Circuit City shares plummet on quarterly loss

Stock falls nearly 19 percent in afternoon trading after No. 2 electronics retailer reports loss of 9 cents a share versus expectations for a profit.

By Parija B. Kavilanz, staff writer

NEW YORK ( -- Shares of No. 2 electronics retailer Circuit City tumbled nearly 19 percent Tuesday after the electronics chain stunned investors with an unexpected third-quarter loss.

The news also dented shares of rival Best Buy (down $1.39 to $47.95, Charts), which were also trading lower on the New York Stock Exchange.

Circuit City (down $4.23 to $18.53, Charts) reported a loss of 9 cents a share, compared to a profit of 6 cents in the same period a year ago. Analysts has forecast that Circuit City would report a profit of 5 cents for the period, according to First Call.

In a conference call with analysts to discuss the results, CEO Philip Schoonover acknowledged that the quarter was volatile for the company.

"During September, our results tracked ahead of our plan, but, as the quarter progressed, our results fell below our expectations," he said. He blamed the poor performance on both "internal and external" developments.

"There was a slippage in our pricing and marketing," he said. Additionally, he said results in the important holiday quarter were hurt by the price war that Wal-Mart ignited, especially in the flat-panel television category.

"While a number of categories underperformed our gross margin expectations, the most significant variance from [the] plan was in the flat-panel television category," he said in an earlier statement along with the company's results. "The pace of the decline in flat-panel television prices accelerated during the quarter as manufacturers and retailers competed aggressively for market share, and prices fell to unanticipated levels."

Total sales in the period rose to $3.1 billion, up from $2.9 billion a year ago, in line with analysts' estimates.

Sales at Circuit City stores open at least a year - a key retail performance measure known as same-store sales - rose 5.1 percent in the quarter compared to a much stronger 13.1 percent for the same period a year ago.

Wal-Mart strikes again

Indeed, Wal-Mart, (down $0.36 to $46.01, Charts) the world's largest retailer, trumped its competition in the popular electronics and toy categories by being the first out of the gate to chop prices on flat-screen televisions, digital cameras, cell phones and other products ahead of Black Friday, the day after Thanksgiving, the traditional start to the holiday shopping season.

Last week, Best Buy, the No. 1 electronics retailer, reported higher third-quarter earnings that nevertheless fell short of Wall Street forecasts.

Best Buy also cited stiff competition for computers, televisions, CDs and other products.

Although Wal-Mart's aggressive move didn't help pump up its sales last month, it did put pressure on the profits of Best Buy, which responded by going with deeper discounts on higher-priced items like flat-panel televisions.

Apparently it was the same story with Circuit City, which also instituted a match or beat competitors' price strategy to this holiday season in response to deep discounts initiated by Wal-Mart, Target (down $0.22 to $58.33, Charts) and Costco (down $0.61 to $53.20, Charts).

Even though flat-panel television unit sales increased by strong double digits, Schoonover said, "sales did not produce the gross profit dollar results necessary to offset these price declines."

Schoonover warned that Circuit City expects the trend to continue this month. Besides profits pressures in the television category, the retailer also struggled with significant out-of-stock situations in notebook computers last quarter.

As a result, Circuit City reduced its full-year outlook. The retailer said it now expects total sales for the year to grow 8 to 9 percent, down from its earlier estimate of 9 to 11 percent.

Analysts currently forecast full-year sales to increase 10 percent to $12.7 billion.

Earnings from continuing operations before taxes are now seen to increase between 1 and 1.4 percent as a percentage of sales, down from a prior outlook of an increase between 2 and 2.4 percent.

According to RBC Capital Markets analyst Scot Ciccarelli, the new forecast would imply full-year earnings of 55 to 73 cents a share. That's well below analysts' current consensus estimate of $1.08 a share, according to First Call.

"Circuit City's sales were light in the period and it's not just because of competitive pricing," Ciccarelli said. "The company's gross margins were down more than expected. Also, Circuit City was investing in its business during the period by building up its services offerings. That was also a drag on profits."

Holding out to the holiday end

Best Buy misses forecasts; stock tumbles Top of page

-- analysts interviewed for this story do not personally own shares of Circuit City and their firms do not currently have an investment banking relationship with the retailer.