Circuit City & Profits, Still More Questions Than Answers (CC, BBY)

Circuit City Stores, Inc. (NYSE: CC) announced something this morning that many thought could not be done.  The company is posting a profit.  It posted a profit of $4.85 million shares, or $0.03 EPS, on $3.65 Billion in revenues (7.7% decrease from last year on same store sales of -10.4%).  Analysts according to First Call were expecting -$0.07 EPS on $3.79 Billion in revenues.

The troubled electronics and entertainment retailer exceeded its fiscal 2008 cost cutting plans by $50 million, reducing SG&A expenses by approximately $200 million. It also showed a 21% increase in direct channel sales and a 29% increase in Firedog(SM) PC services and home theater installation revenues.  The company also cut cap-ex by 11% compared with originally planned fiscal 2008.  It is also claiming consolidated gross profit margin was 20.6%.   At February 29, 2008, it had cash and short term investments of $297.4 million.  Its fourth quarter had a $7.3 million tax gain in it, but that profit posted is recorded as "from continuing operations."

The company has also issued financial guidance out for Fiscal Feb-2009.  It sees sales flat for the year on a mid-single digit decline in same store sales and earnings before income taxes of as a percent of net sales improving by 50 to 100 basis points.  Cap-ex is forecast as $130 to $150 million, while depreciation and amortization if $185 million.  It also sees another drop in domestic net inventory this year of $50 to $100 million.  Including 6 or 8 relocations, it sees 45 to 55 domestic superstore openings.

For the next quarter, it sees a loss from continuing operations (before income taxes) of $180 to $195 million.  The loss increase is based on the expectation of a continuation of the operating trends seen in the second half of fiscal 2008, including a year- over-year decline in gross margin and de-leveraged expenses.  It sees a gradual recover coming in the second half of this year and it believes it has ample cash and borrowing capacity to complete the next phase of its turnaround plan.

Shares of Circuit City closed at $4.53 yesterday ahead of earnings, but they are trading higher by more than 10% at $5.01 in pre-market trading.  Its 52-week trading range is $3.44 to $19.12.

The company still has some serious trust issues at the corner of Wall & Main, and it still has an activist on its heels.  It is hard to trust the actual gains here for about eighteen to months of SNAFU and the conference call at 10:00 AM may put more light on that profit from operations.  Our caveat here is that some companies can actually engineer a turnaround, and maybe that even includes the down and out Circuit City.  It’s still too soon to yell the all-clear signal, but this report is actually not near as bad as many would have guessed.

If things are not that bad at Circuit City, then Wall Street will likely deduce that the guidance at Best Buy Co. Inc. (NYSE: BBY) is reachable as well.  We’d caution that comparing these two is difficult as Best Buy is not in a turnaround and as it generated $33.3 Billion in its annual revenues, almost thrice that of the $11.74 Billion posted by Circuit City.  Best Buy shares are trading up 0.5% at $42.40 in pre-market trading.

Jon C. Ogg
April 9, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at [email protected] and he does not own securities in the companies he covers.