Circuit City Goes Haywire

Shares of electronics retailer Circuit City (NYSE: CC  ) just short-circuited, down 18% today to a fresh 52-week low. Investors were recently applauding the company's turnaround efforts -- are those initiatives now in jeopardy?

Not long ago, Circuit City suffered through a tumultuous couple of years, seeing its stock price fall from $60 in 2000 to less than $4 in March 2003. Back then, arch-rival Best Buy (NYSE: BBY  ) was eating its lunch by rolling out ginormous big-box stores in more convenient locations. In comparison, Circuit City's stores were harder to find, rapidly becoming outdated, and saddled with an increasingly pushy sales force working off commission.

Proving that a sustainable competitive advantage provides only fleeting superiority in the retail world, Circuit City quickly emulated its larger competitor by updating its stores, moving sales associates to fixed wages, and focusing on the hottest-selling flat-panel TVs and other video and audio equipment. The same can be said for other giant retailers; Wal-Mart (NYSE: WMT  ) , Target (NYSE: TGT  ) , Costco (Nasdaq: COST  ) , and Sears (Nasdaq: SHLD  ) have all jumped on the HDTV and electronics bandwagon.

High demand for the latest technological gadgets is driving overall sales growth, but the multitude of retailers selling the goods is wreaking havoc on related-product profit margins. Fellow Fool Alyce Lomax recently reported that Best Buy is holding up well, with its sales and profits still growing; however, its bottom-line trends tracked below analyst expectations for the third quarter. Today, Circuit City just proved why investors are better served sticking with Best Buy, reporting an unexpected loss for its own third quarter.

Circuit City expects results to remain grim as it grapples with intense competition. It should be able to realize continued sales gains as the rising tide of electronics popularity lifts all ships in the space. But other retailers have a much wider array of stock-keeping units to fall back on, should electronics profit margins fall too low, or should record-breaking demand start to slow. And in a face-off with Best Buy, I can't think of how Circuit City could win, especially given its third-quarter turn of events. We'll see how the ultra-important holiday shopping season turns out, but for Circuit City, I'd expect more of the same.

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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.

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