BBY- 52.59
Added some puts
This issue isn't just about CC
HD was also once the darling.
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3rd UPDATE: Circuit City Shares Fall On 3Q Loss, Warning
64 minutes ago - Dow Jones News
(Updates throughout to recast lede, incorporate share activity, include analyst comment) By Mary Ellen Lloyd
Of DOW JONES NEWSWIRES
Shares of Circuit City Stores Inc. (CC) on Friday plummeted as much as 35% to a 16-year low after the struggling electronics retailer issued more bad news regarding its restructuring and said increased financing is in the works.
The Richmond company's loss for the Nov. 30-ended quarter was more than four times as steep as Wall Street expected and represented the second quarter in a row that changes tied to Circuit City's turnaround efforts appeared to disrupt sales more than help them.
"We underestimated the financial impact from the disruption of our transformation work," Chairman and Chief Executive Philip Schoonover said in a statement.
Staffing cuts and other changes designed to overhaul merchandising and customer service for the long term in the most recent quarter led to more customers walking out of the stores without a purchase. Circuit City also generated fewer sales of higher-margin accessories, installation and repair services, and warranties, Schoonover said. Such sales have been a key focus for Circuit City and other electronics retailers as they try to offset the typical decline in product prices and margins as any new technology gains mainstream acceptance.
Schoonover said during a conference call with investors that Circuit City has improved on some of those metrics as store-level changes have abated, and the retailer is now focused on rebuilding its "selling culture."
"We're staying the course on our longer term strategic initiatives," he said.
Circuit City shares traded down 24% at $5.06 recently. Shares, which traded as low as $4.36 premarket, haven't fallen to these levels on a split-adjusted basis since late 1991, according to BigCharts.com. Shares of larger rival Best Buy Co. (BBY) recently traded up 1.9% to $52.37.
For the quarter ended Nov. 30, Circuit City reported a net loss of $207.3 million, or $1.26 a share, compared with a year-earlier net loss of $20.4 million, or 12 cents a share.
Revenue fell 3% to $2.96 billion, while same-store sales fell 5.6%.
The mean estimates of analysts surveyed by Thomson Financial were for a loss of 31 cents a share on revenue of $3 billion. The company had projected its loss to be roughly in line with the second quarter's 38 cents a share.
Results in the latest period included a 62-cents-a-share charge for a write-down of deferred tax credits triggered by a string of losses the company has recorded. Circuit City said the move "does not reflect a change in the company's long-term financial outlook." But a Bear Stearns Cos. (BSC) analyst said it nonetheless indicates "a higher likelihood that they won't generate sufficient earnings in the future to realize the tax benefits related to previous losses."
The results were even worse than Bear Stearns analyst Christopher Horvers' lowest expectations, he said in a note to clients. "The company continues to underestimate the disruptions caused to the business by their own efforts to right the ship," he said. "However, the ship is now listing."
Circuit City has cut labor and recast store procedures as part of its turnaround to stem losses in the face of strong competition from rivals like industry leader Best Buy. Instead, the retailer has seen the red ink continue and the departure of three senior-level executives the past year - including its merchandising executive three weeks before Black Friday.
"The majority of the pressure on its fundamental performance has been self inflicted," said Sanford Bernstein analyst Colin McGranahan.
On Tuesday, Best Buy posted a better-than-expected 52% increase in fiscal third-quarter net income, helped by an extra week of post-Thanksgiving sales and sales of big-ticket items such as video game systems and notebook computers.
Electronics seem to have been among the holiday's best sellers this year, and prices of popular flat-panel TVs, while still falling, haven't gone into the kind of tailspin they did last year. Best Buy's results and analysts' research indicate a better balance between supply and demand and improved planning by retailers have kept pricing more stable so far, despite continued pushes by Wal-Mart Stores Inc. (WMT) and other discounters into TVs and despite weaker traffic in stores leading up to the final shopping weekend. Schoonover and other Circuit City executives said that while traditional competitors may have been less aggressive on pricing and promotion than last year, warehouse clubs and Internet retailers are very focused on pricing and have made the climate as competitive as last year.
Circuit City's gross margin in the latest quarter fell to 19.1% from 22.1%, hurt by sales of lower-margin TVs and personal computers and disappointing warranty-plan sales. And even though Circuit City said it's on track to take out $150 million in expenses this year, the combination of lower sales on lower margins killed profitability in the quarter.
In the U.S., sales fell 4% to $2.8 billion, while same-store sales dropped 5.8% as decreases in projection and tube televisions more than offset growth for flat panel TVs. International sales rose 6%, largely on exchange-rate fluctuations as comparable-store sales fell 1.1% in local currency.
Circuit City now anticipates a "modest" fourth-quarter loss, not the profits the company projected in September, "assuming that current sales and margin trends continue for the balance of the quarter." Analysts had expected a profit of 56 cents a share, according to Thomson Financial's survey.
As for the credit line with Bank of America Corp. (BAC), it has received a commitment for a $1.3 billion asset-backed credit facility, which amends a current $500 million facility. The deal should close next month.
Chief Financial Officer Bruce Besanko said the new credit "enhances our liquidity and flexibility and demonstrates that we have adequate access to capital markets." He said closing of the five-year agreement doesn't depend on a successful syndication.
Between the company's current cash and short-term investments, which stood at $483.1 million on Nov. 30, and the amended credit facility, Circuit City expects to "have more than enough available liquidity to sustain a multi-quarter turnaround," Besanko said. Nearly all of Circuit City's stores generate positive cash flow, he said.
But Bear Stearns said the increase in the credit line and an announcement earlier this week of retention packages for key employees indicates Circuit City has "gone into investor 'assurance mode.'"
The company maintained plans to open as many as 60 stores next year, down from its estimate a year ago that it would open 75 to 100 stores in fiscal 2009.
But Besanko and Schoonover said that expansion plans by rival make it imperative for Circuit City to continue adding stores to remain competitive. They said the chain must also continue replacing roughly 400 older stores designed in the 1980s when Circuit City sold appliances and generally needed more warehouse space. Its newest stores are 20,000 square feet, compared to roughly 34,000 square feet at the older stores, but both formats have about the same amount of showroom space.
Circuit City, which had earlier hired Goldman Sachs Group Inc. (GS) to explore a possible sale of its international business, in September put the plan on hold until after the holidays due to credit market turmoil and its efforts to focus on improving operations.
Circuit City reiterated those plans Friday.
-By Mary Ellen Lloyd, Dow Jones Newswires, 704-371-4033; maryellen.lloyd@dowjones.com
(John Flowers contributed to this report.)
> Dow Jones Newswires
12-21-07 1327ET
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