Following its latest earnings meltdown, the management team at Circuit City
Improving product assortment
Despite the strength of the entertainment segment buoyed by next generation video consoles from Microsoft
Comparable same-store sales of flat panel TVs increased 9% compared to the same period a year ago. Not only that, large LCD screens saw a triple-digit increase in sales. So, how were TVs to blame? Well, as Matthews explains, these increases were offset by "sharp declines" in plasma, projection, and tube, as well as a "modest decline" in small and medium LCD TVs.
The blame was placed on a poor mix of merchandise. Apparently, the company focused on higher-end categories, but because of being "under assorted" and "under stocked" in others, it "missed sales opportunities." A secondary effect of not having a proper balance in the various TV categories is that the overall perception of Circuit City as a "television destination" declines, explains Matthews.
Two key areas that help improve product assortment are merchandising and distribution. As far as merchandising goes, a number of changes have been made, including realigning the responsibilities of general merchandise managers, consolidating its merchandising structure for stores and for its Web enterprise, and putting merchandise members in better communication with other units like planning, inventory, and marketing, through the development of "cross-functional teams." Overall, the leaner organizational structure is expected to eliminate redundancy and in some cases "entire pieces of work," explains CEO Phil Schoonover.
Beyond organizational changes, Circuit City is also in the process of implementing a retooled merchandising system powered by Oracle. Two key parts of the system were put into place last fiscal year, and another two pieces were brought online in June. "Additional modules will go live this fall," said Matthews.
As it stands, the new systems rollout remains on schedule and on budget, according to Matthews. He expects the company to reap the rewards of the new merchandising system by the back-to-school and holiday shopping seasons.
Circuit City's distribution network is also undergoing an overhaul. Two of its current distribution centers are being consolidated into one, and then relocated to a new site in Scranton, Pa. The benefit of the new distribution center is that it will be able to ship both large and small goods from one location, whereas in the past, one center shipped just large items and the other, small ones. The new center is expected to be up and running by next year and will serve the company's Web business in both the Northeast and mid-Atlantic regions of the United States.
Like its organizational goals, Circuit City would like to see a leaner and more efficient inventory management system in place. The management team believes progress has been made in this area, and pointed to current inventory levels as evidence. Matthews pointed out that in the domestic market, inventory levels are down $92 million from year-ago levels. This was accomplished by reducing "at-risk" inventory while at the same time "improving in-stock levels."
This may be, but as management explained earlier, the company's in-stock levels were actually on the short end in several important television categories. This suggests to me that management was overeager to reduce inventory levels, thereby hurting the company's opportunities to capitalize on key sales this past quarter.
Matthews alluded to this problem during the question-and-answer session of the call. He stated that the company's inventories are in "relatively good shape." But then in the next breath he added that there is "opportunity" in some of the categories -- like small LCDs for example -- to add additional inventory in order to meet demand. He added that his team is in the process of purchasing additional merchandise orders to fill these needs.
Big changes, big whoop?
Some of the more recent efforts to streamline activity are expected to save the company about $200 million through the course of this year. However, these cost savings will be offset by investments in these other areas that we have mentioned. What we don't know as of yet, is the full financial impact of these new initiatives for fiscal 2008. Management refused to offer guidance this year due to the difficulty in predicting performance in light of the number of changes being made.
We did learn during the Q&A, however, that the greatest impact in terms of expenses related to these investments was to be felt in Q1. This impact is expected to decline somewhat in Q2, be "roughly breakeven" in Q3, and then move to the positive side in Q4.
The timing of these cost savings are important details for investors, but a more important question might be, "Yeah, so what?" Yeah, the company is making major changes, but are these enough to make a dent in the burgeoning power of Motley Fool Stock Advisor recommendation Best Buy
Circuit City is busy trying to fix things, but Best Buy isn't exactly resting on its successes. In fact, like its recent partnership with Apple
Circuit City should come out as a better company by year-end, but I am not sure if better is good enough to take on the best.More Foolishness on electronics retailers:
Microsoft is a Motley Fool Inside Value recommendation.