Will Circuit City Burn Out?

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On the one hand, it's great to have a positive cyclical swing at your back when you're trying to turn your business around. On the other hand, sometimes that can confuse real improvement with simply "going along for the ride." It remains to be seen whether CircuitCity (NYSE: CC) can achieve its somewhat lofty targets for near-future operating margins.

For now, though, flat-panel TVs and digital audio products like Apple's (Nasdaq: AAPL) iPod are certainly helping Circuit City's recovery and turnaround. Sales were up more than 17% in the most recent quarter, with same-store sales growth greater than 14%, thanks to sales of the aforementioned products and notebook computers. Gross margin slipped a bit, but more restrained growth in SG&A expense led the company to reverse a year-ago operating loss.

There seem to be two main lines to Circuit City's self-improvement plans; I like one, but I'm not sure about the other. The first involves investments into the operating platform itself -- projects like improving in-stock position and inventory control. It takes an up-front investment, but one need only look at Wal-Mart (NYSE: WMT) or Dell (Nasdaq: DELL) to see how behind-the-scenes process improvements can boost profits.

The second line, service offerings, seems more dubious. Best Buy (NYSE: BBY) has been pushing its service angle, and Circuit City wants to make things like PC and home theater installation a bigger part of its business as well. Unfortunately, I'm just not sure there's that much money in it. There's always a "do it for me" segment of the population that'll pay for services, but I'm just not sure it's a big enough group to really make a difference.

In the meantime, demand for high-tech TVs and such will eventually slow -- whether that's due to saturation, interest rates, economic conditions, or what have you. And maybe the folks at Sony (NYSE: SNE) and such will invent some shiny new gadget to keep electronics vendors' registers ringing. Still, I wouldn't overpay just to find out.

Plug in to further Foolishness:

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Fool contributor Stephen Simpson but has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).