First, it was Motley Fool Stock Advisor pick Best Buy (NYSE:BBY) that flexed its muscles on Wall Street with top-line growth in double digits. Circuit City (NYSE:CC) has now taken the stage, showing off its latissimus dorsi, or middle back muscle, in near-perfect form as it pumped its way to 11% revenue growth in the second quarter.
The bodybuilder analogy between these two heavyweights in electronics retailing is not too far-fetched. After analyzing Best Buy's latest conference call, and now the one for Circuit City, it's obvious each one is well aware of what the other is up to and is posturing and positioning to ensure it won't be outdone. This Fool on Call will demonstrate their competitive spirit while highlighting these areas of Circuit City's latest quarterly earnings conference call:
- Launching a new services brand
- Retooling internationally
The bite behind firedog's bark
You might call it service-driven, Best Buy calls it "customer centricity," and Circuit City has its own name for it: firedog. Call it whatever you like; just don't call it a waste of time. Both retailers are investing a significant amount of time and capital building up services that are expected not only to make the customer's life easier, but also to make their bottom lines bigger.
We know that products like flat-panel HDTVs, though they're major sellers right now, carry slim margins. And we know from Circuit City's previous conference call that service margins are "higher than product margins." So the question becomes: Is there a way to more closely link the two to capitalize on the estimated "five-year calculated annual growth rate of approximately 15%" expected in the flat-TV category, in a way that serves the customer and the bottom line?
There is a way, and firedog is it. Circuit City is in the final stages of putting together firedog, which is designed to focus on home theater installation and PC services. Circuit City vice president Marc Sieger says, "As the lines between PC and TV blur, we will be at the crossroads of this convergence with a single distinctive voice." This is an important point because this "convergence" model is distinctive from Best Buy's model, which separates the two services.
Circuit City believes that putting the two under one umbrella makes for a competitive advantage because there's a tighter collaboration between the leadership teams of each one and it takes advantage of the increasing presence of PC-type products in the family room. What? You think Sony (NYSE:SNE) including a Blu-ray laser on its newest console, or Microsoft (NASDAQ:MSFT) making its latest gaming console fully ready for HD, or Nintendo including a new tricked-out controller with its upcoming console release, or the Apple (NASDAQ:AAPL) Mac mini's compact and cute design were all done for giggles and grins?
There's a reason why these powerhouses are pushing synergized products: The living room of the American family is a treasure waiting to be fully tapped into. And to capitalize on the increasing synthesis between the TV and the computer, Circuit City wants to be there with a comprehensive installation service. The company estimates this market will be worth $20 billion annually by 2010, and considering that growth in this segment doubled from year-ago levels for Circuit City, there seems to be good reasoning behind the new firedog brand.
Around the world
Best Buy is still in the very early stages of forming an international expansion strategy, so one might think this is an area where Circuit City can establish an edge -- if it can get its international division retooled. International sales in the quarter did increase 11% for the company, but 9% of this was "due to the favorable impact of foreign currency exchange." Same-store sales actually declined by 2.1% in the period, evidence that something isn't right.
To address the problem, Circuit City hired an outside consulting firm to do a "value targeting assessment." This analysis has been completed, and the company is implementing some of its findings. Management said it believes the company will "begin seeing benefits [from this process] in fiscal 2008."
The second task for Circuit City was to re-evaluate what products it offered to the international market. The company performed such an analysis on the domestic market two years ago with great success, so the process could have a similar effect.
Also, look for Circuit City to build out its e-commerce biz, making direct sales more accessible to Canadian customers. In Canada, Web-originated sales grew at 114% for the quarter, and Circuit City is intent on maintaining this momentum.
The fight goes on
I haven't highlighted another area where Best Buy and Circuit City are waging turf wars -- the premium segment. Here, Best Buy is engaging the premium market with much greater intensity by using its Magnolia service. Circuit City is also upgrading some of its TV and stereo offerings, but as a whole, this initiative falls short of what Best Buy is doing.
But that's the spirit of competition: If one gets an edge, look for the other to emulate the success. Whether it's services, product upgrades, or international expansion, Circuit City is going to do its best to go toe-to-toe with the competition.
This competition should only make Circuit City better as it looks to continue its momentum of the past four years.
More conference call analysis:
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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool is investors writing for investors.
