Circuit City restructures, spins off CarMax unit - Brief Article

DSN Retailing Today, March 11, 2002 by Laura Heller

RICHMOND, V.A. -- The middle of February took Circuit City on a wild ride, culminated on the 22nd by a closing share price of $16.55, an overnight drop of 30%, or nearly 46% less than its 52-week high of $31 reported only weeks earlier on Jan. 9. By the end of the month, the stock had rebounded slightly to $17.88 per share.

Fueling the plunge was a myriad of mixed news, not the least of which was the announcement that the retailer was spinning off its CarMax unit into a stand-alone company, as well as pursuing another remodeling program.

On the first point, the news is fairly straightforward. Circuit City will offer one share of CarMax Inc. stock for each share of stock in the CarMax Group, and hopes to complete the spin-off of the wholly-owned subsidiary by late summer. CarMax has performed adequately as the business has matured and more cost-conscious customers buy used rather than new cars due to economic conditions.

It may just have been poor timing as CarMax contributions to Circuit City Group earnings has climbed, even as the consumer electronics business struggled. "This split-off would enable the investment community to analyze each business on its own merits, creating a simpler investment decision for the financial markets," said Alan McCollough, president and ceo of Circuit City Stores.

"The split-off also would permit management of the two businesses to better focus on the operational and financial objectives of their respective businesses without the constraints imposed by being affiliates within the same corporate group."

The first matter the company needs to attend to is its aging store base and determine a clear remodeling plan after a year and a half of testing several formats and programs.

To this end, the company announced it would reset 300 stores this year to house a new video department designed to better showcase the high-growth TV category, complete with a seating area for the full home theater experience. In addition, each of the 300 stores will receive a new lighting package in line with those installed in all new stores, reflecting the company's newest format that was unveiled in Jacksonville, Fla., in August 2000.

At that time, the company intended to remodel all its stores based on this prototype. After remodeling the rest of Florida to prototype, McCollough amended the program, saying that although he was pleased with the results, he was not pleased with the high price tag of $2.5 million per store and the disruption it caused. All new stores, however, are being opened in this format.

The retailer then embarked on tests of two additional formats: one in Chicago and an even less expensive one in the Baltimore/Washington, D.C., market. During the Feb. 22 conference call, the company indicated it was still testing both markets and was somewhat more pleased with the slightly more expensive Chicago remodels over Baltimore.

But Circuit City also has been conducting smaller tests that McCollough described as "under the radar," and it is one of these very tests that will be rolled out, albeit to 300 stores, slowly over the next seven months.

The run on Circuit City's stock was initiated on fears that remodeling costs would exceed previous forecasts, according to Gerard Klauer Mattison analyst Scot Ciccarelli. A rumor that it would take a restructuring charge related to the remodeling program was quick to follow; a rumor that was decidedly false, according to Anne Collier, vp of financial and public relations.

Rather, remodeling expenditures will be spread out over the next three years as a cost of doing business as Circuit City continues to refresh its entire store base, some of which haven't been touched in nearly 20 years, according to Collier.

Many of Circuit City's recent problems seem to stem from a communications disconnect with Wall Street. Collier told DSN Retailing Today the company regrets any misunderstanding, but believes it has conveyed its plan with the financial community. "We very clearly stated prior to this what our plan was, that we had a variety of options available to us with remodeling and we wanted to make our decision based on all of them," she said. "This is the first time in the year and a half [since Jacksonville] that we said, 'here's what our plan is for remodeling."'

Not all analysts were bearish, though several issued downgrades. Supporters of the stock cite technical indicators and a depreciated stock price as reasons to buy. "Remodel efforts have been ugly so far, but that is old news," said Aram Rubinson of UBS Warburg, upgrading Circuit City to buy. "What matters is that the stock is cheap." Merrill Lynch's Peter Caruso also upgraded the retailer.

But the remodeling fits and starts, as well as the associated costs have frustrated some. Banc of America Securities analyst Shelly Hale downgraded Circuit to market performer, saying, "We believe the plethora of issues surrounding the company will keep the stock from appreciating from these levels."

It's rare to see this kind of wildly contradictory behavior from analysts, with upgrades and downgrades from different firms issued within hours of one another. Some of this erratic behavior may be chalked up to the Enron fiasco as analysts scramble to cover their tracks and balk in the face of any uncertainty.