Circuit City Makes Short Work of Second Quarter

By Richard McCaffery (TMF Gibson)
September 7, 1999

Robust sales of personal computers and other consumer electronics led retail giant Circuit City (NYSE: CC) to expect earnings of about $0.35 per share for its fiscal 2000 second quarter, representing 52% growth from last year. The mark would easily eclipse analyst estimates of $0.34 per share, according to Zacks Investment.

The Richmond, Virginia electronics store, which formally announces second quarter results September 15, said sales from its core electronics retail business grew 14% to $2.4 billion, up from $2.1 billion a year ago. Same-store sales growth of 10% helped power the quarter.

Since 1997, Circuit City has had two series of stock that track its related businesses, which, unfortunately, makes it very difficult for investors to know which business they're looking at. What arises from this mess is needless confusion for the investor that the company should move quickly to address. Basically, the Circuit City Group, the main stock, tracks the performance of Circuit City stores. The second stock tracks the performance of the CarMax Group (NYSE: KMX), the division of Circuit City that sells new and used cars.

Including the 75% ownership Circuit City has in CarMax, the company expects earnings of $0.36 per share, up 64% from last year's earnings of $0.22 per share.

Circuit City is the nation's second-leading consumer electronics chain behind Best Buy (NYSE: BBY). The company operates 551 superstores, two consumer electronics-only outlets, and 46 mall-based stores. CarMax operates 32 used-car superstores and 21 new-car franchises. The company operates in almost all of the country's top 100 markets, expects to open around 250 additional stores, and had sales of $9.3 billion last year.

Circuit City has also enjoyed the consumer electronics renaissance that's been taking place since 1998, when, after a two-year slump due to a lack of new products, sales picked up and consumers started buying again. Accounting for a two-for-one split in July shares of the company have soared from $14 3/8 last October to nearly $53 at the high point this summer.

As always with low margin retailers, however, the better investment is the company with the leanest operating structure and most efficient asset management. In this department, Best Buy is winning the war. Best Buy turned its inventory 7.9 times last year, compared to 4.7 times for Circuit City (based on its most recently available numbers). In terms of sales per dollar of assets employed, Best Buy posted $4.01 in sales per dollar, compared to $2.71 for Circuit City.

Still, Circuit City's ratios aren't shabby and the company has boosted gross margins to 24% in fiscal 1999, up from 23% in 1998. Net margins rose 2.3% from 1.2% over the same time period. There's room enough in the U.S. for both powerhouse retailers. At a fiscal year 2000 P/E of 25.6, Investors that follow this industry should take a close look at Circuit City.

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