24/7 Wall St.

Out of large electronics retailers, Circuit City (NYSE: CC) has become the irrelevant shopping destination and it has a stock that proves it.  Its CEO, Chairman, and Chief Supreme Leader Philip Schoonover is probably hanging by a thread.  It’s time for the board of directors to stomach up some liquid courage and take back control.  In fact, they need to tell Mr. Schoonover that his new name is "Scoot-over."

Mr. Schoonover joined the company in October 2004 as executive vice president and chief merchandising officer. He was elected president in February 2005, joined the board of directors in December 2005, was elected chief executive officer in March 2006 and was elected chairman of the board in June 2006.

Early in 2007, the company lost more confidence from Wall Street when the announcement came that its CFO was leaving the company.  It was also recently announced that David Mathews, EVP of merchandising, services and marketing was leaving his position to become president of Orchard Brands.  Losing your merchandising officer in Q4 ahead of the period after Christmas is not the greatest signal.  Schoonover’s turnaround team under him hasn’t stayed long enough to make a difference.

In a world where your technology customers might have no conscience, having too flexible of a return policy on high-end items isn’t a win.  Flat panel LCD or plasma TV seem to be priced lower and lower each month, and making it too easy for customers to return these hurt.  Firing the rest of your more tech-savvy salespeople and getting rid of your only advantage over rival Best Buy (NYSE:BBY) to go to a lower-paid hourly worker that doesn’t understand the technology as well was perhaps the dumbest attempt to save cash we’ve seen from any retailer all year.  Even though it has asked some workers to return, there is some pretty bad blood that management created.

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.  Even if there wasn’t a private equity crunch and liquidity shortage right now to do deals, there is no way on earth that Highfields would come back with this price and they refused to chase the stock higher.  Circuit City shares actually rose after the buyout offer, although the cracks in the armor started appearing late last year and the cracks broke the armor apart and all that is left is an emperor who wears no clothes.  "Scoot-over" wasn’t the head of the entire show for the entire time but he’s been there long enough to do far more damage.  Mr. Schoonover probably wishes he had a fabled time machine to go back and fix this.

Even the potential InterTAN sale in Canada may not yield enough help here.  S&P has noted that this had one of the largest share price drops compared to prices paid for shares by the company itself during a share repurchase program.  The only thing that occasionally saves Circuit City stock down at such low share prices is the occasional takeover rumor.  We have reviewed this over and over for our Special Situations subscriber letter, but we have not been able to make ourselves see the light.  The earnings have been a disappointment and First Call shows a loss expected for Fiscal FEB-2008, so any would-be buyer today has to be a far better turnaround player rather than an enhancement team that can engineer a 12-month to 18-month flip.

A new CEO with a vision might actually be able to woo back some of the old employees.  Best Buy does roughly 3.5-times the revenues, yet its market cap of almost $22 Billion dwarfs that of Circuit City’s $1.25 Billion.  Analysts have all bailed on the stock, so even if it has recovered off recent lows you could expect a series of upgrades (or at least waves of more positive comments) from Wall Street if "Scoot-over" left or was forced to leave.

Based upon the low share price, the dismay for Schoonover, the gross mismatch in revenue multiple comparisons, the ability to spruce up the stores, the possibility of a new leader getting some workers back, and a dozen more factors…. 24/7 Wall St. feels that if Philip Schoonover would take our "Scoot-over" name to heart that Circuit City shares would potentially rise more than 10% IF he was simultaneously replaced with someone who could turn this around. 

Shares are up $2.00 from its recent lows, but it still looks dismal.  At $7.39, the 52-week trading range of $5.35 to $25.25 makes this party just less-dull.  Circuit City is regularly reviewed for our "10 Stocks Under $10" newsletter.

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Jon C. Ogg
December 6, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.