CIRCUIT CITY PROFIT PLUMMETS ON COSTS OF COMPENSATION SHIFT
Circuit City, saddled with $14.2 million in costs for shift to noncommissioned sales force and severance payments, said its 4th-quarter net income plunged to $75.3 million from $159.3 million.
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Sales fell 5% to $3.19 billion from $3.36 billion on 6% decline in same-store sales. Circuit City trimmed 3,900 commissioned sales positions, but hired 2,100 hourly workers in restructuring earlier this year. It said switch to noncommissioned strategy cut earnings by $10 million but produced $5.8 million in payroll savings in quarter.
One possible bellwether of impact of compensation change was in extended warranties, which accounted for 3.1% of revenue in quarter, down from 3.6% year earlier. Decline in warranty sales was “short-lived” and returned to “prechange levels” in March, CEO Alan McCollough told analysts in conference call. Overall, he said Circuit City hadn’t found “any discernable evidence” that change to noncommissioned strategy had affected sales. “What we have found would suggest that there may be some short-term disruption, but we think that it will come back around,” McCollough said. While restructuring eliminated 30% of Circuit City commissioned salespeople, chain sought to retain staff in AV sections and has active certification program in place for current employees and new hires, it said.
In changing to noncommissioned sales, Circuit City also increased inventory by $175.4 million to $1.41 billion at quarter’s end as it brought in additional merchandise for in- store displays. Main beneficiaries of enhanced displays were “take-with” product categories where “depth of presentation is better,” Exec. Mdsg. Vp Kim Maguire told analysts. Inventory also was added as Circuit City sought to avoid out-of-stock problems that plagued it year ago. Executives categorized higher inventory for display purchase as nonrecurring expense.
Big-screen TVs, portable audio, DVD players and videogames were described as strong sellers in quarter, but DBS and cellular phone categories were “soft” and notebook and desktop PCs slowed, McCollough said. Circuit City’s pretax profit from its finance operation fell to $7.7 million from $34 million because of increase in defaults and lower yield from bank card portfolio. At same time, higher marketing expenses spurred $11.1 million rise in operating costs of finance business. Increased expenses were attributed in part to increase in receivables for Circuit City’s co-branded card with Visa, company said. It also conducted tests with its private label card in effort to “offset attrition and seek out new customers,” McCollough said.
In continued revamping, Circuit City said it would spend $150 million in fiscal 2004 to open 8 stores, relocate 18-22 others, partly remodel 200 more and fully remodel additional 5. Partial remodels will key on video departments, which were overhauled in 301 stores in last fiscal year and resulted in 3% average increase in sales. Sales in relocated stores jumped average of 30% last year. Company also has shifted suppliers, most prominent change being addition of Samsung TVs and dropping of JVC and of some models in Thomson Scenium line.