Circuit City braces for a rough ride ahead

No. 2 electronics retailer suffers deep second-quarter loss; expects sales volatility in coming months as it struggles with turnaround efforts amid sluggish TV sales.

By Parija B. Kavilanz, senior writer

NEW YORK ( -- Circuit City on Wednesday reported a steep first-quarter loss amid a big drop in TV sales and warned that it expects more sales volatility ahead as it charts a turnaround strategy.

Circuit City (Charts, Fortune 500), the No. 2 electronics retailer after Best Buy (Charts, Fortune 500), posted a loss of 33 cents a share for the quarter, compared to a 4 cents a share profit from a year ago.

Analysts had expected a loss of 32 cents a share, according to Thomson Financial.

Revenue for the period fell 4.3 percent to $2.49 billion from $2.6 billion a year ago.

Circuit City shares were fractionally higher on the New York Stock Exchange. The retailer's stock is down 15 percent so far this year and has declined almost 44 percent over the past 12 months compared to a 14.3 percent drop in shares of Best Buy over the same period.

Sales at Circuit City stores open at least a year, a key measure of retail performance known as same-store sales, slumped 5.6 percent in the quarter, which the company blamed on double-digit declines in TV sales and sales of DVD players, camcorders and home audio and digital satellite radio products.

Although flat-panel TVs remain one of the main revenue drivers for both Best Buy and Circuit City, Circuit City said sales gains from plasma and LCD TV purchases in the quarter were offset by falling demand for projection and tube televisions.

What's more, higher gas prices combined with the housing slump and stiffer competition from discounters like Wal-Mart (Charts, Fortune 500) and Target (Charts, Fortune 500) in the electronics arena has made big-ticket purchases, such as flatpanel TVs, especially vulnerable and a risk for electronics sellers in the near future.

During a conference call with analysts to discuss the company's results, Circuit City executives admitted that they had miscalculated the demand for higher-priced 1080i flatpanel TVs and missed on the opportunity to meet demand for projection, tube and smaller-size LCD TVs.

"We were pushing $1,000 TVs like the 1080i maybe to our detriment when the 720p was good enough for some customers," said David Matthews, Circuit City's executive vice president of merchandising and marketing.

"We have to be aware that a thousand dollars is a lot for some customers," he said. "More customers gravitated to [lower-priced] 720p televisions than we thought."

Meanwhile, the retailer is also struggling with 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 and erode employee morale.

While slowing sales of flat-panel televisions are indicative of a weak consumer spending environment, Deutsche Bank analyst Michael Baker wrote in a note to clients that Circuit City "is also clearly losing share to Best Buy which had a solid double digit, or 20 to 40 percent growth in flat panel TV sales."

Circuit City also withdrew its financial guidance for the remainder of the year.

"In the first quarter, the amount of change that we introduced to the company led to significant volatility, which we expect to continue through the summer," CEO Philip Schoonover, said in a statement.

"With an uncertain macroeconomic environment, for the time being, it is difficult to project sales and earnings performance for the balance of the fiscal year. As a result, we are withdrawing financial guidance at this time," Schoonover said. Top of page