Management blunders cause Circuit City stock to short out
Management blunders cause Circuit City stock to short out

By Malcolm Berko Comments 0
Published: October 14, 2007

Dear Mr. Berko: I bought 200 shares of Circuit City late last year at $28, and the stock just fell and fell and fell in price. I spent a lot of money on TVs and electronics there, and I thought it was such a great company that my wife and I decided to buy the stock. What's wrong with this company? Why has the stock price fallen so low? Should I sell my shares or should I buy more stock and lower my cost price?

W.T., Oklahoma City

Dear W.T.: In 2003 my daughter Hilary defended a trio of bozos who one evening tried to reduce the electronics inventory of a Circuit City store (CC-$9.05). Neither was successful, but her subsequent visits to that store resulted in the purchase of a large-screen TV and 200 shares of Circuit City stock at $4.50 per share. Hilary has a nose for things, which I wish I had. Two years later, CC was trading at $20, and in April of 2006 she sold her 200 shares at $30.50. When I asked Hilary why she sold CC, she said she thought their customer service was lacking and that it was more fun to shop at Wal-Mart, Costco or Best Buy. She also believes management, with whom she's crossed swords, "is a few atoms shy of a molecule.”

I couldn't agree more. These are the same people, who in May of 2006 canned 10 percent of their top salespeople because they were earning too much money. Can you imagine General Motors, Merrill Lynch, MetLife or Century 21 eliminating their top producers because they earn too much money?

Well, since that "cut 'em loose” edict of "Prince” Phillip Schoonover (chief executive officer, president and chairman) over a year ago, CC's revenues have been flat as a debit card. Morale imploded and 2007 net profit margins crashed to their lowest level since Ollie North was running the government from the basement of the White House.

So last year, after sending their star salespeople to the pasture, Schoonover tells the Street that he expects sales growth of about 6 percent and earnings to improve by 1.8 percent. Well, so far sales have flopped by 5 percent and net income is expected to plop by 60 percent. And yes, Hilary was right as rain. Circuit City's customer service is as much an oxymoron as military intelligence!

I'm aware that some of CC's problems stem from the general market weakness in the home electronics market. And I'm mindful that most electronics customers are price-sensitive buyers. I'm also aware that margins on the popular stuff such as video game hardware, laptops, cameras, TVs, etc. are thin as onionskin.

But why does competitor Best Buy, which sells the same stuff at the same prices, have twice the per store sales, with profit margins that makes CC's look like a subprime mortgage? The answer is simple as sunlight ... superb management and executives with foresight — not guys like Schoonover and his sycophants who, like puppy dogs, follow the successful trends of competitors like Best Buy.

If ever there were a company that needed new management, Circuit City certainly fits the bill. Over the past dozen years, CC's earnings have been up and down like a chimney sweep. Its return on capital and equity are ungenerous, and net profit margins (a company's heartbeat) are so weak that an accountant might declare CC a dead company.

Were I Schoonover, I'd be embarrassed to show my face to shareholders, company employees or anyplace in CC's Richmond, Va., hometown. Circuit City is a living disaster.

There is one caveat though. According to the latest filing, CC's book value is an astonishing $11 per share or $2 higher than the current market price and the company has over $1 billion in working capital.

So among the solutions that could turn this $12.5 billion revenue company around:

•A leveraged buyout.

•A new management team.

•The judicious and frequent application of industrial-size management enemas.

Should these appear to become a reality, the perception would be sufficient to add between four and six points to the market value of CC.

Don't sell your shares. I'm hearing that a white or gray knight may come to the rescue.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net.