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Struggling Circuit City tries a hipper, slimmer store format and asks investors for patience.
Published Feb. 12, 2008

Circuit City chief executive Philip Schoonover is hoping he can make more out of less in the latest attempt to turn around the big-box chain.

The nation's second-largest consumer electronics retailer plans to open 50 to 60 stores this fiscal year in a new, smaller format that it calls simply the City. They'll be staffed with Generation Y employees carrying computer tablets ready to look up stats on any product in the company. Shelves have been cleared of merchandise with ho-hum sales to focus on blockbuster sellers. Computers, cameras and video games are ready for hands-on testing.

The staff recites such mottoes as "Keep it real" and holds twice-daily rituals of "shameless self-recognition." Employees wear uniforms of black T-shirts and jeans straight out of Steve Jobs' closet.

The City is a window into the kind of company Circuit City hopes to become - as innovative as the genius bar at Apple stores and as convenient as a drive-through pharmacy. One day, Schoonover imagined, Circuit City's tech-help team, Firedog, may even be its biggest business, with retail on the side.

But such visions remain far from the brutal reality. Once known for its customer service, Circuit City slashed its workforce by 3,400 last year and squeezed out $150-million in general expenses. So far this fiscal year, it has lost more than $300-million, and its stock price dropped to $3.60 last month, the lowest since the early 1990s and down from a 52-week high of $22.02. Investors are getting antsy, and Wall Street has begun wondering whether the company should put itself on the auction block.

"This proved to be a disastrous cocktail," said Daniel Binder, an analyst with Jeffries & Co. "The gap with (chief competitor) Best Buy has widened considerably in every way, and closing it will take time, if it is even possible at this point."

The rollout of the City - and its success or failure - will be a crucial test of the company's plan to win back shoppers following a sharp drop in the price of flat-panel TVs during the 2006 holiday season that eroded its profit margins.

Circuit City acknowledges the year has been dismal. But Schoonover and other top executives say they have also seen glimmers of hope. Online sales and revenue from Firedog are growing by double digits. Prototypes of the City stores, which are about 20,000 square feet, generated as much money as stores of 30,000 square feet or more, with lower costs and a higher profit percentage.

It remains to be seen how long investors will wait for reforms to take hold. Circuit City has rejected two buyout attempts in recent years - one by Mexican billionaire Carlos Slim Helu in 2003 and another from Boston hedge fund Highfields Capital Management in 2005. Analysts have begun asking management about seeking similar "strategic alternatives."

"People just don't have a lot of patience with them right now," said Stephen Baker, vice president of industry analysis for consumer research firm NPD Group. "They really have to find a way to right that ship as fast as possible."

Chain of troubles

Circuit City, which has trailed Best Buy for years, has struggled with management turnover and jettisoned thousands of employees in recent years. Here's a look at recent events at the company:

February 2005: Closes 19 stores, five regional offices and a distribution center, resulting in layoffs of about 1,000 employees.

March 2005: Rejects a $3.25-billion takeover bid from a Boston hedge fund.

September 2005: Posts its first second-quarter profit in five years on strong plasma and LCD TV sales, surprising analysts.

Late 2006: A price war over flat-panel TV sets puts the company in the red for the year.

March 2007: Dismisses 3,400 store employees it said were too highly paid so it can replace them with workers who would accept lower pay.

June 2007: Cuts 850 jobs, including 654 management jobs, and says it plans to open 165 stores and expand technical repair service.

October 2007: Begins testing its new store model, called the City (a Richmond, Va., version is below) featuring a new look and product selection.

November 2007: David Mathews, executive vice president of merchandising, becomes the third senior executive to leave in a year.

December 2007:Approves cash incentives up to $1-million for vice presidents to encourage them to stay until 2011.