12/21/2007

By MICHAEL FELBERBAUM  / Associated Press

Holiday shopping might not be enough to save the fourth quarter for struggling electronics retailer Circuit City Stores Inc.

Executives with the Richmond company warned Friday that they expect a modest loss in the period, despite America's traditional holiday hunger for televisions and other high-tech gadgets.

Coupled with a wider-than-expected third-quarter loss, the gloomy prediction prompted Wall Street to question whether Circuit City should give up trying to fix its numerous problems and hang out the for sale sign.

The nation's second biggest consumer electronics retailer saw shares tumble Friday as investors reacted to a quarterly loss driven by lower extended warranty sales and business interruptions the company blamed on ongoing restructuring efforts.

"Clearly we are very disappointed," Chief Executive Philip Schoonover told analysts during a conference call. Schoonover said the company underestimated the financial impact of cost-saving initiatives on sales. "Our current focus is to rebuild our selling culture," he said.

Its shares fell $1.85, or 27.8 percent, to $4.81 in afternoon trading Friday after briefly sinking to a 52-week low of $4.77 earlier in the session.

The results came three days after larger rival Best Buy Co. reported its third-quarter profit jumped 52 percent, ahead of analyst expectations for the Richfield, Minn., retailer.

For the three months ended Nov. 30, Circuit City's losses ballooned to $207.3 million, or $1.26 per share, from $20.4 million, or 12 cents per share, a year ago. Excluding tax-related accounting items, losses totaled 64 cents per share in the latest period.

Sales slipped 3 percent to $2.96 billion from $3.06 billion a year earlier, with sales at stores open at least a year falling 5.6 percent.

Analysts were clearly disappointed.

Chris Horvers from Bear Stearns asked Schoonover in the conference call if he had considered throwing in the towel and looking for a buyer. "It seems every quarter comes as surprise as to the amount of disruption," Horvers said.

Schoonover, however, maintained Circuit City is on the right track. "We're implementing the right initiatives to lead to profitability and sustained growth," he said. "We're staying the course on our longer-term strategic initiatives."

Circuit City also said it has received a commitment to more than double its $500 million credit line to $1.3 billion.

The company also said it planned to open 61 to 63 new and relocated U.S. Superstores in fiscal 2008; two-thirds of the openings will be 20,000-square-foot stores, called "The City," with a new look and different fixtures, lighting and product selection. It also expects to open 50 to 60 new and relocated stores in fiscal 2009.

In the third quarter, the company said sales improved strongly in several product categories, but those gains were offset by declining purchases of other electronics gear. For instance Circuit City saw a double-digit increase in video gaming products.

Likewise, significant sales decreases in tube and projection televisions more than offset double-digit sales growth in flat-screen televisions. Sales of camcorders and DVD hardware fell by double digits.

Revenue from Firedog, the company's PC services and home-installation business, increased 29 percent, Circuit City said. Sales of extended warranties were $67.4 million, compared to $103.3 million in the same period last year.

While Circuit City laid off 3,400 high-paid workers and replace them with lower-paid new hires in March, it announced this week the approval of millions in cash incentives to retain its top talent following the departure of several key executives over the past year. Executive vice presidents could claim retention awards of $1 million each and senior vice presidents could get $600,000, provided they stay with the company until 2011, according a filing with the U.S. Securities and Exchange Commission.

The bonuses didn't sit well with Merrill Lynch analyst Danielle Fox, who questioned whether Circuit City should be focusing on incentives for the people who sell its products in stores.

"It seems like the top executives are getting paid more for poor performance," Fox said. "I don't see really what the incentive is for them to perform, to stay with Circuit City."

Schoonover said the bonuses are essential to keep together a team he spent three years assembling. He added that Circuit City offers competitive starting wages for store employees and gives performance bonuses to supervisors.

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AP Business Writer Tim Huber in Charleston, W.Va., contributed to this report.

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On the Net:

Circuit City: http://www.circuitcity.com