Seeking Alpha
Profile| Send Message| ()  

For some reason I found myself struggling to find a way to discuss Circuit City’s (CC) recent quarter results (Qtr ending 5/31/08 – Q1 FY 09), probably because the situation is just more of the same and the company’s situation just continues to get worse. So I’ve decided to just let the numbers speak for themselves.

  • Overall Net sales (Domestic & International) decreased 7.4% on a YoY basis and declined 8.8% domestically due to a comp store sales decline of 12.2%. Considering the current retail environment the drop in revenue isn’t that bad, the real issue is the YoY change in earnings as we’ll discuss below.
  • The company’s pre-tax consolidated loss from continuing operations nearly doubled on a YoY basis to $161.8 million from $82 million in the previous year. The company’s net loss increased to $1.00/share from $0.33/share in the previous year, a YoY increase of roughly 203%.
  • On the balance sheet net cash declined by 271.9 million on a YoY basis to 92.2 million a decline of 74.68%; one has to wonder how many quarters like the most recent one can Circuit City survive without needing a major influx of capital?  
  • In order to conserve its remaining capital the company is suspending its dividend and tapping lending facilities to build up inventory for the holiday shopping season. While the company may not admit it, their dramatically reduced cash position coupled with accelerating losses puts them at significant risk.
  • The call made a reference to a “shelf registration” with the SEC that could presumably be part of a future attempt to raise capital, if/when the company’s cash position declines further.

The story for the above is pretty simple: despite revenue declines that are fairly typical for the current retail environment the company’s losses have increased dramatically, and their cash position is at significant risk.

Despite the company’s claims as to the veracity of their turnaround plan, the company has been in turnaround mode since 2006, and shareholders have been rewarded with nothing but a decline in the value of their investment as the company continues to go downhill. How can the company’s executives tout their turnaround plan when the company is in worse shape than before the plan was initiated two years ago?!

While the company (and analysts) may blame the current retail environment, Wal-Mart  (WMT) and Target (TGT) selling more electronics, etc, it doesn’t change the fact that Best Buy (BBY) is turning a profit via selling a nearly identical product line at very similar prices. In fact despite a tough retail environment, electronics sales continue to be a bright spot for many of Circuit City’s competitors. I.e. there is no excuse for not being able to make money selling electronics right now, even if we are in the midst of an economic slowdown.

If you want to handicap a management team’s ability to successfully turn a company around, look at their candor with investors, if they’re clued in to their problems and how they react when things aren’t going well/proceeding according to plan. When I look at Circuit City, I’m more disturbed by their executive’s cluelessness and lack of candor, than I am by the financial results themselves. Q1’s loss wouldn’t be as disturbing if the management team was clued in enough to execute a successful turnaround plan, as opposed to being a legion of spin-doctors who have done nothing but wreck the company over the past two years.

At this point, even the most optimistic of observers would have to pronounce Phil Schoonover’s tenure at Circuit City as a colossal failure, as his turnaround plan has done nothing more than to send the company backwards. At this point, the company needs a new turnaround plan to get them back to the state they were in before the current one was initiated! If that wasn’t bad enough the company is unable to generate profits in an environment that continues to be fruitful for CC’s competitors, in spite of the current rather difficult retail environment and declining individual product margins.

Moving forward, it’s not a question of when Schoonover’s turnaround plan begins to show fruit; it’s a question of when does the board do their job and oust him and the rest of his management team. The only way Schoonover can claim to be on track with respect to turning Circuit City around is if he believes that the goal of a turnaround is to drive a company into bankruptcy.

Sources:

Seeking Alpha: Circuit City F1Q09 (Qtr End 5/31/08) Earnings Call Transcript” – June 19, 2008.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article.

Source: Circuit City Needs a Management Overhaul