Circuit City: Firing Best Sales Staff Not Good Plan

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Includes: BBY, CCTYQ
by: Eric Savitz

Circuit City (NYSE:CC) shares got clobbered this morning following its surprisingly poor May quarter earnings forecast announced after the close late yesterday. The Street is not happy about the news, understandably; analysts at Credit Suisse and Citigroup downgraded the shares.

Credit Suisse’s Gary Balter cut his rating to Neutral from Outperform, and chopped his price target to $18 from $25:

Although CC has a strong cash position, it is facing pressure from Best Buy (NYSE:BBY) in its core business, has not come up with a strategy to differentiate its offerings from the leaders, and is facing increasingly challenging macro trends which is lowering the umbrella that we thought the company can hide under while it makes the required infrastructure investments. CC and BBY both had warned previously how tough Q1 could be. The even weaker sales trends, which may be a combination of weather, seasonal calendar shifts, morale at CC after laying off so many associates, or a slowdown in consumer spending clearly is disturbing.

Meanwhile, Citigroup’s Bill Sims went to Hold from Buy, and cut his price target to $17 from $26:

Without an earnings update until June and with our view that full-year guidance is based on an overly optimistic view on the timing of a rebound in business trends, we cannot recommend buying the shares.

The one thing that seemed most disturbing in Circuit City’s outlook was the very weak sales of large screen TVs in April. “We believe consumer expectations for TV pricing were set at an extremely low level in the last two months of 2006,” says Pacific Crest’s Andy Hargreaves, who keeps his Outperform rating on the stock. “Since then, TV pricing has stabilized, which has likely driven many consumers to delay purchases until another round of price cuts.”

Given the specific weakness in April, maybe there is another explanation: the company’s March 28 restructuring plan, which called for the layoffs of 3,400 of its highest paid sales associates. Fire your best sales people, and then sales disappoints…ya think maybe that wasn’t such a good idea?

Scott Ciccarelli, an analyst at RBC Capital, thinks the connection is obvious. “Firing top producers for less expensive labor had to create significant sales disruptions, particularly in the ‘high touch’ [flat panel TV] category, so it’s no surprise the category performed so poorly,” he wrote in a research note this morning.

Circuit City today is down $1.55 at $15.90; Best Buy is down 89 cents at $45.76.

CC vs. BBY 1-yr chart:
cc bby chart 010507

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