Novice Investing - Short Circuit At Circuit City

Date: Thursday 07th 2008f August 2008 01:43:46 PM

Short Circuit At Circuit City - 12/22/2006

By: Novice Investing Staff

After rival Best Buy (BBY) reported lackluster earning, it was Circuit City (CC) confession to report the same. The consumer electronic retailer reported a third quarter loss as deep discounting in flat-panel televisions and computer hardware hurt margin. Circuit City reported a third quarter loss of $ 16 Million or 9 cents per share on December 19th, 2006. A year ago, Circuit City reported earning of $ 10.1 Million or 6 cents per share. Meanwhile, same store sales rose 5.1% from a year ago while overall sales improves 7% to $ 3.1 Billion.

This says quite a few things about margin. When your sales stay steady, margin generally improves as you gain efficiency over the time. This time, however, same store sales actually increase and profit picture worsen. This indicates that average selling price falls faster than efficiency that is gained through time. The company reported that prices for flat-panel TV declined 50% more than the budgeted while plasma pricing decreased three times greater than expected. Many things attribute for this. As other retailers such as Amazon and WalMart gets into flat-panel televisions space, margin has been dropping. Further, vendor had been initiating irrational price cuts in an effort to gain market share. This caught Circuit City in the middle of the heat and thus, for the poor third quarter result.

As a result, Circuit City now expects an 8-9 percent revenue growth for 2007 fiscal year as opposed to 9-11 percent growth previously. Meanwhile, for the nine month ending on October 2006, Circuit City reported earning of $ 423,000 or breakeven on the per share basis. Not to worry though. Most retailers generally generate more than half of their revenue and three quarters of their profits during the last three months of the year.

Not all is doom and gloom, however. Several bright spots in the company third quarter earnings are: web originated sales which improves 67%, call center revenue which experiences an 84% growth and service revenue which grows revenue by 72%. Further, as the company operation gets better over the past year, cash balance holds steady at $ 600 Million while long term debt is negligible. What is more, as Circuit City 'miss' expectations, its share price was shaved by as much as 20% and it is currently trading at around $ 19 per share or $ 3.45 Billion market capitalization.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Circuit City Inc. (CC) or any other securities.

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