Fellow Foolish writer Rick Aristotle Munarriz recently called consumer electronics retailer Circuit City (NYSE:CC) a Big Tease. It's a fitting label after turning down a mid-February $17 cash buyout offer and then today reporting a lethargic first quarter that sent the stock slumping below $17 a share.
So which will it be? Does the company turn tease into promise, or will lethargy overwhelm it?
Lethargy: First quarter revenue rose 6% over last year's comparable quarter, but same-store sales, the number used to measure organic growth in the retail world, were flat.
Tease: Gross margin rose almost a point and a half to 25.0%, and that rise was attributed to, among other things, increases in higher-margin extended warranty sales and lower personal computer hardware sales.
So the company teases with margin, but it comes at the expense of a sales decline in a key product category in which there were inventory shortages.
Lethargy: Circuit City reported a net loss and, although small, it was a penny higher per share than analysts expected. Compare that to its giant competitive peer and Motley Fool Stock Advisor recommendation Best Buy (NYSE:BBY), whose latest quarter's same-store sales increased 4.4% and whose net income came in at a lofty $170 million.
Tease: Circuit City is working with two high-profile consulting groups. Infinitive is being asked to "capture revenue and margin improvements in fiscal 2006" in the merchandising and marketing functions. (Hey, make sure they look at why computers aren't on the shelf to meet customer demand.) Boston Consulting Group is there to "execute innovation initiatives" to drive long-term sales. Most companies use consultants. In fairness, it might legitimately be a good thing, but to name them and their charter in the earnings report is too much tease for this observer.
Lethargy: For the fiscal year ending in February 2006, the company expects overall sales growth of 3-6%.
Tease: Circuit City projects that its operating margins will be between 1.3-2.3%. If historical averages are in any way indicative at 1.33%, we're not likely to see much improvement in operating margins. But, consider this. A 1% improvement in operating margin on $10.87 billion in this year's estimated sales is $108.7 million. That's $.58 cents a share.
The Big Tease:
Circuit City has $798.7 million in cash and a total debt of $13.4 million. There is lots of cash available to get things right. The company is also signaling that it likes its potential. It has already spent $440.2 million (of an $800 million authorization) to repurchase its own shares. If this company fixes its margins, the upside could be explosive.
To understand the upside, consider competitors' trailing 12-month operating margins. Best Buy tips the scale at 5.3%. Radio Shack (NYSE:RSH) packs a 10.9% operating margin.
Lethargic Circuit City is certainly a tease but, given time to improve margins, this cash-rich company could handsomely reward long-term investors.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see the Motley Fool's disclosure policy.
