2/22/02: Circuit City to SpinOff CarMax
Circuit City to Spin-Off CarMax
Feb 22 2:19pm ET
By Ellis Mnyandu
NEW YORK (Reuters) - Circuit City Stores Inc. said on Friday it will split off its CarMax used-auto store business, and warned that store overhauls will cut earnings through 2003, sending its shares into a tailspin.
The Richmond, Virginia-based company, the second largest U.S. consumer electronics retailer behind Best Buy Co. Inc. , also said sales in January and February were below expectations.
The company's shares plummeted $7.18, or 30.27 percent, to $16.48 in early afternoon, making it the top percentage loser on the New York Stock Exchange. Trading in the stock was delayed for nearly half an hour after the opening.
Todd Kuhrt, an analyst at Midwest Research, said news of the CarMax spin-off may be seen by some investors as positive, but the majority would find the company's earnings guidance disconcerting. "It's a little disappointing," he said.
Alan Rifkin, an analyst at Lehman Brothers said he was advising investors to sell Circuit City shares and buy those of Best Buy instead as Circuit's store overhaul "will be very disruptive to existing operations".
"(Circuit City) is spinning off what appears to be the only growth engine," said Rifkin. "We point out that CarMax had been the portion of Circuit City's business that had been providing the upside surprise throughout 2001," he added in a research note.
His comments were contrary to the "strong buy" recommendation which Merrill Lynch analyst Peter Caruso put on Circuit City's stock on Wednesday, citing recent improvements in the company's operating cash flows last year which suggested strong underlying earnings trends that would not justify recent price correction.
TIMING FOR SPIN-OFF
The plan to spin-off CarMax -- a Glen Allen, Virginia-based chain of some 40 dealerships in 10 states -- comes at a time when the used auto retailing industry is expected to benefit from a drop in new vehicle sales which have until recently been boosted by the lure of zero-percent financing.
In the spin-off, which Circuit City expects to complete by September, holders of CarMax Group stock would receive one share of CarMax Inc. stock for each share of stock redeemed by the company.
Circuit City's store remodeling and store relocations, which are expected to cost $182 million in the next two years, will slash 6 cents off earnings per share in 2002, and reduce profits by 18 cents in 2003, Circuit City said in a statement.
The retailer said it expects to earn between 70 cents to 74 cents in the fourth quarter, ending Feb. 28, slightly below analysts' consensus estimate of 75 cents, as compiled by research firm Thomson Financial/First Call. Current analysts' estimates range from 72 cents to 78 cents. Circuit City earned 49 cents in the year-earlier period.
Kuhrt at Midwest Research added that the company's earnings outlook could even be much worse if the store remodeling costs were accounted for, not as one-time items, but as ongoing charges that are prevalent in the retailing industry, which always has stores being revamped or relocated.
Circuit City President and Chief Executive Alan McCollough said the store revamp will focus on the introduction of a new, well-lit video section at 300 stores by September in order to cash in on the high-growth big-screen television segment.
He said the video section plan will cost an average of about $325,000 to $350,000 per store. The company will also work to improve supply chain management, advertising and making sure its shelves always stay stocked.
"What we are trying to do this year, is invest in those things that we believe will provide the long-term health of this business," he said. Shares of Best Buy also fell 5.52 percent, or $3.90, to $66.75 in early afternoon.
Shelly Hale, an analyst at Banc of America Securities said Best Buy's fall could be as a result of a fear that if "Circuit City succeeds in (revamping) its video segment, that might mean some competition to Best Buy".
Since 2002 began, Circuit City shares are off 35 percent, compared with a 10 percent drop in Best Buy and consumer electronics industry No. 3 RadioShack Corp. .
INVENTORY CRUNCH?
Circuit City, with more than 600 stores, said it had anticipated January and February sales to "moderate" from the December levels, especially given merchandise shortages as a result of vendors changing to new product lines. But Rifkin said the sales shortfall may be due to Best Buy getting the lion's share goods from vendors.
Fourth-quarter sales at stores open at least a year, or same-store sales, are expected to show mid-single-digit growth, Circuit City said, adding for the two months same-store sales growth is likely to be in the low single digits.
Circuit City has been losing market share and customers to Best Buy as it struggles to revamp its operations and boost sales after deciding in November 2000 to cease selling major household appliances like refrigerators and dishwashers.
Increased spending by Americans on red-hot home entertainment technologies like big screen televisions and DVD players since Sept. 11, helped Circuit City regain some lost ground through the second half of 2001. |
