Circuit City: Finally, Schoonover Is Asked to Pursue Other Opportunities

If Circuit city (CC) shareholders (what few there are left) aren't dancing around like it is Mardi Gras, there isn't anything that will make them do it. After almost a year of my pleading, CEO Phillip "Phil The Shill" Schoonover has finally been asked to "pursue other opportunities".

Schoonover, who served as chairman, president and chief executive officer, was brought in from Best Buy (BBY) four years ago to turn around Circuit City. Instead, the 48-year-old executive, who was named CEO two years ago, presided over a further deterioration in the company.

The latest blunder was when Blockbuster (BBI) offered to buy Circuit City for $1 billion, or about $6 to $8 a share (it currently trades under $2). It ended in July when the Blockbuster rescinded its offer after Circuit City inexplicably would not open its books. That gaffe followed the replacing (firing) of 10% of the highest-paid, most-seasoned staff in the company's stores, in an effort to reduce costs. It turned out those "high paid" people were the only ones who actually knew how to sell the products in the stores. This was evident when only months later the company begged them to return.

All these of course follow buyout offers of $17 and $23 a share that Schoonover and his merry band of shareholder wealth destroyers dismissed as "too low" and "inadequate". Uh huh.

What is still disappointing here is that it took this long to finally pull the plug. It is a lesson in giving too much power to a person who has not earned it through results. Circuit city has been in a free fall for two years now and every move Schoonover made only increased the downward velocity. It is one thing to have a deteriorating operating environment, it is another to allow management's mistakes to cause conditions to worsen for two years!

Now that this chapter is finally done, we can look at Circuit City. I believe it has a valuable brand, quality real estate in good locations and a valuable franchise in its "Fire Dog" operations. The company has just been abysmally run... I just need to find out more about the current "acting" CEO and wait for the replacement.

Disclosure: None

Comments

[dfordtheman:]

It's sad it took so long for this to happen. As an ex-employee, I enjoyed working for this company and know that they do have excellent personnel at all levels to do a turnaround. Hopefully Mr. Marcum will be the leader they need. I,m now working for a competitor who's doing well despite the economy and have already noticed the difference in the leadership.... that being putting forth good customer service, diversifying, pricing, offering, and HAVING product in inventory. I made a lot of friends while at Circuit and I hope this change will help them out!

2008 Sep 24 10:13 AM

[billddrummer:]

Todd,

Thanks for sounding the early warning bells on CC back when you did. I only wish I had shorted the stock last year.

On your comment regarding real estate, the company doesn't own much. Only 5 domestic stores are owned, along with one repair facility, some of the land under its headquarters, and a portion of the headquarters building. And apart from the HQ building in Canada and the retail store, all the other outlets in Canada are leased.

What's most disturbing on a forward-looking basis is the amount of cash committed on lease termination costs for previously closed stores. At 2/29/08, the company was liable for $375 million in costs on terminated store leases, and another $341 million in contingent liabilities on CarMax leases (a subsidiary that was divested in 2006). (As far as CarMax, CC claims the sublease income fully covers the outstanding obligations, but the company remains contingently liable for the leases CarMax signed. If the car business gets worse, these leases may become direct obligations that also need servicing.)

While earnings may not be as bad as originally predicted, I'll be more interested in what the balance sheet looks like at quarter end. My guess is that cash will be gone, debt will be way up, and the capital position will be extremely precarious. Which begs the question,

Who would buy an illiquid, money-losing, asset poor company with no direction and weak future prospects?

Heading into the holidays with a balance on your credit line is never a good idea. This will probably be the final holiday season with CC as a nationwide chain. After the holidays (which pundits are predicting will be grim), I expect store closings to accelerate, and store openings to stop.

Red is the best color for this business. It's produced red ink in 6 of the last 7 quarters, and the only profitable quarter was attributable to a tax credit.

Let's hope Marcum is the genius everyone's saying he is.

Disclosure: None.

2008 Sep 24 11:14 AM

[infosprt:]

My ideas for a turnaround at CC.

Circuit City is a great brand name. In my opinion the first thing that Mr. Marcum should to is to diversify the offerings. The local store here is way to big for what they have in it. TV's take way too much room. How many screens to you need showing the same thing at very close price points and features?

There is also a need to replace your computer every 3 or 4 years. So for the right price people will buy from CC. I bought my newest computer there and am very satisfied with the price and equipment.

They have a cellphone stand in the store. The new Google Android phone could draw people in to check it out. Have some operating models that people can actually play with instead of dead cellphones that you can not try out. They have wifi in the store why not use it to demo the cellphones that have decent browsers on wifi.

If they don't have the Google phone they could always make some live iPod touches so people can try them out. The price point for the new iPod touch is very attractive. They could sell out the stock of touches in no time.

We have two local Bestbuys. The sales personnel there drive me crazy by offering to help every minute of so. I only go to Bestbuy if they have something on sale I need and try my best to get in and out before the sales people harass me too much. CC doesn't have that problem. At least not here anyway.

Cameras are so so. I think CC has too way many models at close price points and features. However cheap memory cards could get people into the store.

We are starting into a recession. Price means everything at this point. People will still need electronic gadgets and will buy since they keep getting cheaper and better.

Christmas is coming and hopefully the new management gets their act together quickly to meet this golden opportunity to turn the franchise around.

I am a web developer and if I didn't diversify (with new web sites) I would be making only a fraction of what I am now. Competition comes and if you don't change to meet the circumstances you will end up in the dust heap.

-Al

BTW: Please stop by my newest site 700000000000.com ( 7 and 11 zeros .com) to help kill this financial bailout. There is a link there to the get your Congressmen's contact information and an appropriate cartoon.

2008 Sep 24 11:23 AM

[User 268773:]

I'm glad that people are hoping Marcum will turn the company around. But we have to look at history to find out exactly what may happen with Marcum at the helm.

Hollywood Video, Ultimate Electronics now CC. Both of the past companies were Wattles take-overs, day-to-day involvement by Marcum. Marcum was placed at CC after the Wattle proxy issues.

Looks to me like CC will survive, but the shareholders won't. My prediction is that CC will go bankrupt, firesale will occur with Wattles getting 90% of the good locations and inventory management, them will combine with Ultimate under one PRIVATELY held umbrella.

MM

2008 Sep 24 12:28 PM

[billddrummer:]

To user 268773,

Sounds like you're right on target.

2008 Sep 24 01:26 PM

[dfordtheman:]

To 268773 / billddrummer: Good possibility, down sizing the less profitable stores and going with the "The City " concept stores only. I would look for it to happen at the first of the year. ; cept storesnecpt stores only

2008 Sep 25 11:20 AM

[billddrummer:]

To dfordtheman,

Looks like a good plan. I suggested CC turn its stores into online pickup points well over a year ago.

boards.fool.com/Messag...

Obviously, that didn't happen. But the larger stores could serve as local warehouses for product ordered online. The smaller ones? Convert them to 'the city' boutiques catering to affluent consumers.

2008 Sep 25 07:34 PM