Circuit City, Wishing They Could Go Back In Time (CC, BBY)

September 20, 2007 by Douglas A. McIntyre

Circuit City Stores, Inc. (NYSE:CC) is feeling the wrath of the trading gods today.  At $9.05 it’s also putting in a new 52-week low under the prior $9.43 low, and this is actually a lowest price since the end of 2003 or start of 2004. 

The company lost $62.8 million in the quarter, or -$0.38 EPS.  That was under the $0.06 reported last year.  Revenues were also down 6% to $2.64 Billion, and same-store-sales fell about 8%.  First Call had estimates at -$0.12 EPS and $2.78 Billion in revenues.

This was one we added to a “watch list” for a Bait Shop (buyout candidate) at the end of 2006 when cracks really started taking hold in the stock around $19.50 (new year low at that time too), and we revisited the “watch list” status again in April.  We were trying to see if there was going to be an implied floor since private equity was still on a buying binge, but we couldn’t get past the Circuit City woes.  But because of how the company killed its own business model we couldn’t find any reason whatsoever to be positive on this.  We still can’t.  In fact, Circuit City might even need to move its “Goodwill” from the asset side of its books to a new “ill-will” under the liabilities side of the books.

The problem is that Circuit City wrecked what was already somewhat a flawed or at least a tier-2 model.  This has never been a cool shopping spot, at least not in recent years, and it hasn’t had the buzz of a Best Buy (NYSE:BBY) store in longer than memory serves.  Go inside the stores back to back for a comparison and you’ll understand.  But then the company killed its only advantage: it fired its more tech-savvy floor workers to go for the cheaper per-hour flat rate worker.  Management thought salespeople were just numbers.  This will end up being a good university business school case study in the future about what not to do when you aren’t number one. 

Why it had the open and simple return policy for its flat screen LCD and Plasma TV’s is anyone’s guess, but it was another poor move.  Could you imagine car dealers taking a perfectly fine car back a couple months after they sold it?

If you will recall the company received a private equity bid at $17.00 per share in cash from Highfields Capital Management LP back on February 11, 2005.  That was back before private equity firms started buying companies as though they were playing a tycoon board game where everything down to the corner deli and the laundromat was deemed as attractive.  Circuit City ultimately rejected the bid as inadequate.

Even if Highfields or another private equity group were to get interested again, they’d be dealing with a poor business model compared to early 2005.  This company has gone from decent, to marginal, to bad, to a disaster.  A classic private equity firm wouldn’t be interested.  Now it would be a complete and total turnaround or bailout firm, and they’d be fighting a major battle from the lower ground.

We still review this from time to time to see if we can make the justification that someone would be interested in turning this around.  We haven’t changed our name to Dr. Pangloss yet.

Jon C. Ogg
September 20, 2007