Second Could Work at Circuit City

I haven't been kind to Circuit City (NYSE:CC) lately, having declared archrival Best Buy (NYSE:BBY) the winner when it comes to dominating electronics retailing. But before we give up on Circuit City, let's look at the benefits of playing second fiddle in retailing.

Sure, Circuit City is feeling the heat from intense competition in the consumer craze for flat-panel plasma and LCD televisions. A quick read of the newswires will confirm that Best Buy is taking names on the customer service front. Best Buy's friendlier, more knowledgeable employees and an overall emphasis on service are moving the focus away from merely selling low-margin goods. It's also winning with bigger, more conveniently located stores, and a wider array of products.

Circuit City isn't the only victim; regional rivals such as Tweeter, CompUSA, and Rex Stores are having to shutter underperforming stores to stem the slide in profitability and store traffic, as big-box behemoths including Sears (NASDAQ:SHLD) and Wal-Mart (NYSE:WMT) bring the flat-panel frenzy to their own doorsteps. What's a few dollars less on a TV when it means more sales in other categories?

Rapidly decreasing TV prices are wreaking havoc on Circuit City's margins, as are "significant charges associated with our actions to position the company for long-term success." Although the company recently reported a loss for all of fiscal 2007, this was due primarily to a goodwill impairment charge. Additionally, annual sales grew 8%, while same-store sales advanced a very respectable 5.8%.

Even with the current industry dynamics, Circuit City is buying back stock, continuing to open new stores, and maintaining very low levels of long-term debt. It also recently announced job cuts and other moves "to lower our cost and expense structure and to ensure our competitiveness." It sounds promising, but certain Fools remain skeptical. It wasn't too long ago that turnaround efforts started to take hold at Circuit City, as it emulated Best Buy by emphasizing TVs and other home entertainment offerings. The improvements proved short-lived, sending the company and stock into their latest funk.

Fortunately, the barriers to entry in retailing are low, so Circuit City could easily copy Best Buy again with the latest version of customer-centricity, or whatever you want to call it. Heck, it may even run into an original idea to turn its fortunes around. In any case, it's not in any danger of going out of business soon, and industries are scattered with duopolistic layouts where two firms cohabitate successfully in the space.

Petsmart (NASDAQ:PETM) and Petco come to mind, as do Bed Bath & Beyond (NASDAQ:BBBY) and Linens 'n Things. It's clearly best to be the leader, but second does have its place -- just ask the private equity guys in the case of Petco and Linens 'n Things. Plus, the upside can be substantial if emulating the leader or restructuring moves end up working out.

For related Foolishness:

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Best Buy, Bed Bath & Beyond, and PetSmart are Motley Fool Stock Advisor selections. Bed Bath & Beyond and Wal-Mart are Motley Fool Inside Value recommendations. Try any of our Fool newsletters free for 30 days.

Fool contributor Ryan Fuhrmann is long shares of Petsmart and Bed Bath & Beyond, but he has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.