Circuit City warned that third-quarter earnings will be significantly below the guidance it issued in October. A confluence of several events is hitting the company right now, including higher remodeling costs, slowing sales, shrinking margins, and discounters selling electronics. Hopefully, the company can efficiently remodel its stores and get customers back in them. If not, the pain could continue.
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Whew. It's been a long, hard ride down for Circuit City Stores (NYSE: CC). Settling into a new 52-week low, shares of the electronics retailer are off some 20% today on the company's latest earnings warning. Circuit City has been racking up warnings this year like holiday shoppers racking up debt. This one is the second in under two months. When Circuit City warned about its third quarter back in October, it expected a loss of between $0.05 and $0.10 per share including remodeling costs. Its new guidance is for a loss of between $0.31 and $0.35 a share, including the costs. After the October warning, the adjusted consensus estimate was for a loss of $0.08. Ouch. What caused this? Additionally, some of Circuit City's costs related to its store remodelings were higher than the company had expected. Circuit City is attempting to remodel almost all of its nearly 600 stores. Ultimately, the company hopes its exit of the appliance business will allow it to use all that space in its stores to stock more higher-margin consumer electronics. Right now, though, the company is experiencing the pain associated with such a huge undertaking. In addition to the full and partial remodels lopping off a combined $0.19 from EPS, Circuit City is also suffering from sales disruptions because of the associated construction mess. Those disruptions account for $0.03 of the expected third-quarter loss. External and internal forces taking toll Two reasons for the sales slowdown The second catalyst for the sales dropoff is a concern that should be considered longer-term. Consumer electronics retailers aren't the only places to get electronics anymore. Wal-Mart (NYSE: WMT), Costco (Nasdaq: COST), and Target (NYSE: TGT) are now in the game. With Wal-Mart's pricing power, it could pressure places like Circuit City and Best Buy on price. It may also be that e-tailers such as Amazon.com (Nasdaq: AMZN) are taking market share from Circuit City and Best Buy. The e-tailer announced that in its third quarter, consumer electronics was its second-biggest business behind books, beating out music. Circuit City is in a tough spot because it's trying to remodel its stores to meet a demand that could actually be shifting away from it. The combination of macro-economic forces mixed with the encroachment of discounters into its space, plus the added weight of higher expenses, will probably keep this company hurting for a while longer. It's too soon to say whether discounters are really a huge long-term threat to Circuit City, but this is a trend that should be watched closely. Your Turn:
The culprit for the shortfall? The same stuff that's been going on with Circuit City for a while. The company is blaming lower-than-expected sales, for one thing. Circuit City said it had a great weekend after Thanksgiving, but it wasn't enough to make up for a dragging quarter. Competition prompted promotional pricing, which pressured margins. Also, the company's markdowns on appliances -- the business it's getting out of -- shaved $0.06 off of EPS.
More troubling than the remodelling costs are the company's disappointing sales. Waiting through renovations is one thing. Slowdowns in the sales of the products the company is choosing to focus on, though, doesn't instill tons of confidence that the "new" stores will actually be successful. When the company warned about its third quarter the first time, it said that sales were slow across "virtually all product categories."
Two things are probably going on here. First, consumer spending in general has been slowing, and competition for the consumer-electronics dollar is fierce. Circuit City isn't alone in this regard. Competitor Best Buy (NYSE: BBY) warned about the remainder of its fiscal year a few weeks ago.
What do you think lies ahead for Circuit City? What could the company do to make sure that customers continue shopping at its stores instead of places like Wal-Mart and Target? Talk about it on the Circuit City discussion board.
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