Circuit City's Shares: No Different Than a Lottery Ticket

Circuit City (CC) CEO Philip J Schoonover has finally resigned. Here is a guy who took a reasonably profitable company, a company that Jim Collins described as great in his book 'Good to Great' and ran it to the ground. Under his stewardship, CC's share price plunged from $30 to $1.7.

While all this was happening, the CEO had no idea why, or what could be done to turn the company around. He tried desperately, like a guy who is drowning and doesn't know how to swim. For example, replacing senior employees with high school kids to cut costs was a particularly dark chapter in the history of Circuit City.

If a company's return on assets is less than the cost of capital, it is not wise to buy more assets. Despite that, CC kept on opening more and more stores, leading to bigger losses. One may argue that in retail, the economy of scale matters a lot, but you have to have some idea as to what revenue target you will need to break even. It seems that the more stores Circuit City opened, the more losses it reported.

The chances of Circuit City's survival as an independent company are now slim. Either it will be bought out by vulture investors (which seems more unlikely now since all the company's cash was squandered by the current management), or it will be bought by some other company that sees synergy with CC. The best scenario for investors is that the new CEO will turn the company profitable, or at least break even, making it considerably more attractive to prospective buyers. This process will take a long time. If you are patient and adventurous, you can either earn a 400% return in 1-2 years, or lose it all.

Disclosure: None

Comments

[stox4u:]

Circuit City is not much different than any other publicly traded company operating in today’s hostile market environment. As far as I’m aware, they made a very prudent move by firing high cost commissioned sales reps and replaced them with lower cost employees. As far as I’m aware, circuit has some of the best web based training available for sales reps and it doesn’t take much time to get them up to speed. Circuit City is a much better run company than it’s competitor but they are only a casualty of negative public perception. I’m sure that most stock holders have seen volatility through most sectors and many stock values are based strictly on Wall Street emotions instead of facts. As far as I’m aware, most company stocks as of today isn’t too much better than the purchase of a lottery ticket but as it pertains to Circuit City, I say that it’s a matter of patience. This company will be fully restored and be made whole again. My suggestion is to buy as much as you can afford and watch your money grow by 10+ fold.

2008 Sep 23 03:54 PM

[Ben Dejo:]

On Sep 23 03:54 PM User 268036 wrote:

> Circuit City is not much different than any other publicly traded
> company operating in today’s hostile market environment. As far as
> I’m aware, they made a very prudent move by firing high cost commissioned
> sales reps and replaced them with lower cost employees.

Wha... Do you have any idea what you are talking about?

First off they didn't fire all of their commissioned staff, they did retain a good deal of it, when "Soon Over" decided that as hourly staff they still made too much, did the entire problem really begin. By wiping out the most experienced 10% of your staff at once ( unlike Best Buy who does the same thing, but more gradually so the accumulated experience isn't lost as a big shock), close rates fall off, people have a "bad" perception of your company, and employee motivation to do well all go out the window. Maybe that's why the Home entertainment division is now paid base PLUS a group commission.


On Sep 23 03:54 PM User 268036 wrote:

> As far as
> I’m aware, circuit has some of the best web based training available
> for sales reps and it doesn’t take much time to get them up to speed.

Circuit City digital training is a joke. As a current sales rep who managed to survive "Phil" I can tell you that no amount of "digital" training is ever as useful as getting the right people who want to sell and are not afraid of customers. Sales skills are taught one on one with role playing, repetition, and reinforcement of successful behaviors, not watching a badly made shockwave presentation with a rented Lenovo. Product knowledge is more effectively served by spending about an hour each day going through the "trade" magazines like Wired, Engadget, Gizmodo, DP Review, et cetera to learn about product.

> Circuit City is a much better run company than it’s competitor but
> they are only a casualty of negative public perception.

You are really "Flogging" here, I would think that looking at the comparable quarterly statement released by both companies in the past year would say differently.

> I’m sure that most stock holders have seen volatility through most sectors
> and many stock values are based strictly on Wall Street emotions
> instead of facts. As far as I’m aware, most company stocks as of
> today isn’t too much better than the purchase of a lottery ticket
> but as it pertains to Circuit City, I say that it’s a matter of patience.
> This company will be fully restored and be made whole again. My suggestion
> is to buy as much as you can afford and watch your money grow by
> 10+ fold.

I could put that money into an FDIC insured passbook savings account and get a 10 fold increase, and I'm willing to bet it would be more likely to happen with the passbook savings, and much faster.

2008 Sep 23 10:56 PM

[billddrummer:]

To user 268036,

If CC is so well run, why is its stock down over 90% this year?

If CC has such good management, why did the company reject buyout offers of $23/share (2005), $17/share (2006) and $8/share (2008)? [Current price: $1.60]

If CC is so much better run than its competitor, why did its principal competitor announce cumulative revenues of over $105 billion, and earnings of $3.9 billion over the past 3 fiscal years, while CC produced $35.7 billion iin revenue and net losses of $184 million over the same period? (Interestingly enough, CC's combined revenues over the past three years were $5 billion less than BBY's revenue for 2008 alone.)

You, friend, need to read the financial statements.

2008 Sep 24 11:41 AM

[phil'spal:]

CC has systematically frittered away every strength that they ever may have enjoyed. Sacking Schoonover was a good move.... but in true CC fashion, their timing sucked (as in: after it would do any good). They've scaled their presence in the market down from Circuit City to Circuit Town to Circuit Village to Circuit Hamlet. I guess it was at that final point when they realized that they were even too small to have their own village idiot. Let's not confuse a sense of adventure with foolhardiness. Waiting for a turnaround here is kinda like not dating because you're holding out for a shot at siring Angelina Jolie's lovechild. Patience wont likely get you much more than the opportunity to look back on today and notice that $1.70 is a Circuit City 52 week high unless before that, The Reaper mercifully spares them the agony of a protracted but well-deserved demise.

2008 Sep 26 01:31 PM

[billddrummer:]

To phil,

You're right that CC waited too long to get rid of Schoonover. Now that he's gone, the stock is trading at $1.37.

CC's market cap is less than 10% of WMT's.

2008 Sep 26 07:27 PM

[phil'spal:]

to bill
CC's mkt cap is 230 Million.
WMT's mkt cap is 236 Billion
BBY's is 16 Billion
RSH's is 2.3 Billion
It looks like CC is .1% of WMT, 1.4% of BBYand about 10% of RSH in mkt cap. I'm not splitting hairs. I'm just trying to get my head around the scale of the players in the market. They're going into the gunfight for the holiday season spending dollars with a short pointy stick, and if they're really lucky, they won't poke out their other eye.

2008 Sep 28 01:58 PM