Circuit City Stores, Inc. Reports First Quarter Results

Circuit City Stores, Inc. Reports First Quarter Results

Circuit City Stores, Inc. today reported results for the first quarter ended May 31, 2007.

Statements of Operations Highlights Three Months Ended May 31 2007 2006 (Dollar amounts in millions % of % of except per share data) $ Sales $ Sales Net sales $2,485.5 100.0% $2,596.6 100.0% Gross profit $560.2 22.5% $635.8 24.5% Selling, general and administrative expenses $648.4 26.1% $634.3 24.4% (Loss) earnings from continuing operations before income taxes $(82.5) (3.3)% $8.3 0.3% Net (loss) earnings from continuing operations $(54.8) (2.2)% $5.3 0.2% Net (loss) earnings $(54.6) (2.2)% $6.4 0.2% (Loss) earnings per share from continuing operations $(0.33) – $0.03 – (Loss) earnings per share $(0.33) – $0.04 – Balance Sheets Highlights May 31 (Dollar amounts in millions) 2007 2006 % Change Cash, cash equivalents and short-term investments $364.1 $634.3 (43)% Merchandise inventory $1,745.9 $1,931.4 (10)% Merchandise payable $923.0 $995.6 (7)% Long-term debt, including current installments $55.9 $56.9 (2)% Stockholders’ equity $1,700.2 $1,945.8 (13)% First Quarter Summary * Net sales declined 4.3 percent, driven by a comparable store sales decline of 5.6 percent. In the same period last fiscal year, the company posted total sales growth of 17.4 percent and comparable store sales growth of 14.6 percent. * In the domestic segment, direct channel sales grew 21 percent and services revenues grew 70 percent versus the prior year. * Gross profit margin decreased 195 basis points compared with last year’s result due to a decrease in domestic segment extended warranty net sales as well as lower merchandise margins that were driven by a greater mix of lower-margin PC hardware sales. * SG&A expenses as a percentage of net sales increased from the prior year by 166 basis points, which primarily reflects approximately 90 basis points in net incremental expenses, related to investments in the domestic segment for information technology, multi-channel capabilities and innovation activities, as a percentage of consolidated net sales, as well as the overall de-leveraging impact of lower sales. * The loss from continuing operations before income taxes was 3.3 percent of net sales compared with earnings from continuing operations before income taxes of 0.3 percent of net sales in the prior year. * The company reported a loss from continuing operations of 33 cents per diluted share compared with earnings of 3 cents per diluted share in the prior year. * The company’s cash, cash equivalents and short-term investments decreased by $270 million to $364 million, driven by $311 million in purchases of property and equipment and $258 million in stock repurchases and dividend payments, partially offset by improvement in net-owned inventory.

“While I am disappointed with the large net loss for the first quarter, we met our revised guidance while up against our toughest comparable store sales increase comparison of this fiscal year,” said Philip J. Schoonover, chairman, president and chief executive officer of Circuit City Stores, Inc. “We made significant and substantial changes to improve Circuit City and position the company to compete while facing economic uncertainty in the near term and new realities in the consumer electronics marketplace over the longer term.

“The structural changes we made to reduce our costs and expenses were necessary to fund our four key growth pillars. The initiatives taken are expected to reduce domestic segment SG&A expenses by approximately $135 million in fiscal 2008 and $185 million annually beginning in fiscal 2009. Initiatives in the international segment are expected to generate SG&A savings of $15 million annually beginning this fiscal year. Now that the structural changes to our organization are behind us, we are focused on simplifying our business for Associates and simplifying the shopping experience for our customers.

“As a result of the changes we are rolling out this summer, we expect continued volatility in our financial results in the near term. The second quarter changes include new merchandising and marketing systems that came on line in early June; new retail store operating procedures that are being rolled out during the summer and will be completed by the end of August; and the expected deployment of a new point-of-sale system in our domestic segment stores starting in July.

“We wanted to make the structural changes to our business during the first quarter and free our Associates from unnecessary work so that in the second quarter we can build towards executing crisply during the important holiday selling season. By simplifying the business and focusing on execution, we will better serve customers with an improved shopping experience in the second half of the fiscal year that should translate to improvements in revenue and margin per transaction in our key product categories.”