness in the planning cycle that we are currently in.

Daniel Binder - Buckingham Research

Just one last thing and I promise to go. I think Wall Street tends to look at a lot of the opportunities in your capital structure, and your ability to maybe lever up a little bit more. I was wondering if you could speak to that opportunity?

With regard to Canada, some of us view it as another opportunity. Is that at a point where you would consider divesting that asset?

Mike Foss

Let me try to address that. On the whole capital structure, clearly we have very little, if any, classic debt. We have some short-term facilities that we utilize principally in Canada. So clearly this entity has the capability to support a pretty sizable debt versus where we are today. So there is that opportunity for us. I would not want to comment on whether we would or would not do that, but clearly it is an option available to us at some point in the future.

On Canada, I think, clearly the performance in Canada has been very disappointing to us, and our focus has to be on it and there's a lot of activity going on driving change up in Canada to drive more economic value for that organization as well as for Circuit City. So one of the principal things is to say is there's no sacred cows here. We're attacking all pieces of the business to drive an improved financial performance.

Phil Schoonover

Finally, we think there's an opportunity to retool the business model in a small-store format. You may have read the release about the work we're doing in Summerville, Massachusetts with Comcast, an assemblage of services and products that help customers with solutions and partnerships like Comcast to rationalize the cost structure.

Daniel Binder - Buckingham Research

Is that the opportunity you are seeing for the small stores in Canada? Is that what you are getting at?

Phil Schoonover

No, there's a couple of things going on. As we talked about in past conference calls, there's a lot of deep process work going on, because frankly the processes we had in Canada in merchandising and supply chain and retail have huge opportunities for improvements. With some outside help, we're working on that as we have for the last several months.

There's an opportunity for us to potentially look at alternative formats for some of the space we have there. We still see The Source itself as a very viable brand for us. We continue to work on trying to get an assortment that is rationalized for the customers who are in the malls that we operate within. So there's just a lot of work to do. We're attacking, I think, everything, Dan.

Daniel Binder - Buckingham Research

Thanks.

Operator

Your next question comes from Brian Nagel - UBS.

Brian Nagel - UBS

My question also pertains to gross margins. If you look at your in-store matching policy, first off, what other chain are you typically matching prices with? Is there any way to quantify what impact that had on your gross margins recently?

Mike Foss

Well, we have had a low-price guarantee in place for a number of years. It's a price entry into the competition of the CE category.

Doug Moore

The other part I would say is when we go to market promotionally through our tabs, we make a point of view relative to our main competitors to price to like SKUs at similar prices in the moment of going to market, and that's been a policy for some time.

Mike Foss

Basically any legitimate price in the marketplace, we will match those prices.

Brian Nagel - UBS

Clearly this is a positive for your market share and for the consumer, but is there any thought to maybe making this policy a little tougher on the price matching side?

Phil Schoonover

I think nothing is sacred. We will examine every policy and practice given the realities of our margin pressure, and the realities of the new competitive set. When we say acceleration, part of what we're doing is we're looking at every bucket of pricing and price protection and price match to see if modification or complete change in policy makes sense. But in general, and I would caution everybody, we said the home entertainment business is a stake in the ground. Our model is highly leveraged. We have gained new customers in this transformation, particularly in the home entertainment business, and we're not prepared to give them back to our competitors.

Brian Nagel - UBS

Okay. Thank you.

Operator

Your next question comes from Mike Baker - Deutsche Bank.

Mike Baker - Deutsche Bank

Just a clarification. So Mike, you had said that December, the gross margin remains under pressure, but if Black Friday counted for more than a third of the gross margin declines in the third quarter, I would assume that the gross margin in the fourth quarter, which we are tracking now, is down less than that 190, is that a fair statement?

Mike Foss

Mike, I wish I could help you there. Again, we're only about halfway through the month, so I really wouldn't want to comment on gross margins other than reiterate the fact that some of the pressures that we saw in the third quarter are still present today and we would expect them to continue through the fourth quarter.

Mike Baker - Deutsche Bank

Asked another way then, some of the pressures are still present, but I think historically promotional activity peaks around Black Friday and then maybe dissipates a little bit as you work through December. Historically, is that what happens? Is that the same or different this year?

Mike Foss

Clearly, the whole weekend immediately after Thanksgiving tends to be extremely promotional. But again I think we have to assume that it will be a pretty competitive environment throughout the fourth quarter.

Mike Baker - Deutsche Bank

Okay. Thanks a lot.

Operator

Your next question comes from Mitch Kaiser - Piper Jaffray.

Mitch Kaiser - Piper Jaffray

Good morning, guys. I was wondering if you could comment on how the services business with the rebranding of FireDog, impacted gross margin in the third quarter?

Mike Foss

We're encouraged by the growth of the services business, and as we have talked about, the gross margin rate in the services is very accretive to us, so we can't tell you the magnitude of the impact in the quarter, but we're pretty happy with the growth rate that we have seen and the margin structure we have seen in FireDog. We clearly believe we need to keep the pressure on it and grow as fast as we can, but I can't give you more specifics about the actual impact.

Mitch Kaiser - Piper Jaffray

Okay. So it's safe to assume that it was accretive to gross margins, and that that rate should only continue to increase as you get better utilized with FireDog?

Mike Foss

It is very accretive from a gross margin and from a profit contribution point of view, and obviously as the mix of services increases, it would have a positive effect on our overall gross margin and our overall profit structure.

Danny Clark

We think the services gives us a great opportunity to provide end-to-end solutions for the consumer and we mentioned earlier the 72% growth rate for the quarter.

Mitch Kaiser - Piper Jaffray

We heard from Best Buy how services shook out. How did they shake out over the Black Friday weekend for you guys? Was it difficult to keep up with demand? How would you categorize it?

Danny Clark

We had very strong services growth over the weekend, and we were prepared for that, we expected it, and we saw very strong growth in both HTI and PC services, and we were pleased with how the weekend went from an execution standpoint and growth standpoint around services.

Operator

Your final question comes from Chris Horvers - Bear Stearns.

Chris Horvers - Bear Stearns

First, a quick clarification. It seems like you said both ways. In the fourth quarter guidance, are you assuming that gross margins get worse sequentially from the third quarter? Because at first it sounded like it was getting better, then it sounds like, well, it's not getting better.

Mike Foss

Again, it's all reflected in the 1.0% to 1.4% EBIT percentage outlook we have given you. I don't want to get into specifics about third quarter versus fourth quarter gross margin rate.

Chris Horvers - Bear Stearns

Are there any one-time items that would be pressuring your expense structure in the fourth quarter that we should think about on the SG&A side?

Mike Foss

Again, it's all reflected in the guidance, but as we said, with the initiatives that we're trying to accelerate during the quarter, there could be some benefits from that, but there also could be some expenses related to the implementation of some of the outcomes of those initiatives, but it's just too early to tell.

Chris Horvers - Bear Stearns

Stepping back and looking at the top line, as we think about 2007, particularly as you get into the fourth quarter and while TVs aren't the only things that you are selling, given the size of the ticket, the decline in the price point and the slowdown in the unit growth, combined with a weak CD and DVD business, how should we think about the ability to comp positively next year in the fourth quarter?

Phil Schoonover

I think we're going to provide guidance at the year end as we go into the new year. I would like you to think about a few growth engines beyond just the traditional product categories. Mike talked earlier about our real estate strategy. This is a massive growth engine for us and we are accelerating the number of new stores beginning next year. The direct business -- not only web but call center business -- real core capability, building in competency there; massive growth engine not only for the pure four wall transactions on the web, but for web-generated sales that end up shopping in our stores. Finally, the services engine moves the brands from the store into the customer's home, and we have an opportunity not only to grow the sale of services, but to grow the sale of products in people's homes; so there's more than just the obvious product category growth engines.

We have a constant pipeline of innovation that puts new ideas into our stores and we plan to continue to invest in the innovation experiments.

Bill Cimino

We thank everyone for participating in today's call and for your questions. Before we conclude the call, I would like to remind you that a replay of it will be available by approximately 2:00 p.m. ET today and will remain available through December 26. Investors in the United States and Canada may access the recording at 1-800-642-1687, and other investors may dial at area code 706-645-9291. The access code for the replay is 3328132 and a replay of the call also will be available on the Circuit City investor home page at investor.CircuitCity.com. This concludes our call. Thank you very much.

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