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Slowdown hits retailers
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June 6, 2000: 5:06 p.m. ET
Circuit City, RadioShack, others hit by investor fears of interest rate hike effects
By Staff Writer John Chartier
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NEW YORK (CNNfn) - Several retailers took it on the chin Tuesday as investors, spooked by signs that recent interest rate hikes are finally taking effect on spending, sold off shares of some major chains.
Circuit City sparked a chain-reaction of declines in the retail sector Tuesday, after reporting flat quarterly and monthly sales. Although the company said it expects to beat fiscal first-quarter estimates its stock tumbled more than 20 percent on worries over a slowdown in appliance sales due to rising interest rates.
Rivals Best Buy and RadioShack soon followed, posting 7 percent drops along with Home Depot, Sears, and Wal-Mart, which also posted losses on the day.
"Consumers are beginning to react to the fact that the interest rate they pay on their credit card is beginning to amount to a heck of a lot of money"
-- Kurt Barnard, president, Barnard's Retail Trend Report
Analysts agreed that investors were reacting to worries that consumer spending is beginning slow the torrid pace it has followed as a series of six interest rate hikes in the past year by the Federal Reserve and its chairman, Alan Greenspan, are having an effect.
"A lot of people were spooked by the sharp drop in home sales and that is now having its consequences," said Kurt Barnard, president of Barnard's Retail Trend Report. "A lot of people suddenly felt that while Best Buy is a very good company, Circuit City is a very good company, (and) RadioShack is a very good company, they are now questioning whether the outlook for these companies in view of the decline in home sales and construction is as good as it was. Consumers are beginning to react to the fact that the interest rate they pay on their credit card is beginning to amount to a heck of a lot of money."
Matthew Fassler, an analyst with Goldman, Sachs & Co., said the slowdown is more than a bump in the road and that investors have taken Circuit City's sales report as another sign of a moderating economy. But that is still no reason to panic.
"We have been and remain concerned about the potential for slowing spending due to moderating real wage growth and moderating housing sales," Fassler said. " ... I say there are signs that spending gains are moderating off very robust levels, thought he slowing is not universal, nor is it dramatic. It's probably more than a bump in the road. We expect to see continued same-store gains, but not at the levels investors became accustomed to over the past two years."
Circuit City sales flat...
Shares of the Richmond, Va.-based consumer electronics chain Circuit City tumbled 25 percent, or 12-7/8, to close at 39-1/4 in trading Tuesday.
Analysts expressed concern that sales at the company's car dealerships division, Carmax, are outperforming its core retail electronics business.
"Although Circuit City's first-quarter sales slightly exceeded expectations, we anticipate that the merchandise sales mix will result in lower overall gross profit margins than we initially estimated," said Richard Sharp, the company's chairman and chief executive officer.
Analysts attributed the slack store sales to a decline in big-ticket purchases such as refrigerators, washers and dryers because of steady interest rate hikes finally slowing the economy. Additionally, competition from rival Best Buy (BBY: Research, Estimates) is also pressuring the company.
"We think a disappointment is the only way that we can read these numbers today," said Harry Katica, a Prudential analyst in a research note Tuesday. " ... We think a tug-of-war between interest rates and concern over sales slowdown will ensue."
Katica also said Prudential would not lower its "accumulate" rating on the company because he thinks Circuit City's stock is reflecting the bad news.
... but company expects to beat Street
Analysts' lowered expectations thus discounted Circuit City's anticipation of first-quarter earnings of 28 cents a share, which is a penny more than analysts' consensus of 27 cents a share forecast by earnings tracker First Call/Thomson Financial. The company is scheduled to report first-quarter earnings on June 16.
For the three months ended May 31, Circuit City (CC: Research, Estimates) reported a 14 percent increase in overall sales to $3.07 billion from $2.69 billion a year earlier. Sales at stores open at least a year, a closely watched measure of retail strength known as same-store sales, rose 7 percent.
 Total sales for May rose 3 percent to $812 million from $791.4 million during May 1999, while same-store sales were unchanged. That's far less than the 14 percent overall sales increase analysts had projected, according to First Call.
For the Circuit City Group, total sales for the first-quarter rose 11 percent to $2.45 billion from $2.20 billion in the year-ago quarter. Same-store sales in the group rose 7 percent.
"The first-quarter comparable stores sales growth was slightly ahead of our expectations, with sales exceeding our outlook early in the quarter, but softening during the final month," said W. Alan McCollough, the company's president and chief operating officer. McCollough said April and May sales were affected by the shift of a weekend between the months, adding 4 percentage points to the April same-store sales growth and reducing May's growth.
Carmax performs
Sales at Circuit City's Carmax group rose 29 percent to $625.3 million from $486.1 million in the first quarter. Same-store sales rose 14 percent. For the month of May, total sales rose 20 percent to $223.3 million from $185.8 million in the same period a year ago.
Big-screen televisions, DVD players and digital cameras had strong sales, but were all down slightly from the year-ago period, and sales of major appliances dipped the most in the period, McCollough said.
But home office products saw the greatest sales growth in the period. Home office sales were up 31 percent compared with 26 percent increase in the year-ago period. Appliance sales rose 14 percent, somewhat weak compared with a 16 percent rise a year ago.
"I think that the appliance weakness that we have seen is more a function of higher interest rates and the same factors that have caused housing to slow and some big ticket sales to slow," said Kenneth Gassman, a retail analyst with Davenport and Co. in Richmond. "I think the consumer is finally getting Mr. Greenspan's message," he added, referring to Federal Reserve Chairman Alan Greenspan who has been behind six interest-rate hikes in the past year.
Gassman said that he was not surprised by the news given that he saw a slowdown begin earlier than he expected in big-ticket purchases such as jewelry. He also said he would likely lower his first-quarter estimates for Circuit City by a modest amount.
 Chuck Hill, First Call's director of research, said pressure from Best Buy could also be a factor. Last week, Best Buy said it expects to beat first-quarter earnings forecasts by 20 percent, and reported a first-quarter sales increase of 9.5 percent with an overall sales increase of 24 percent. But even that is off from the 13.5 percent same-store sales it reported in the year-ago period.
RadioShack eats investors' static
RadioShack (RSH: Research, Estimates), which surprised analysts by reported strong quarterly and May sales early Tuesday, was not immune to the sell-off started by Circuit City. Its shares fell 3-3/16, or 7 percent, to close at 41-1/16.
The Fort Worth, Texas-based electronics retailer Tuesday reported total May sales rose 11 percent to $325.6 million from $294.3 million in the year-earlier period.
Same-store sales at company-owned stores rose 7 percent for the month compared with a 17 percent increase the same period a year ago.
Other retailers get slammed
Best Buy also felt some of the heat from Circuit City's news and the slowing economy. Its shares fell 5-1/4, down nearly 8 percent, to 66-3/4 Tuesday.
Shares of Wal-Mart (WMT: Research, Estimates), the nation's No. 1 retailer, fell 2 percent, closing down 1-1/8 at 58-3/16.
Home Depot (HD: Research, Estimates), closed down 2 at 50-3/8, about a 4 percent drop.
And Sears (S: Research, Estimates) shares dropped nearly 7 percent, shedding 2-5/8 to close at 35-/34. 
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