Circuit City's credit card sale keeps focus firmly on core business

DSN Retailing Today, Feb 9, 2004 by Laura Heller

RICHMOND, VA. -- Circuit City stores began the year by selling off the final piece of its credit card business. While the move raises some much-needed cash to further the chain's store remodeling program, it also leaves the company with just its retail operations from which to realize profits even as buyout rumors continue to swirl, this time in the form of Eddie Lampert, majority shareholder.

In addition, profits have been a bit elusive for the beleaguered chain of late. For the third quarter ended Nov. 30, 2003, overall sales and comp-store sales declined 1%, and for the nine months ended Nov. 30, 2003, total sales decreased 4% to $6.5 billion from $6.76 billion the year before. Comp-store sales dropped 5% for the nine months, and the company had a net loss from continuing operations of $83.3 million, or 40 cents per share, compared with $54.9 million, or 27 cents per share, in the first nine months of last fiscal year.

December 2003 offered little cheer as Circuit City posted a total sales decline of 1% to $1.71 billion from $1.74 billion in December 2002, and a comp-store sales drop of 2%--even as chief competitor Best Buy saw its comps rise 9.3% overall and 9.6% domestically. Overall, the CE category generated $96.3 billion in sales for 2003, according to the Consumer Electronics Association. But when CE retail sales were released in January, all CE retailers but Best Buy failed to post positive sales during the holiday season in a very popular category, prompting CIBC World Markets retail analyst Dan Wewer to ponder the prospect of "profitless prosperity."

"Unfortunately, most CE retailers are unable to leverage the strength of the product cycle and improved consumer spending into consistent profitability," wrote Wewer in a research report. "Circuit City, Tweeter and Ultimate Electronics [not rated by CIBC] are all posting lower than expected same-store sales and total revenue growth for the holiday season."

Futhermore, Wewer and other industry analysts note Best Buy's continued gains in market share, notably at the expense of Circuit City. By getting rid of its commission-based compensation to sales associates, the Circuit City may well have done away with one of its few points of distinction.

"Circuit City used to differentiate itself with service," said Aram Rubinson, equity analyst at Banc of America Securities. "After de-commissioning its sales force however, Best Buy has narrowed that gap."

With CarMax completely spun off into a separate company and the credit business sold, Circuit City will focus largely on its store expansion program. "We're confident that this agreement allows us to fully focus on [our] revitalization efforts and greatly simplify the investment picture for Circuit City," said chairman and ceo, Alan McCollough.

"For the fiscal year beginning March 1, 2004, we expect to open 65 to 70 superstores," said company spokesman Jim Babb. "Slightly more than half of those will be relocations, and the others are entries into new trade areas; either in existing markets or in new, smaller markets."

McCollough doesn't expect the influx of cash from the credit card sale to speed up the store rejuvenation program. Based on the portfolio balance of $1.8 billion as of Nov. 30, 2003, the after-tax cash proceeds to Circuit City should total approximately $355 billion.

Bank One will manage both the company's private label card program and its branded Visa Card. The retailer sold the other portion of its finance subsidiary to FleetBoston Financial in November 2003.

Selling ancillary businesses to raise cash is standard procedure for retailers in need of a turnaround. It also leaves them vulnerable.

"They don't have anything else they can sell except for their retail business," said David Campbell, retail analyst at Davenport & Co. "They are doing what they should be doing and what they need to do. Unfortunately, this process is going to take some time, and the competition isn't standing still. It's not going to get any easier for them."

Circuit City owns very few of its stores and holds mostly long-term leases, according to Campbell--not very attractive for anyone looking to take over the company. But rumors to this effect continue to bolster Circuit City's stock price. Last year, Carlos Slim made a bid for the chain, but Circuit City's board rebuffed the offer of $8 per share. Sears has supposedly shown interest in purchasing the chain and more recently, financier Eddie Lampert is rumored to be picking up shares of Circuit City although as of press time, no such purchases had had been filed with the SEC.

Said Babb, "We have a very strict policy against commenting on rumors."