Circuit City Earnings: The Devil Is Always in the Details

Circuit City (CC) reported fiscal fourth quarter (Feb.) earnings of $0.10 per share, excluding non-recurring items, $0.17 better than the First Call consensus that called for a loss of $0.07. Revenues fell 7.7% year-over-year to $3.65 billion versus the $3.79 billion consensus estimate. GAAP EPS was $.03 a share vs a loss vs $.04 last year. (Click here for conference call transcript.) Sounds great right? Look closer....

I like to look at the results from "continuing operations". It gives me the best snapshot as to the health of the operating business before the accountants and tax collectors get in there and muddle the picture. That being said, in 2007 CC posted a Q4 profit if $27 million from operations. But, in the same quarter of 2008, that plummeted to a LOSS of $2.7 million. So, how did CC then post a profit in its press release?

"For the fourth quarter of fiscal 2008, the company recorded an income tax benefit of $7.3 million. For the fourth quarter of fiscal 2007, income tax expense was $34.3 million."

There you have it, the reason for both the loss last year and this years gains. The illusion is that last year was worse than this but the reality is the opposite. Operations have deteriorated markedly with same store sales plummeting 11%, margins shrinking and results from operations decimated. Yet, due to a nifty tax benefit, results look nice to the naked eye...

The bottom line is despite what management may say, operationally, the company is deteriorating, fast.

Here is a pdf of the full release.

Disclosure: No position.

Comments

[whenthemusi...:]

Excellent Todd

2008 Apr 10 12:43 PM

[billddrummer:]

Well done. It's interesting how the company is projecting a $185 million loss for the first quarter of this year when they were crowing about 'improved execution' and 'being on the right path' with regards to the turnaround. Fact is, with a 20% gross margin, to get to breakeven, they have to reduce their fixed costs by another $200 million on top of the existing $200 million they say they've saved. Only way to do that is to close more stores. The City concept is a good one if only because fixed costs are lower for smaller footprints. But this company looks more like Radio Shack than Best Buy if that's the direction they're moving. No hope. And if you look at interest income, it's down by 29% quarter to quarter, 33% lower year over year. What that means to me is that the company is burning through its cash hoard, which signals draws on the new credit line in the third quarter to ramp up inventory for the holiday season. By the end of that quarter, they'll have very little cash and a lot of debt. One of the props for the stock price was cash/common share. That number is going down every day. Soon it will be a narrower current ratio. And the final chapter is illiquid inventory.

If this is an 11 page book, with the demise of CC at the end, we're mid-way through chapter 8 now. Chapter 11 is the final one.

2008 Apr 10 01:59 PM

[Yazz:]

If we are at chapter 8, that means we are past the toughest part - chapter 7.

2008 Apr 10 02:05 PM

[todd su:]

thank you

2008 Apr 10 02:06 PM

[billddrummer:]

I think they skipped chapter 7 when they turned down the buyout offer 18 months ago. They may go back to 7 after 11.

2008 Apr 10 02:30 PM

[Dan Jacome:]

BBY at a market multiple is a steal....look at 09 #s.

2008 Apr 11 02:19 AM