Upshot from Circuit City's Annual Report

I picked up a few shares of Circuit City (CC) on a lark when Carl Icahn came in (CC was his pet project before he became consumed with making Yahoo's Jerry Yang pay him off). CC sports a yield of about 3.5%, but that's probably going to be reduced at some point. Even with Icahn's participation and the dividend, CC will need more long-term catalysts to turn itself around.

So how is CC revamping itself?

1. CC has expanded its online presence through its website, www.firedog.com . Firedog.com is easy to navigate and seems like a Geek Squad for consumer TVs and car electronics.

2. CC is going to remodel some stores into a concept called "the city," a term it has trademarked. What is "the city"? I have no idea. I live near a few Circuit City stores, and I've never seen this advertised. On the other hand, I've been in a Best Buy several times. That's not a good sign.

3. CC seems to be banking on consumers trading their analog signal/broadcasting televisions for digital televisions. "We expect a large number of consumers to replace analog television sets in the next few years." (page 14) Most of CC's revenue is generated during the time period from Thanksgiving through the Super Bowl. I don't think the rebate checks will last until November. That's a problem for CC, unless people are upgrading now.

I didn't see much else in its annual report that made me think that a turnaround was imminent. Some other highlights:

1. CC "had a net loss of $319.9 million for the year ended February 29, 2008, and a net loss of $8.3 million for the year ended February 28, 2007." And you wonder why the shares are trading at around 4 dollars each.

2. Looks like IBM is doing a good job selling its products--CC outsources its "information technology infrastructure operations to IBM."

3. Most of CC's stores are in CA (92), TX (61), and FL (53). No other state has more than 50 stores. Unfortunately for CC, the economies in CA and FL have not been doing very well.

The key point to take from all of the above is Circuit City's net losses expanded by over 300 million dollars in one year. If consumers are going to be hurting even more financially in 2008, I don't see how Circuit City will be able to reduce its net losses.

What I predict will happen is that CC will sell off some assets and report artificially inflated earnings as a result of one-time sales. When that happens, I am going to dump its shares. For now, I will be holding onto the tiny number of shares I own.

Disclosure: Long CC

Comments

[billddrummer:]

CC also predicted a net loss of $185 million for the first quarter. (That's also in the annual report.) Earnings will be released next week, and if they haven't had any asset sales it will probably be worse than forecast.

BBY also releases first quarter results, and the contrasts will be even starker than they were last year.

2008 Jun 13 11:16 AM

[hazeleye:]

What a waste of time it was reading your article. No new information combined with ignorance. Not a good combo!

Why dont you just sell your CC holdings now instead of "waiting for earnings" which will be released in 6 days? If you bought CC as an earnings play then you should have known it would be a long wait, especially with the current CEO at the helm. Personally, Ill be happy to know you are out of CC once earnings are released... prepare to be dissapointed!

Me, Im the smart money. I bought on valuation. The same valuation that caused Blockbuster to make a $6-8 bid for the company. The same valuation that also caused Carl Ichan to write in a letter to CC that he himself would purchase CC (if Blockbuster couldnt get the financing approved) so long as the CC financial books confirmed what they think they already know.

Enjoy your $4+/share. Hope you were able to break even.

2008 Jun 13 11:52 AM

[Matthew Rafat:]

Hazeleye, in a comment you posted re: CC on April 5, you said:

"But something, something, appears to be on the horizon within 2 weeks from today that should move the stock upwards..."

Two weeks later, CC's stock went around 20%. That alone damages your credibility, as well as the several spelling mistakes you've made in your comments.

In addition, it seems you are banking on Mr. Icahn coming through and boosting the value of the company. Take a look at Yahoo's stock post-Icahn. It has come down. Icahn's reputation has suffered quite a bit in recent years. He is losing his mantle as the real-life Gordon Gekko. Given that I have so few shares, I will hold onto my CC shares and enjoy the wild ride.

2008 Jun 13 06:15 PM

[Matthew Rafat:]

Hazeleye, I just want to revisit your April 5 (Saturday) post, where you said that CC would go up "within 2 weeks":

April 4: CC = 4.78/sh (day before hazeleye's post)

April 11: CC = 3.90/sh (18% drop; around a 20% drop)

April 28: CC = 4.53/sh (5% drop)

June 13: CC = 4.35/sh (9% drop)

2008 Jun 13 10:05 PM

[bentheredunit:]

Once upon a time CC had most of the best minds in retail. Then in Feburary 2003 someone said , Hey, we can save over 300 million dollars a year if we just can get rid of about 3800 overpaid sales counselors. Consumers are savvy and can educate themselves on the internet and they will come in to our stores and say "I'll take one of those 50 inch plasma tv's , no need to sell me, just write me up. Oh, and give me the $599 warranty and about $400 worth of Monster Cable while you're at it. Piece of cake, any $8.50 an hour clerk can handle today's savvy customer. Then 2 years later these same guy's said "holy cow" have you seen the raises those low paid people we kept in 2003 have gotten. These people are dead weight. Let's blow them away and hire some more "sales counselors" at around $7 an hour. That'll save us around $350 million. I'm still in the a/v biz just no longer with CC and I still haven't had a customer walk in and say, hey buddy, you got one of these $5000 Pioneer Kudo's in stock? It's so pretty, write me up for one. Oh, and give me that $599 extended warranty and about $400 in monster cable and we're done. Today, no one at Deep Run or anywhere else in CC has a clue to successfully running a profitable consumer electronics store. Hail Hail the chief. Long Live Phillip Schoonover. Enjoy those stocks, I hope you make a buck or 2 but the odds are against you

2008 Jun 13 11:19 PM

[Wurtzel's Tech:]

The CC higharchy became stubborn to consider revisiting what made them famous when Rick Sharp left in 2000. During the successful years, CC was an attraction for all to see. People came just to observe what was going on in the stores....and they bought lots of stuff. Boastful advertising and promotions, spirited and inspired staff who received a piece of the cake, a floor design that led each Customer through the entire store. Fast product repair whether you bought the extended warranty or not. They sold everything that kids wanted, their parents wanted and their Grand Parents wanted. Now, I see CC as an antiseptic, sterile and impotent force that doesn't wish to compete with the likes of BBY and other CES retailers. Everyone's blaming Schoonover, but the un-fixable damage was done by Alan McCollough. He cut the heart out of CC. I saw it happen 1st hand over 5 years. Changing the name to "The City" and putting different shirts on associates ain't gonna do anything positive for the bottom line. Bring back the attraction and you'l bring back the Customers......

2008 Jun 18 08:04 AM

[Wurtzel's Tech:]

The CC higharchy became stubborn to consider revisiting what made them famous when Rick Sharp left in 2000. During the successful years, CC was an attraction for all to see. People came just to observe what was going on in the stores....and they bought lots of stuff. Boastful advertising and promotions, spirited and inspired staff who received a piece of the cake, a floor design that led each Customer through the entire store. Fast product repair whether you bought the extended warranty or not. They sold everything that kids wanted, their parents wanted and their Grand Parents wanted. Now, I see CC as an antiseptic, sterile and impotent force that doesn't wish to compete with the likes of BBY and other CES retailers. Everyone's blaming Schoonover, but the un-fixable damage was done by Alan McCollough. He cut the heart out of CC. I saw it happen 1st hand over 5 years. Changing the name to "The City" and putting different shirts on associates ain't gonna do anything positive for the bottom line. Bring back the attraction and you'l bring back the Customers......

2008 Jun 18 08:04 AM