By Tom Ryan
Sometimes the tide doesn't float all boats. Despite soaring demand for flat-screen TVs, videogames and GPS gadgets, Circuit City last Friday reported a much larger third quarter loss than analysts expected, partly due to weak sales of accessories and warranties.
The consumer electronics retailer reported an adjusted loss of $105.2 million, 64 cents a share, for the quarter ending Nov. 30, missing Wall Street's mean estimate for a loss of 31 cents a share. Revenues dropped 5.6 percent on a comparable store basis.
The company also said it expects a 'modest' loss from continuing operations for its fiscal fourth quarter. Analysts had been forecasting a profit of 56 cents a share.
The announcement - its fifth straight quarterly loss - contrasted sharply with Best Buy's report earlier last week that third quarter earnings soared 52 percent.
The shortfall was blamed on drastic cost-cutting measures implemented earlier in the year and poor real estate.
Circuit City this spring fired 3,400 of its most experienced sales clerks, replacing them with lower-wage help to trim costs. But the downgraded sales force apparently led to weaker sales of higher-margin accessories, product warranties and installation and repair services. The labor cuts followed earlier missteps, including eliminating commissions and imposing a zone system on sales clerks that kept them from following customers around the store.
Circuit City CEO Philip Schoonover told analysts during a conference call that the company underestimated the financial impact of cost-saving initiatives on sales. "Our current focus is to rebuild our selling culture," he said.
Russell Jones of Alix Partners told The New York Post, "It's a shame, because a few years ago customer service had been one point where Circuit City had a potential advantage over Best Buy."
But Deutsche Bank's Mike Baker said the company primarily suffers from bad floor plans at its 400 oldest stores, many of which are in unattractive locations.
"These lead to weak sales per foot, necessitating a lower cost structure, meaning that Circuit City must sacrifice customer service," he told Business Week. "This then leads to share loss."
But while Circuit City is moving its stores to better locations, Goldman Sachs Matthew Fassler believes the retailer is taking on too much debt in doing so.
"The company is betting that its new units will produce before its existing stores deteriorate to untenable levels, and, moreover, that its problems reflect poor real estate, as opposed to being endemic to the core of the organization," he said. "We view this as unwise."
Mr. Schoonover, who came from Best Buy in 2004, told analysts, "These issues are primarily self-induced and are within our control to improve."
Discussion Question: Why do you think Best Buy is performing so much better than Circuit City? Can Circuit City replicate Best Buy's success or do you they need a truly differentiated strategy?