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Circuit City (NYSE: CC) is a big-box consumer electronics (CE) retailer. It is the third largest CE retailer behind Best Buy and Wal-Mart, generating over $11.7 billion in sales during the 2008 fiscal year^[1]. The company also offers repair and installation services under the brand 'Firedog,' and now emphasizes their growing phone and online store. Circuit City has an international presence in Canada, following the 2004 purchasing of InterTAN stores, which were re-branded as The Source by Circuit City.

Circuit City management initiated a turnaround process in 2003, generating a profit from 2004 to 2007. However, more recently, in fiscal 2008, Circuit City once again found itself under serious pressure. The company's sales fell 5.5% to $11.7 billion and lost $321 million on net for FY08^[2]. During the same year sales at Circuit City's main rival, Best Buy, grew 11.4% while posting net income of $1.4 billion^[3]. A significant part of Circuit City's recent troubles have been as a result of lost sales to Best Buy, but profits have also fallen as a result of a decrease in warranty sales and an increase in sales of low-margin PCs and falling margins on flat-panel televisions.

Circuit City is also under increasing pressure from discount retailers like Wal-Mart, Target, and Costco, who are able to leverage their pricing advantage to capture increasing market share. These companies are able to capitalize on the rapid product cycles that characterize the CE market, where new innovations quickly force down prices of previous technology, lowering prices and sales margins.

In April of 2008 Blockbuster (BBI) announced an unsolicited bid (of about $1 billion in cash, approximately $6 to $8 a share) to acquire Circuit City. However Circuit City's management initially questioned the validity of the offer and declined to allow the potential suitor to examine company's records for a few weeks before giving in to Blockbuster's request. After reviewing the electronics retailer's financial condition Blockbuster announced on July 3, 2008 that it would no longer be pursuing an acquisition of Circuit City. Despite Blockbuster's pull out, Circuit City is continuing to look for a buyer, as the company's struggle with profitability and sales continued in the first half of fiscal 2009; Circuit City posted a net loss of $164 million for the quarter and a further loss of $239 million in the second quarter, as sales fell 8.5%^[4][5] On November 10, 2008 Circuit City filed for bankruptcy protection, due to increasing pressure from the global economic crisis, with falling vendor and consumer confidence.^[6] .

Contents 1 Company Overview 1.1 Products 1.2 Service 2 Potential Takeover: Blockbuster Drops Bid for CC; Other Suitors? 3 Challenges with Restructuring Initiative 3.1 Struggles Maintaining Profits 3.2 Circuit City Struggles to Stay Afloat 3.3 Poor Performance in International Segment 3.4 Personnel Disruptions 4 Sales Cycles 4.1 Product Cycles 4.2 Seasonal Cycles 5 Consumer Electronics Product Trends 6 Competition 7 References

[edit] Company Overview

[edit] Products

Circuit City does business in five major categories:

1. Video: includes televisions, DVD players, digital cameras, and camcorders, as well as related accessories and services. Video accounted for about 42% of total revenues over fiscal year 2007.
2. Information Technology: desktop and laptop computers, computer hardware, and telecommunications equipment, including cellular phones. Information Technology accounted for about 27% of revenue.
3. Audio: home, mobile, and portable audio, such as home theatre, car audio, and mp3 players. Audio accounted for 15% of revenue.
4. Entertainment: movies, music, software, and video game hardware. Entertainment accounted for 11% of revenue.
5. International: Circuit City's operations in Canada, consisting of the four above categories combined. International sales accounted for 5% of revenue.

[edit] Service

Consumer electronics retailers attempt to differentiate themselves from discount or online retailers through service offerings—most prominently, extended warranties, installation, and repair. Circuit City offers the latter two through their in-house brand firedog, which was launched in October 2006 and competes directly with Best Buy's Geek Squad and their Magnolia Hi-Fi home theater installation offerings. Through the first three quarters of fiscal 2008, warranty and service revenue accounted for approximately 7.6% of net sales company-wide.

Circuit City has not released detailed margin information regarding their extended warranty program, but it can be assumed that as a high premium, low loss insurance, it represents considerable profit for the company. Margins on installation and repair services are likely not as high, but still represent a considerable value add to a sale. Installation has also been shown to reduce return rates versus self-install purchases.

Despite the launch of firedog, and an increased focus on customer service as a differentiation from discount retailers, Circuit City's customer satisfaction ratings are poor, trailing Best Buy and Costco considerably, and lagging even Wal-Mart. Circuit City's satisfaction rating has steadily declined since 2003, dropping 5.5% overall.

The company's continuing viability as an independent entitiy remains open to question as does its attractiveness to a potential acquirer

Customer Satisfaction Ratings

Retailer	2003	2004	2005	2006
Circuit City	73	72	70	69
Best Buy	72	72	71	76
Costco	80	79	79	81
Target		75	78	77
Wal-Mart	75	73	72	72

[edit] Potential Takeover: Blockbuster Drops Bid for CC; Other Suitors?

News that Blockbuster (BBI) has made an unsolicited bid to acquire Circuit City broke on April 13, 2008, initially offering over $1 billion for Circuit City, valuing the company between $6 and $8 a share. However on July 3, 2008 Blockbuster (BBI) announced that it was no longer interested in acquiring Circuit City. Despite Blockbuster rescinding its bid for the company, Circuit City has hired Goldman Sachs Group to assist the retailer explore "strategic alternatives" to the company's current state, most of which involve being acquired by another company

[edit] Challenges with Restructuring Initiative

[edit] Struggles Maintaining Profits

Circuit City launched a turnaround plan in 2003, and operated in the black from 2004 until 2007. Circuit City revitalized their business by shifting focus from aggressive market expansion to a defensive stance focusing on improving profitability. The company accomplished this by focusing on profitable HDTV sales, expanding its high-margin service offerings, and placing an increased emphasis on phone and internet sales. Circuit City's web-based sales increased 50% during fiscal year 2007 to $1 billion. However, in fiscal 2008 Circuit City failed to turn a profit, operating at a net loss of $321 million on revenue of $11.7 billion^[7]. These problems continued through the first half of 2009 as the company lost $404 million on net as sales fell 8.5% in the first two quarters of 2009.^[5] This downturn in profitability can be attributed to several factors:

• Competition with Best Buy: Circuit City's most direct competitor, Best Buy has beaten Circuit City soundly so far in calendar year 2007 (Circuit City fiscal year 2008) in terms of sales, revenue growth and profitability. While Circuit City has seen sales fall 4.5% during the first three quarters of fiscal 2008 compared with the same period in 2007, Best Buy has experienced revenue growth of 17%, taking away substantial amounts of customers and market share from Circuit City.

• Falling Sales of Warranties: So far in fiscal 2008 Circuit City has generated approximately $616 million in revenue from sales of warranties and services. This figure is a 7.1% decrease from the same period in fiscal 2007, a significant drop considering a large portion of company profits come from these high-margin sales (exact margin figures not available but estimates range from 30-60% for warranties and services sales). This drop has been a major driver of the decrease in gross and net profit that has caused Circuit City to operate at a net loss so far in fiscal 2008.

• Decreasing Margins on PCs and HDTVs: Through the first three quarters of fiscal 2008 sales of PC hardware took over a great share of Circuit City's product mix. This has had a negative effect on profits as margins on PCs have fallen in recent years. Also, competition and gains in technology have combined to push downwards on margins on HDTVs, which had been integral to Circuit City's turnaround to profitability from 2003 to 2007.

[edit] Circuit City Struggles to Stay Afloat

With the tightening of the credit noose and a declining consumer confidence brought by the credit crisis, Circuit City struggles to keep afloat. So far fiscal 2009 has not been profitable at all, losing $404 million in the first half of the year has only strained its working capital.^[8] As of August 31, 2008 Circuit City was down to $92.5 million in cash^[8], and is closing and liquidating 155 stores, more than a fifth of its U.S. stores^[9]; this action is intended to decrease operating expenses, since it will cut about 17% of its U.S. work force^[9]. A slowdown in consumer spending has limited Circuit City’s option for expansion, decreasing short-term investments by 78%^[8] and suspending the opening of new store locations planed for the year. To remain afloat, Circuit City must conserve its cash and risks pressure of having to close down more stores or seek bankruptcy if consumer spending continues to decline and does not improve.

On November 10, 2008 Circuit City filed for Chapter 11 bankruptcy protection, which will allow it to continue operations and hold off creditors while developing a reorganization plan.^[6] The global economic crisis, with falling vendor and consumer confidence, has taken a toll on Circuit City. The primary reason it filed for bankruptcy was because vendors were threatening to withhold products during the holiday season.^[10] Circuit City obtained $1.1 billion in loans to provide working capital through the holiday season.^[6]

[edit] Poor Performance in International Segment

Initiatives have begun to restructure under-performing Canadian acquisition InterTAN, following the lead of their American stores. Circuit City's Canadian stores account for the majority of its overall presence (789 stores in Canada vs. 681 stores in America), but only about 5% of total revenue. Most recently, during the third quarter of FY08 Circuit City's international segment generated approximately $0.2 million per store whereas the domestic segment generated approximately $4.1 million per store. The condition of the international segment is continuing the deteriorate and Circuit City looked into a possible sale of its international operations in September of 2007, but has decided to postpone shopping for a buyer until the credit markets recover from the subprime lending invoked fallout, to which there is no clear end in sight.

[edit] Personnel Disruptions

During the turnaround, Circuit City has undergone considerable management turnover; out of fifteen current executives, only four have been with the company prior to 2003. The current CEO and Chairman of the Board, Philip Schoonover, joined Circuit City in 2004 after nearly ten years experience at Best Buy. Circuit City has attributed poorer than expected performances in recent quarters to be partially due to execution and internal issues. Chief Financial Officer Michael Foss left the company in April of 2007, the third senior executive to depart in six months, which has caused concern regarding executive turnover during the restructuring process.

In March of 2007, Circuit City made the controversial move to dismiss 3400 senior store employees, replacing them with new hires or allowing them to return at a lower salary. These layoffs represent approximately 8% of the in-store work force, or on average, 5 staff members per store. This had immediate returns on profitability; however, there is concern that it will have lasting repercussions on employee morale and the company's reputation with consumers. By replacing the most experienced sales members, who are also presumably the most knowledgeable and most adept at working with customers, Circuit City may lose effectiveness in both sales and customer services, two fields where they already lag Best Buy. This considerable turnover will also likely lead to temporary understaffing while new employees are hired and trained, further affecting service and sales performance.

[edit] Sales Cycles

[edit] Product Cycles

The consumer electronics market is propelled by innovation, which creates new product cycles and pushes current cycles forward more quickly than other retail markets. This creates demand through the introduction of new technology, as well as through driving down prices of the previous generation of technology. CE retailers like Circuit City and its main competitors are extremely dependent on product cycles; during the strong cycles created by the introduction of the VCR, the CD player, and the DVD player, they outperformed the vast majority of retailers in all markets. However, as demand for these products slows, sales growth for CE retailers slows as well, unless these cycles are replaced or refreshed by new innovations.

Rapid product cycles also leave CE retailers vulnerable to rapid price drops, which cut into profit margins. As these products become commoditized, discount and online retailers, such as Wal-Mart and Amazon.com, can take market share. Product cycles of particular import to Circuity City currently include the falling prices and margins on PCs as well as decreasing margins on HDTVs.

[edit] Seasonal Cycles

Seasonal cycles also affect product cycles. The holiday season in particular can have an unpredictable effect, as both sales and price competition tends to increase. As an example, the holiday season of 2006 saw prices on flat panel TVs falling much faster than expected as vendors became locked in a price war. Video game software is also seasonally dependent, as publishers often time major releases to coincide with traditionally strong sales periods, such as the holidays or the summer, as well as positioning big-name titles to compete against the prominent releases of their rivals.

[edit] Consumer Electronics Product Trends

CE sales have been strong over the last three years due to the strong market for cellular phones, LCD and plasma flat panel televisions, portable MP3 players, and digital cameras. These five product cycles accounted for 26% of total CE sales and 90% of total incremental sales growth in 2005. Flat panel televisions, in particular, are extremely important to success in the current CE market, as demonstrated by the crowding-out effect their popularity is generating, and Circuit City has identified digital television sales as a priority.

Flat panel TVs are of particular importance to CE retailers because of warranty and service opportunities. Recent surveys have demonstrated that CE customers are considerably more likely to purchase warranties or installation for flat panel TVs than they are for most other electronics. Only 24% of customers indicated they "usually" purchased an extended warranty for consumer electronics; in contrast, 58% responded that they were "somewhat likely" or "very likely" to purchase a warranty for a flat panel TV costing $1000 or more, with 42% responding similarly for flat panel TVs less than $1000. Service offerings helped Circuit City return to profitability between 2004 and 2007, but warranty and service sales have dropped so far in fiscal 2008 as customers seem to be choosing Best Buy over Circuit City.

Other product cycles of importance are video game hardware, software and accessories; of particular import are the newest consoles from Nintendo, the Wii, and Sony, the PlayStation3. However, current production shortages on the Nintendo Wii could limit the positive impact of the console's popularity during the 2007 holiday shopping season. On Sony's end, the company recently cut prices on its PlayStation3 which could help spur sales of the console which often lead to increased sale on higher margin software and accessories.

As the third largest consumer electronics retailer in the United States, Circuit City will likely take a large portion of the $1 Billion in expected revenue from converter box sales around the time of the Analog to Digital Television Transition date of February 17, 2009.

[edit] Competition

Circuit City's most direct competition is Best Buy (BBY), which currently has a considerable lead in market share, customer satisfaction, and in efficiency of operations, as demonstrated by its higher sales per store and per square foot. Circuit City also tends to lag Best Buy in expansion and development; for example, the firedog service comes years after Best Buy acquired Geek Squad and Magnolia. So far in fiscal 2008 Circuit City has fallen even farther behind Best Buy. Circuit City has operated at a $325 million loss for the first three quarters of FY08 due to falling sales and decreases in profitability, while Best Buy has experienced a 17% increase in revenue and an 18% increase in operating profit. Apart from Best Buy, other CE retailers, such as Radioshack (RSH) and CompUSA, hold considerably less market share, and are currently undergoing restructuring processes of their own.

Company	Total Revenue (mm)	Gross Profit (mm)	Operating Margin	Same Store Sales Growth	Sales Per Domestic Store (mm)	Sales Per Int'l Store (mm)
Circuit City	$12,430	$2,930	0%	5.8%	$18.3	$0.71
Best Buy	$30,848	$7,712	5.3%	4.9%	$35.37	$21.41

Note: All figures from FY07.

Circuit City also faces growing competition from large-scale discount retailers, such as Costco, Target, and particularly Wal-Mart, which has the second-largest presence in the CE market. The company also competes with specialty retailers, like Gamestop (GME) in the video game market. Online discounters like Amazon are also gaining mindshare as a destination for consumer electronics.

Circuit City faces some pressure from top-tier vendors, who can control prices, limit release of certain product, such as video game consoles, and in some cases (for example, Sony and Apple) have established their own retail presence). Dell, as a major player in computer sales, can also be considered as a competitor.

Top Ten Consumer Electronics Retailers

Company	Revenue 2005 (mm)	Revenue 2004 (mm)
1. Best Buy	$23,688	$20,747
2. Wal-Mart	$13,678	$12,114
3. Circuit City	$11,400	$9,611
4. Dell	$7,930	$7,601
5. Radio Shack	$4,507	$4,311
6. Target	$4,452	$3,953
7. CompUSA	$4,064	$3,823
8. Costco	$3,134	$2,424
9. Sears	$3,073	$3,131
10. Sam's Club (Wal-Mart)	$2,336	$2,070

Top CE Destinations

Company	Rank
Best Buy	1
Wal-Mart	2
Circuit City	3
Amazon	4
Target	5
Costco	6
Sears	7

[edit] References

1. ↑ Circuit City Stores (CC) 10-K 2008
2. ↑ Circuit City Stores (CC) 10-K 2008
3. ↑ Best Buy (BBY) 10-K 2008
4. ↑ Circuit City Stores (CC) Press Release, First Quarter Earnings Release 2009
5. ↑ ^{5.0 5.1} Circuit City (CC) Press Release, Second Quarter Earnings Release 2009
6. ↑ ^{6.0 6.1 6.2} Circuit City Files for Bankruptcy, November 10, 2008
7. ↑ Circuit City Stores (CC) 10-K 2008
8. ↑ ^{8.0 8.1 8.2} Circuit City Stores, Inc. Reports Second Quarter Results, September 29, 2008
9. ↑ ^{9.0 9.1} Circuit City to shut stores in effort to stay afloat, November 3, 2008
10. ↑ Circuit City files for bankruptcy protection, November 10, 2008
11. ↑ Circuit City Stores (CC) 10-K 2008
12. ↑ Best Buy (BBY) 10-K 2008
13. ↑ BBY, 2007 10-K, Item 8, Page 62
14. ↑ ^{14.0 14.1} BBY, 2007 10-K, Item 7, Page 33
15. ↑ BBY, 2007 10-K, Item 7, Page 32
16. ↑ CC, 2008 10-K, Item 8, Page 44
17. ↑ ^{17.0 17.1} CC, 2008 10-K, Item 7, Page 30-31
18. ↑ CC, 2008 10-K, Item 7, Page 22
19. ↑ CC, 2008 10-K, Item 6, Page 21
20. ↑ GME, 2008 10-K, Item 15, Page F-5
21. ↑ GME, 2008 10-K, Item 7, Page 31
22. ↑ ^{22.0 22.1 22.2} GME, 2008 10-K, Item 6, Page 24
23. ↑ RSH, 2007 10-K, Item 15, Page 47
24. ↑ RSH, 2007 10-K, Item 7, Page 21
25. ↑ ^{25.0 25.1 25.2} RSH, 2007 10-K, Item 6, Page 17