Circuit City: Outlook Is Grimmer Than Ever

Five years after Circuit City (CC) refused an $8-a-share offer from Mexican billionaire Carlos Slim and a 2005 $17-a-share offer by hedge fund Highfields Capital Management LP, Schoonover and his crew messed up a $6 to $8 offer from Blockbuster (BBI). Shares today sit at $1.75. Why did Blockbuster back out? Lack of disclosure from Circuit City.

Now word comes word that  the company has put on hold the completion of a $45 million distribution facility near Scranton, PA., which had been slated to begin operations later this year. The facility was to replace two others in an effort to streamline operations and save money. When you don't have the cash to spend (even after canceling the dividend) to save cash, things are really tight.

The WSJ ran a piece yesterday that has a classic paragraph:

In July, Mr. Schoonover asked investors to forget much of the Richmond, Va., company's recent history: turnarounds that didn't materialize, a revolving door of top executives and burgeoning losses. Instead, he held out a vision of a company "on the right track with the right strategies, the right talent and improved processes," he said in a conference call with investors.

Schoonover then went out and destroyed investors' last hope of seeing more than $3 each for their shares anytime this decade. In a final irony, Schoonover, who was interviewed by the Journal last year about "how to execute a turnaround" declined to be interviewed for this story. Good idea.

The Journal continued:

Circuit City has a secured credit line of about $1 billion that could allow it to withstand losses for the rest of the year, assuming continued support by its big suppliers. Supplier discontent helped send retailers Linens 'n Things, Steve & Barry's and Mervyn's to seek bankruptcy protection this year.

Circuit City also recently filed a shelf registration that would allow it to bolster its capital by selling new shares or to find debt-assuming buyers. A Circuit City spokesman says that "the vendors are still supporting us.

OK. Who would buy it? Really? CC has enough credit available to hang on for a while assuming vendors will continue to sell them product on credit. That is by no means a sure thing. Credit is tightening for companies with good outlooks and this little thing called profits. For a struggling company, hemorrhaging money using the credit card to buy products to lose more money, credit will evaporate.

If we believe the economy will struggle or flatline through 2009, then CC is done. The company cannot make it through another year like this. Perhaps it'll buy a lifeline if it can sell its Canadian stores, but not a lengthy one.

I think in six months it will be proven that the Blockbuster offer was the "last chance" for shareholders. What Schoonover and The Board has done there should be criminal.

Disclosure: None

Comments

[racer2456:]

Being a share holder at $8.40, I was disappointed to see, that they still don't get it. A recent extended warranty claim was treated with a rude customer service rep supervisor, who was no help at all. Especially after I had spent $500.00 for the warranty!! This happened about 2 weeks ago. Maybe they should treat an already paying customer better, I'll never go back. I had bought my whole Home Theater from them costing thousands of dollars. I guess they don't need my money.

2008 Aug 13 08:03 AM

[vpaul:]

All you have to do is go shop there and find you are almost the only one in the store with sales floor personel standing around talking to each other. Would hate to interupt their conversation to get some help. If you are going to buy a retail stock, I would visit the store first to see how you are treated and if there is anyone buying product.

2008 Aug 13 08:33 AM

[circuitvol:]

The last line in your column says it most accurately..........ex... that it "is" criminal.

2008 Aug 13 09:25 AM

[billddrummer:]

Schoonover talks about 'crisp execution' in his turnaround speeches. He and the board should be 'crisply executed' for the value they've destroyed over the past 3 years.

I'm long on BBY, but like to see viable competition, because it makes you better. With CC on the ropes, who can challenge BBY in consumer electronics? I realize that consumer electronics is a discretionary sector, subject to spending cutbacks by consumers who are being whipsawed by high fuel, food, and housing costs, meanwhile losing the value of their primary asset--their homes. But BBY executes better than any other company in this segment. And as long as the company continues to innovate, it will continue to outperform its competition.

Too bad about CC. Should have sold out back in 2005.

2008 Aug 13 01:06 PM

[dfordtheman:]

As an ex-employee (just released last month because of job preformance issues....right.. been doing consumer electronics for almost 25 years), I can tell you the problem with CC is what everyone is stating- the BODs. I had the pleasure (?) of going to Richmond for a Forum of 10 associates chosen nationwide because of our abilities and our contribution on making the company better. While there, I met some very dedicated corporate and associate personnel who do care what happens and we exchanged some outstanding ideas on turning CC around. But there was a large glass door going into another section of the building that we were not allowed into because that's where the CEO and his board offices were. To top it off, they were all off on business trips and couldn't meet with us during the Forum. I really enjoyed working for CC and hope the best for them, simply for the good people who are trying. But there definitely needs to be some BIG changes starting at the top. When I started work at CC shares were around $ 17, today it's currently at $ 1.75. I know of very few companies that would tolerate this much of a loss without some kind of big change occurring in leadership.

2008 Aug 13 03:33 PM

[Jetta2003:]

I agree, I used to be an employee as well so had to witness the cutting of thousands of employees 5 or 6 years ago and most of them were the best hard nosed sales people who generated fantastic sales transactions. I was one of the many thousands who got layed of in March 2007. I had a feeling then that this was not going to be good for the future. I mean how much can you expect from young unskilled employees who get payed minimum wage. Why should they care about providing you great service if there is absolutely no benefit at all.
Even the company's policies are not geared towards good customer service. The company generated tremendous profits selling warranty but in turn would piss off clients who could not have their electronics repaired correctly. It was an embarrasement to be on the other side of the counter.
I've always believed that paying employees commission produces the best results from employees in terms of being motivated to want to sell. Now customer service is another issue. I've always believed that companies should promote people from within and not from the outside. This is what they get for hiring useless corporate higher ups to run the company and who get payed way too much while ruining the company at the same time.
Finally, overall retail stores are no longer the way they used to be as they were in the 90's. I walked in Best Buy two days ago and asked an associate a question who had to ask two other associates my question to give me an answer. I already knew the answer but was just curious about their knowledge. This is why i now buy my electronics Online. Screw big box stores. I don't need to support a store who doesn't give a crap about their employees nor the customers.

2008 Aug 13 04:08 PM

[mgv11:]

one thing I've noticed: in the small towns the service is better in the big cities where they've hired kids who don't see CC as their future, you get no service. I think this where they need to start self evaluating their situation. I'm sure the big wigs are busy at 50,000 feet and are in fact missing the details.

2008 Aug 13 09:45 PM

[time_for_re...:]

CC's real problem is that it has no identity. They are a big store...so what...they have a decent selection of electronics...yawn....... the employees are demotivated. If they want to turn this company around they would have to start by getting rid of management. To make that happen they would likely have to get rid of the board. I think BBI did hte right hting here. Instead of buying the whole company you can wait and purchase the pieces you really want out of bankruptcy!

The real question right now is how long it will take the board to realize they can not support this management team? Too many boards get to close to management and allow themselves to be blinded to what is happening. My guess is that they are not adequately informed about the business and that is their fault for not demanding more information. I have to believe though that eventually the desire to protect their own backsides will kick in and they wil do the right thing. Will it be too late?

2008 Aug 14 02:25 PM

[kkinva68:]

mgv11

i noticed that there is a big difference between small town stores and big city stores too, smaller town stores are bustling with life, but city stores are bustling with little kids and other sales staff with limited english

2008 Aug 14 02:34 PM

[ddh:]

More of the same trash talk from Sulivan withot any objective analysis of underlying fundamentals. You would think he was a former terminated sales rep for CC. Bk,- customer service- Broke Buster - lets keep stressing opinionated negatives without substance that amount to garbage. His opinion is free and that is what it is worth. Please give us a break and find something productive to do-maybe something that will generate profit that you appear to solely rely on in the current short term to determine future value..

2008 Aug 14 10:39 PM

[User 243677:]

I was one of the 3400 laid of March 28th of last year. The stated to me that they could replace me with two high school students with the pay that I made. How's that working. Inside theft has gone thru the roof and customer service is now non-existant. Other manager's have left and headed for Home Depot and Office Max etc.... The CEO is a criminal and has no morals at all. Loyalty from employees that have been with his company for as long as 16 years kept the company afloat. Now they are thru and its the people at the very top who distroyed what once was a nice place to work and an honorable job. You cant treat your employees like a number. Maybe they learned this from sweat shops overseas. They are getting what they asked for. No one I know will shop there. Walmart is actually better.

2008 Aug 15 01:46 AM

[phil'spal:]

What started as a mild but morbid curiosity with Circuit City's situation has developed into a morbid fascination for me. The more research I do, the bleaker, surer and more deserved seems the probable outcome. Corporations in general tend lately to describe themselves as 'nimble'. Circuit City's management has demonstrated that attribute to the extent that they have brilliantly managed to sidestep or dodge just about every opportunity that got anywhere close to them (eg. Wattles, BlockBuster, Carlos Slim). The most audacious example so far was paying lip service to BlockBuster's offer but refusing to open the books for due diligence. Heaven forbid that they find out what they're buying! Controlling payroll cost is a good idea! Decimating the most skilled and experienced top echelon of your sales force transforms that good idea into a fundamental business blunder. Fortunately, it looks like nobody at the brainstorming session tumbled to the idea that if they sacked EVERYBODY, they wouldn't have to worry about payroll expense at all. Woohoo! More wiggle room for those management bonuses! Increasing sales is a good idea. The idea of opening a bunch of new stores and thinning out your already pillaged store staff across your expanding empire might not be the best execution of that concept. Building them close to competing BestBuy stores is not a tribute to their confidence in going toe-to-toe in good old fashioned competition. They've almost perfected the fine art of squandering market share. As a final stroke of strategic genius, when they give their customer a ride to the BestBuy to make the purchase, they won't have as far to go. Their skill, or lack thereof, at store selection is already evident in the number of unprofitable locations that are crushing them with poor performance and long term, iron-clad lease commitments. Approaching the endgame, shelving the planned distribution center and axing the stock dividend is final recognition that there's nothing left. Shareholders at this point, are holding out for 3 or 4 cents of their invested dollar. Employees, if they're smart, have their resumes in order. A wise chef once said: 'you can't make chicken salad out of chicken sh*t.' It is noble at this point to talk about turnaround, but in Circuit City's case, a more fitting term would be quixotic.

2008 Aug 15 08:23 PM

[Bill Herbert:]

I agree with the conclusion of Sullivan - this is one of the most hopelessly and cluelessly managed companies of the modern era. The mixture of arrogance and ineptitude in the exec suite rivals that of Ford, or maybe some of the mortgage brokers that buried themselves.

Best Buy is not great, but they run circles around CC and have for years. I used to comparison-shop the two, but now don't even bother. I buy some stuff online, now more than a few years ago. It is easier and cheaper, and I actually find the level of customer service better through a phone connection than live-and-in-person at BBY or CC. Amazing, but true.

I have probably spent over $20,000 at BBY over the last 15 years, and less than $1,000 at CC. That tells you something - the price points and selection just aren't there. It reminds me of a K-Mart - cheesy, low class, not where I want to shop.

I expect CC to be a BK within 6 to 7 months - this Xmas will be brutal; the weaker dollar means higher costs, less traffic, and a poor season for most retailers. The electronics guys may get a break from the sales of digital TVs as analog goes offline, but that's the only goodie in the stocking this year for them, I'm afraid.

2008 Aug 27 04:05 PM