Circuit City managed to surprise investors this morning, but not in a good way. The company posted an unexpected loss for the third quarter of $16 million, or 9 cents a share. Analysts had been estimating the company would end up with earnings of 5 cents a share. The news caused shares of Circuit City to tumble sharply, falling roughly 18% in morning trading. Price cuts associated with stiff competition from companies like Wal-Mart (WMT: Charts, News, Offers) were cited as the primary cause for the third quarter loss. The results have already caused Circuit City to lower their outlook for the full year; how will they manage to deal with the competition moving forward?
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- RedChip Research Target Price $ 5.25
The loss of $16 million compares with earnings of $10.1 million, or 6 cents a share, in the year-ago period. Sales for the third quarter rose 6.9 percent, from $2.9 billion last year, to $3.1 billion this year. The results were still slightly below analyst's expectations of $3.12 billion. On the plus side, same-store sales for Circuit City increased by 5.1 percent.
Circuit City's chief executive, Philip J. Schoonover, said, “Although flat panel television unit sales increased by strong double digits, the increase in television units and associated attachment sales did not produce the gross profit dollar results necessary to offset these price declines.” Flat-panel televisions ended up being the main category where gross margins ended up falling below expectations. Schoonover had the following comments, “The pace of the decline in flat-panel television prices accelerated during the quarter as manufacturers and retailers competed aggressively for market share, and prices fell to unanticipated levels.”
To some degree, Circuit City's results echo those of Best Buy (BBY: Charts, News, Offers), whose earnings came in last week below expectations. Both companies have been negatively affected by the price competition that was initiated by Wal-Mart. Best Buy significantly lowered their prices, and Circuit City offered to match or beat competitor's prices. The situation is a little more complicated for Circuit City though, as the company has been working through plans to turn the company around to gain back market share from Best Buy.
For the full year, Circuit City expects sales to increase by 8 to 9 percent, which is lower than their previous estimate of 9 to 11 percent. The company has also lowered their sales forecast for the 2007 fiscal year. Given these results, investors are concerned about the status of Circuit City's turnaround efforts. Also, as flat-panel televisions become more popular, the competition isn't likely to let up. Since their expectations for the holiday season were off the mark, Circuit City will have to work to show investors that they are capable of competently managing their operations in the face of such competition, and that ultimately their turnaround operations will be successful.
The Company's principal activity is to market branded consumer electronics, personal computers and entertainment software through retail stores. It operates the Circuit City Superstores and the mall-based Circuit City Express stores. The stores sell video and audio equipment, mobile electronics and home office products. The products include televisions, DVD players, camcorders, cameras, audio systems and compact disc players. The other products include car audio, video and security systems, computer peripherals, facsimile machines, wireless phones, video games and movie discs and music albums. The major suppliers include Sony, Hewlett Packard, Panasonic, Samsung and Toshiba. As on 31-August-2005, the Company's domestic segment operated 616 Superstores and 5 mall-based stores in 157 US markets and its international segment operated 938 retail stores and dealer outlets in Canada. On 12-May-2004, it acquired InterTAN, Inc and on 02-April-2004, it acquired MusicNow, Inc.
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