Circuit City tries a turnaround in a bad economy

Struggling consumer electronics giant Circuit City pulled a big surprise Wednesday by posting a profitable first quarter, which is amazing considering its sales margins are still sounding alarm bells with investors.

Circuit City's overall sales numbers were down for the fourth quarter of its fiscal year just ended, but it also opened or relocated 22 US superstores and enjoyed gains across Web sales, international sales, and revenues from LCD TVs, video gaming products, GPS, and PC Firedog and home theater services.

"Our weakest areas included projection, tube, and plasma TVs, as the consumer shifts sales focus to large LCDs, which is a trend that we've been seeing across the industry," said Bruce H. Besanko, Circuit City's CFO, in a conference call yesterday.

CEO and Chairman Philip J. Schoonover admitted during the call that, on the whole, Circuit City's fiscal year 2008 -- which ended last February -- was very disappointing.

"The fourth quarter, however, showed some progress, and we expect continued improvement from our turnaround strategies in fiscal year 2009," Schoonover told analysts.

Specifically, the second largest CE retailer in the US earned $4.85 million for the three months ending February 29, compared to $4.25 million for the fourth quarter a year ago. In contrast, Circuit City's much bigger competitor, Best Buy, last week reported earnings of $737 million for its fourth quarter, a 3% drop from the year before.

Circuit City's Schoonover also voiced unhappiness today over profitability margins for the fourth quarter. But he said the chain will work on improving those margins over the year ahead by doing a better job of training sales associates to sell not just higher-margin products but also service after the sale, such as Firedog PC tech support and home theater installation.

"Our under-penetration in PC Firedog services is a tremendous growth engine for Circuit City," Schoonover maintained.

Already, the retailer showed year-over-year sales increases of 11% on those two services alone in the fourth quarter, and 14% in "direct channel" -- or Web-based -- sales.

"Our specific opportunity [with home theater] is not only to help our customers to upgrade to flat and digital but to bring the entire high definition (HD) experience alive in their homes through a digital source, theater-like audio, and post-sales support," according to Schoonover.

Over half of the products ordered over the Web were picked up by customers inside Circuit City stores, which means the Web is bringing them through the door anyway. "We continue to focus on strategies that provide enhanced shopping capabilities for online customers and further integrate all of our shopping channels," the CEO contended.

As a major factor behind the improved profitability for the fourth quarter -- which stretched from December 2007 to February 2008 -- officials pointed to cost reductions in the fourth quarter from "continuing structural changes" such as earlier store closings and a consolidation of Circuit City's previous ten regions into eight regions.

"We exceeded our goal to take $150 million out of SG&A [selling, general, and administrative] expenses this year and actually took out approximately $200 million," Schoonover said. "We [also] achieved greater than expected savings in non-store headcount and indirect spend, which is made up principally from not for resale goods and services."

During the call, Besanko specifically cited 27 store closings over the past year in Circuit City's international segment. Despite those closings, international sales rose 17.4%, reflecting an in-store sales increase of 8.6%in local currency, along with "the favorable impact of foreign exchange rates," Besanko said.

Near the end of the call, the executives also pointed to some market drivers they think will work in Circuit City's favor over the next 12 months.

John J. Kelly, Circuit City's chief marketing officer, mentioned the Olympics in August and the digital-to-analog TV conversion next February as pushing sales of digital TVs and audio systems.

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