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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: patron_anejo_por_favor who wrote (17816)	12/6/2004 6:34:01 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

I just updated my post look at the press release

To: patron_anejo_por_favor who wrote (17816)	12/6/2004 6:51:37 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Snip on CC by Jeff Macke On Minyanville In terms of how much of CC's miss was due to weak entertainment sales, the company itself notes that the category was 13% of total sales in '04 vs. 14% in '03. The company offers that declines in this category accounted for 160 basis points of the sales miss. Thus they seem to have been planning higher sales despite less promotions and a weak line-up (simply bizarre). CC attempts a similar psuedo-dodge on sales of satellite TV systems and wireless. They blame 120-basis points of their miss on digital video and 90-basis on wireless while simultaneously claiming that the shortfall in both cases were "principally driven by a business model change". Between entertainment, digital TV and wireless Circuit City blames 370bps of their shortfall to plan on strategic decisions. It's a stance akin to pushing a broken car over a cliff then being "disappointed" when it won't start. Red Flags So far we haven't learned anything new that we can apply to other retailers. With the recent numbers from Echostar (DISH:NASD) and DirecTV DTV:NYSE) it's clear that digital TV "weakness" is all about CC. As for entertainment, sales are weak (we've heard it from BBY as well) but not surprisingly so. The most ominous signal from this release as it applies to consumer electronics in general is in video (TV's, DVD's etc) which accounts for 43% of CC sales. The working assumption in consumer electronics is that the consumer rotating into hi-def televisions will be a boon for the industry. Higher ticket items, presumably higher margins and a bonanza of related accessories; this migration is the seen as the land of milk and honey for CE retailers. Seemingly in support of this idea, Circuit City saw triple-digit sales gains in displays, double-digit gains in LCD displays and digital imaging and single digit gains in digital televisions. "The rub", and it's a big one, is that double-digit decreases in tube televisions, DVD players and digital video service (which the company counts twice) offset those gains and led to total sales gains of 0 (zero). This is simply remarkable given the hype in the space and the price points of hi-def displays. Between price declines at the high-end and consumer disinterest in the low end the result was that triple digit sales increases at the high-end weren't even enough to get total category sales up to flat. Conclusions (NB: My opinions, not advice): Circuit City remains an execution train-wreck. The company has inferior locations, a worse business model and, it would seem, lesser managers than their competition. They may not get picked completely clean by Wal-Mart (WMT) and Best Buy but they need some new ideas fast if they are going to survive. I'm not interested in the stock of CC long or short. Decent balance sheet and buy-out risk remain the best parts of the long thesis and are good enough (particularly the latter) to keep me away from the short side; despite the facts of the first bullet point making the long side unappealing (again, only in my opinion). Entertainment software (DVDs and video games) sales are generally soft. We've heard this from enough companies to assume it to be true (regardless of how "surprising" it may be). It's still early in the hi-Def migration but it's not unfolding as promisingly as it once seemed. While conceding upfront that CC is uniquely bad, their experience in video sales netting out to zero at this point in the Great TV Upgrade is concerning. If Hi-Def sets are going to sell simply as a function of price coming down even as that potential of lower prices all but eliminates sales at the low-end... well, that's a bit of a problem and not an idea built into the long-range thinking and planning for retailers. If Wal-Mart's focus on electronics price cuts "hurts" BBY (and it does) it treats CC in a way that would make the Marquis de Sade blanch. CC overpaid on the 4.5M shares they bought back at an average of $15.42 per share (and why on earth would they buy back shares with operations this bad?). Put the December 17th earnings release and call on your radar. With sales results generally soft the last reed of retail hope is better margins. CC didn't guide eps lower. If the company managed to hit their number due to margins as opposed to s-t-r-e-t-c-hing the better operators in the space go unscathed by this and the Hi-Def margin promise is alive (if a little sickly).