Consumer electronics retailer Circuit City hopes a new marketing campaign will make for a better summer and beyond after fiscal first-quarter net income was decimated year-over-year. But with primary competitor Best Buy today turning in comparatively outstanding results for the most-recent three-month period, it's clear Circuit City's challenge is a tough one.

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By Dave Marino-Nachison (TMF Braden)
June 19, 2001

Faced with slumping earnings and solid performance from primary competitor Best Buy (NYSE: BBY), consumer electronics retailer Circuit City (NYSE: CC) will launch a marketing campaign aimed at rejuvenating its business.

News reports yesterday said Circuit City executives are planning a new logo and ad campaign that will start next month and include television spots. "We don't have the leisure of not being aggressive in the marketplace," said CEO Alan McCollough in a Reuters story. A trial campaign, the story said, helped drive encouraging results during the Mother's and Father's Day shopping "seasons."

He's right. Beset by a flagging economy that has hurt consumer spending, a market in transition with weak PC sales and many new digital products still gaining traction, and costly internal factors, including a remodeling that targets future growth areas, Circuit City has delivered mostly bad news in recent months.

Though its CarMax (NYSE: KMX) division has generally performed well, the overall picture isn't as rosy. Last week Circuit City said fiscal first-quarter (ended May 31) net income, while falling in line with market estimates, fell more than 70% -- though revenues fell only 13% -- as same-store sales fell a remarkable 25% year-over-year.

Perhaps that's understandable given the economy, but not nearly as much so after reading Best Buy's fiscal Q1 (ended June 2) earnings press release. Though the company did turn in net income that fell to $55 million from $72 million a year ago, several of the company's other numbers looked better: Sales improved 25% and gross margins improved as well. The results would have been even better but for the company's acquisition of Musicland, which lost money on an operating basis as a favorable product mix helped push profits.

Now the company is looking for "modest" same-store sales growth in the second half and is pointing investors toward EPS of $2.16 to $2.21 for the full year assuming "no significant decline in the overall economy." (Wall Street's current consensus estimate is $2.13.)

Both Circuit City and Best Buy are up against some difficult circumstances, but the latter is putting up a better fight. Given that, it's somewhat remarkable that on a price-to-earnings basis using Market Guide data from the last 12 months -- and even with Best Buy's superior stock performance over that period -- the two companies still trade at nearly identical multiples.

Sometimes Dave Marino-Nachison just feels like crying. His stock holdings can be viewed online, as can The Motley Fool's disclosure policy.

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