Circuit City Q2
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Circuit City Q2
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
Circuit City <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CC)") else Response.Write("(NYSE: CC)") end if %> UNION CITY, Ca., September 16, 1996/FOOLWIRE/ --- Circuit City reported their Q2 1996 results this morning. Total sales for the quarter were $1.77 billion, up 10%. That includes a 7% comp store decline. Earnings were $31.6 million or $0.32 per share versus $0.42 per share in Q2 last year. Year to date, that puts them at $0.49 per share versus $0.67 per share for the first half of last year.
On a percentage basis, the decline in earnings was somewhat less than in Q1, but obviously was not a performance they are particularly excited about. The short-term environment this quarter was not much different from the environment last quarter. It is a difficult industry environment particularly on the audio/video -- what they would consider their core consumer electronics side. PCs slowed down for them, and they think in the home market in general. Some of the strength in the PC industry they think is coming out of the corporate environment moving to Windows '95 and upgrading their equipment in conjunction with that. Circuit City did see a pretty good performance over the major appliance category, although the Summer months were cool and they were significantly weaker on air conditioner sales this year versus last year.
A breakdown of sales by product category for the quarter versus same quarter last year: TV was 17% versus 16% last year, VCR and camcorders was 14% versus 13%, audio was 17% versus 19%, home office was 23% versus 24%, major appliances was 19% versus 18%, and other was the same in both years at 10%. For the 6 month period: TV was 17% versus 16%, VCR and camcorders was 14% versus 14%, audio was 18% versus 19%, home office was 23% versus 24%, major appliances 18% versus 17%, and other was flat at 10%.
Overall, the promotional environment remains intense. They continue to see competitors do things that seem to Circuit City to be irrational in terms of pricing or their interest-free, no payment financing promotions, and some of those bundled on top of each other. Circuit City's strategy, as it has been, is to continue to balance their desire for market share growth and protecting their price and value image with the consumer with the necessity to earn a return for their shareholders. They said that they do make that trade-off on an ongoing basis and might have managed it a little better this quarter. That is reflected in gross margin, although it was down 0.6%, that was a little slower than the decline they have seen in the last couple of years. It does reflect, in addition one of the factors that is bringing that down that is growing is the increased sales from CarMax, so the core business is obviously doing a little bit better because the CarMax business operates at about half the gross margin of the core business, so as it grows it will have downward pressure.
They were aided by a somewhat lower percentage of PCs in the sales mix. One of the factors over the last two or three years that has been bringing gross margins down has been an increasing mix of PCs. They declined just 1%, but it was nice to see from their perspective a little bit more of their sales coming out of appliances and the audio/video business while still not doing well saying even with what's going on on the PC side. On the video side, they continue to add share in the value-added segments of their merchandise as they actually maybe lose some share on the commodity end of the category, as long as consumers are coming to Circuit City for their better goods and their more sophisticated bigger ticket purchases, that is exactly what Circuit City believes their sales force and their breadth of good and better merchandise allows them to do the best job for consumers.
They believe that their mix gives them significant opportunities with the vendors. They pay their bills on time and have a very strong balance sheet which is appreciated as some of their smaller competitors are struggling. The fact that they are still growing total sales and that they continue to give vendors a good mix and pay their bills puts them in a very good position with the vendors.
SG&A for the quarter was up to 19.3% of sales versus 18.6% in the prior year and reflects, primarily the fact that their comp store sales are down and they are getting no leverage. They are adding new stores that are not as efficient and are not getting leverage out of their older stores, so that is putting some pressure on SG&A. Some of that SG&A pressure was offset because they do continue to have increased contribution from the banks and the lower cost structure for CarMax.
They are seeing some increased delinquencies and some increased bankruptcies, but the gross in the portfolio allowed them, overall, to continue earnings growth on the back side. As they look forward, they think there are some product opportunities coming. The most exciting product, they believe, for Christmas will be DSS (Digital Satellite System). Circuit City is the nation's most successful retailer of DSS systems by a significant margin and both they and the vendors expect that continue for the foreseeable future. The price points are now down to $199 after rebate, which they think is a very attractive price point. It is growing very rapidly, but against a relatively small base. As they work through Christmas, they think there is real opportunity and this is a product that offers an attractive gross margin too.
The next product on the video side is DVD or Digital Video Disk which has received a lot of press. There are questions about whether it will come to market this year although it seems likely that some hardware and limited software will be in the market before Christmas. There is a lot going on between the content owners, the studios, etc. and their concerns about protecting their intellectual property and there are ongoing meetings between various industry groups about that issue and there has been no resolution yet.
The larger screen television business continues to show better performance than the smaller end and there are some new technologies coming with LCD and some projection technologies (involving LCD, mirror, and laser technologies). They think this large screen television plays right into their strength in the area of audio/video surround sound systems. Their stores are set up to display a number of venues where they display these complete systems and it is the kind of product where they can do a great job demonstrating and explaining the technology to the consumer. They said that they will see some introductions of these TV-oriented Web browsers for the Internet. They are likely to be priced in the $300-$400 range. They are not sure how big of a product that is going to be but they will certainly be carrying it and ultimately as the Internet becomes more of an entertainment/information service, the prospect of using a television to access it becomes more appealing.
Their PC strategy continues to be out there fighting the battles, to have a very competitive offer of complete systems (they sell 7 of the top 10 brands today), but they are not moving to try to compete head up with CompUSA. They are focusing their attention on serving their customers and providing an extraordinarily high level of support for the packaged system buyer. They think that is what fits their format and their strategy best.
They have just introduced the Appliance Station, online interactive kiosks, in a little more than half of their stores which has them interfaced directly to GE and Amana where they can get right into their technical information, product data and photographs and display them in stores. If a customer has an interest in a special order, they can get into GE/Amana's inventory, reserve the piece and know the specific delivery date. They are online and in test with Whirlpool and Kitchenaid. It's not up yet, but they expect it to be up relatively soon.
They will likely be reducing their assortment in some of the commodity ends of product lines, like 19" and 20" TV sets where there isn't a lot of variety. As the price points have compressed and the features of the entry level product have moved up, there are just not as many differentiators of product as there were a few years ago. So they will allocate that space back to enhanced assortment in the value-added and bigger screen sizes, in the case of television. They think this will also improve their inventory productivity in these commodity classes.
Longer term, they said as they began the year that they thought they had the opportunity to add about another 400 stores and approach 800 stores at maturity. They are on track this year for opening about 65 stores and expanding or relocating 15-20 others. They are already seeing some opportunities to very efficiently advertise on a national basis. Last week they used the Monday Night Football spot to introduce the $199 DSS system. They have weekly ads in USA Today now.
In the CarMax unit, they continue to have 5 stores open and are on track to open 2 more this year, one in Orlando and one in Tampa. They are putting in place and making tremendous investments in systems, people, and training there to build the infrastructure necessary to rapidly grow this business starting next year as they will open 8-10 stores and then 15+ for the following 5 years. They are moving aggressively to penetrate the top 50 markets in the country and expect to have 80-90 stores opened by calendar year 2001 or over the next 5 years. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |