Best Buy to Circuit City: Employees matter

No. 1 electronics retailer logs a solid quarter while its archrival suffers a loss amid more market share erosion, layoffs.

By Parija B. Kavilanz, senior writer

NEW YORK ( -- It's all about the customer - and your employees.

It was that philosophy, and not flatscreen TV sales alone, that helped Best Buy to beat its sales and profit estimates last quarter, CEO Brad Anderson said Wednesday.

Does this sound like an obvious dig at archrival Circuit City? Probably. And with good reason.

While Best Buy reported an impressive 18.5 percent jump in its fourth-quarter profit on better-than-expected sales of flat-panel television sets, gaming and notebook computers, Circuit City reported a fourth-quarter loss Wednesday as its sales widely missed estimates.

However, shares of both Best Buy (Charts) and Circuit City (Charts) were lower on the New York Stock Exchange amid concerns that year-over-year flat-panel TV prices were trending lower and could pressure profits for both retailers in the months ahead.

Circuit City, the No. 2 consumer electronic retailer after Best Buy, took charges to close stores and initiate numerous restructuring efforts - including the move, announced earlier this month - that it will replace 3,400 store workers with lower-paid employees in a bid to cut costs.

Industry experts widely criticized that decision, saying that it would make Circuit City even less competitive with Best Buy's customer-centric approach.

Anderson and other Best Buy executives stressed that point during a conference call with analysts to discuss the company's fourth quarter results. The call was monitored via Web cast in New York.

"The conventional wisdom facing us today is that a better business model is to start with the viewpoint of the customer, their problems and desires, and match those to solutions that we can offer," Anderson said during the call.

"We're continuing to do this while our rivals are closing stores. Consumers are moving toward our brand as a result of our ongoing efforts," he said. "Our assets are our 140,000 employees. We want to grow the quality of our employees."

Minneapolis-based Best Buy reported an 18.5 percent rise in fourth-quarter profit, helped by sales of flat-panel televisions.

Net income for its fiscal fourth quarter rose to $763 million, or $1.55 per share, from $644 million, or $1.29 a share a year earlier. Revenue increased 21 percent to $12.9 billion. Same-store sales, also known as sales at its stores open at least a year, increased 5.9 percent for the quarter.

Video gaming hardware and notebook computers purchases also boosted its comparable sales. These gains helped to offset same-store sales declines in tube and projection TVs, printers, CDs and desktop computing.

Analysts on average expected profit of $1.52 per share on revenue of $12.6 billion, according to First Call

For 2007, Best Buy said it would expand its offering of Apple products and computers to 200 of its stores this fall.

Best Buy president Brian Dunn said he expects gaming to be a " huge" category for the retailer this year with the introduction of a number of new titles this year.

For its current fiscal year, Best Buy anticipates profit of $3.10 to $3.25 a share and a 9 percent rise in sales to $39 billion. Same-store sales are expected to increase between 3 to 5 percent for the year.

Analysts, on average, expect the company to log a full-year profit of $3.18 a share and sales of $39.7 billion, according to First Call.

Best Buy said it anticipates gross-profit rate will decrease marginally going forward due to faster growth of lower-margin products in its revenue mix and a more stable sales environment.

At the same time, executives said they hoped to counter that trend by reducing administrative and other expenses. The company plans to open 130 new stores, including 95 domestic stores and 35 stores internationally.

Circuit City: More pain ahead

Meanwhile, Circuit City delivered a dour look for its current fiscal year.

During the company's conference call with analysts, executives said they expect the housing slowdown combined with subprime mortgage defaults to result in "significant losses" for the company in the first-half of the year.

But more importantly, the company expects profits and sales growth to improve in the second-half of the year, which includes retailers' crucial fourth-quarter holiday shopping period.

For the full-year, Richmond, VA-based Circuit City expects net sales to increase 5 to 8 percent, same-store sales to grow between 3 to 5 percent. It expects earnings from continuing operations before income taxes as a percentage of net sales of 1.4 to 1.8 percent.

Analysts currently expect sales of $13.3 billion for the year ended 2008, which would represent a 6 percent rise over the prior year, according to First Call.

Circuit City CEO Philip Schoonover also addressed the company's decision to replace current employees with lower-paid workers.

"There's been a lack of discipline managing wages and rates. Even though it is difficult and painful and people are impacted, we have to make tough calls to be competitive," Schoonover said. "But we treated these employees with respect and provided them with severance."

As of last week, he said store staff that were paid above market rates had been replaced in all but 159 Circuit City locations .Schoonover added that all the replacements would have taken place by May 1. He announced that Circuit Circuit would also streamline personnel at the senior level.

"What's interesting here is that we have two divergent results between Best Buy and Circuit City," said Scott Tilghman, analyst with Soleil-Hudson Square Research.

"Circuit City's transformation is still a little bit all over the place. The employee morale issue is something they have to work through," Tilghman said. "Their supply chain is not as robust as Best Buy and they are still behind on improving their real estate strategy. This turnaround will be a challenge for the company."

In other restructuring efforts, Circuit City said it had hired Goldman Sachs to explore "strategic alternatives" including a possible sale of its Canadian unit InterTAN.

Regarding its "Firedog" tech support service, which Circuit City launched in response to Best Buy's Geek Squad unit, Schoonover said he expected the service to be become a bigger contributor to the retailer's overall profit this year.

-Analysts quoted in this story do not personally own shares of Best Buy or Circuit City and their firms do not have an investment banking relationship with Best Buy or Circuit City.

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