Circuit City’s Q4 Results: Sign of a Turnaround or More of the Same?

Circuit City (CC) reported a narrow profit of 0.10/share despite decreased revenues this past quarter, beating their own estimates that the company would show a loss for Q1. Circuit City’s executives used the “earnings surprise” as an opportunity to tout the strength of their turnaround plan, and to claim that the company is on the path to recovery. However if you dig deeper into the results you still see a company that is struggling to make money while its competitors flourish:

• Revenue declined by 7.69% on compared to the same quarter last year
• Gross profit declined by 20.39%
• Profit from continuing operations declined by 90.04% down to ($2.7) million for the quarter.
• Over the last twelve months the amount of cash on the books declined by 59.78%, falling from $739.5 million to $297.4 million.
• For the last twelve months the company is showing an operating loss of ($327.6) million, compared with an operating profit of $112.3 million for the previous 12 month period.

Q4’s so called “profit” and last year’s “loss” were actually the results of tax treatment, as the company actually lost money on an operating basis. Simply put: the company’s financial condition did not improve on a YoY basis, and last year’s results (whilst still abysmal) were better then they seemed. One could argue that it’s a bit a disingenuous for the company to cheer its profitability when it showed a loss from continuing operations, but perhaps that’s a topic for another discussion around corporate earnings spin and the business media.

At the end of the day Circuit City’s results are nothing to cheer about as the company is continuing to lose money, its financial conditioning is worsening and they weren’t able to generate an operating profit over the holiday shopping season. Perhaps the most disturbing aspect of Circuit City’s earnings results is the fact that management is trying to spin the situation into a validation of their turnaround plan, despite the fact that the company continues to deteriorate.

Perhaps the most telling part of CC’s earnings conference call was management’s focus on cost cutting as the key to solving the company’s woes, as opposed to a wholesale transformation of the way the way the company presents itself to the customer. Circuit City’s primary problems are about branding and the customer experience not internal cost cutting, because reducing expenses won’t solve the problem of customers preferring to shop at Best Buy (BBY) despite CC’s nearly identical product line-up. Until management comes to grips with this fact, CC’s fortunes will continue to worsen.

Unfortunately CC’s shareholders do not have the luxury of waiting for Schoonover and company to finally “get it”, and a new management team that actually understands the company’s problems needs to be installed ASAP. Hopefully the activists targeting the company are in touch with the company’s problems, and will be able to install people who are capable of getting the job done.

Disclosure: at the time of publishing the author didn’t own a position in Best Buy or Circuit City.

Comments

[needtoeat]

Is this a site of rookie writers? (shorty) is the term for most of the writers here- "plug for profit" I understand that CC is in trouble and the CEO is the one of the worst, but the industry is were to be if you are a growth investor. I am looking for "un" bias information that can lead to undertaing of why things in companies are going on. Thanks for the posting, but i would love to see posts were the men and women write FACTS not opioins- and if opioins are present your status of invesment in the company. Best regards