Circuit City gives up on Divx; Best Buy to grow aggressively

Discount Store News, July 12, 1999 by Laura Heller

NATIONWIDE DSN REPORT -- The nation's two largest consumer electronics chains both had plenty to boast about at their respective annual meetings held within days of each other. And although financially the picture is rosy, neither intends to rest on its laurels in the coming year.

Best Buy announced a more aggressive expansion plan, while Circuit City said it will slow its own, even as it unveiled an expansive e-commerce initiative. But in a down note directly following the meeting, Circuit City announced it was dumping Divx, its failed DVD venture.

When Circuit City chairman and ceo Richard Sharp faced shareholders on June 15, he was enthusiastic about sales, citing a 22% increase in total sales for the company and a 17% increase to $9.34 billion for Circuit City Group, which includes the CE stores. Net earnings for the CE business were up 48% to $235 million from $159.2 million in fiscal year 1998, and comp store gains were 8%.

But the company could not find additional financing for Divx; and it was not only having trouble convincing other retailers to carry the product but also had problems with the studios, many of which had been slow to release titles on Divx in spite of original agreements. These were all areas that needed to be rectified if Divx was to succeed, a subdued Sharp told shareholders.

"Divx is not intended to be business Circuit City would handle on a regular basis," Sharp said at the meeting. "We hope to have some success here this year."

Famous last words. Less than 24 hours after the meeting, the company announced that Digital Video Express would cease operations.

Circuit City is now offering $100 cash rebates to everyone who purchased a Divx player, refunds on upgrades to unlimited viewing for individual movies prior to the announcement, and has slashed prices on the remaining hardware and software in stock. The company will continue to run service operations for two years, during which time the movies can still be viewed. But as of June 30, 2001, Divx discs will cease to function.

Wall Street cheered the decision, sending Circuit City's stock price up 10%.

With Divx left behind, Circuit City faces an upbeat future. Total sales for the first quarter increased 19% to 2.69 billion from $2.27 billion for the same period last year. Earnings from continuing operations rose 104%, and comp store sales for the CE business were 9%. Excluding CarMax, earnings from continuing operations for the Circuit City Group rose 65% to $39.3 million. Simultaneously, the chain announced a 2-for-1 stock split effective June 30.

The company took a $114 million charge during this quarter for the now-defunct Divx. But true costs to the company are more in the neighborhood of $350 million in pre-tax dollars for the total operations, according to Doug Gordon, analyst, NationsBanc Montgomery Securities. But he, like most in the financial community, thinks Circuit City was wise to cut their losses and move on. "I just don't think that at the end of the day [Divx] made a lot of sense," he said.

What does make sense is the chains' plan for e-commerce. In July, the company will go live with more than 700 skus for sale on its site and will make information available for an additional 400 products as well.

"We intend to seamlessly integrate our existing store offer with the Web shopping offer," said Alan McCollough, president and coo. The site actually allows consumers to check the inventory of several nearby Circuit City stores, make a purchase and pick up the product immediately at the store, saving shipping costs and eliminating the need to wait at home for deliveries. It's an option that has proven popular with the chains' build-to-order computer buyers, approximately 70% of whom opt for in-store pick up, according to Dennis Bowman, senior vp, cio.

The program also allows for return and repairs to be made through the store, and an automatic low-price feature assigns whichever price is lowest--in-store or on line--to the product on the date of pick-up. Although the company initially won't sell appliances over the Internet, it plans to as soon as a real-time on-line scheduling program can be implemented, Bowman said. "We hope to have it by late this year or early next year," he told DSN.

In contrast, Best Buy had nothing but positives to report at its annual meeting on June 24. The company boasted a 138% increase in earnings for fiscal year 1999 on revenues of more than $10 billion and comp store gains of 13.5%. Gross margin was up more than 120 basis points from the prior year, and SG&A as a percentage of sales declined to 80% from 86% in fiscal year 1998.

There were two 2-for-i stock splits during the year, and on June 28, the company was added to the S&P 500 Index.

The company also is ramping up its expansion plan, which had been slowed while management worked on upgrading systems and overhauling operating efficiencies.

As a result, last year the chain opened just 28 new stores. It plans to open 45 units this year primarily in Northern California and on the East Coast, including Circuit City's hometown of Richmond, Va. Schulze said he intends to open more than 50 stores in 2001. In contrast, Circuit City will open 30 stores next year and concentrate on converting existing stores to its new, open format with expanded software and computer departments.