Circuit City annual meeting comes amid buyout talk

June 22, 2008 6:18:42 PM PDT
Investors hope to gain some clarity on the future of consumer electronics retailer Circuit City Stores Inc. at its annual shareholder meeting Tuesday.

Adding to uncertainty created by the slowing economy is the possibility of a buyout for the Richmond-based retailer, which has seen only one profitable quarter since mid-2007.

The company says many of its recent financial problems result from actions intended to improve its long-term stability. But analysts say a lot remains to be done if Circuit City is to endure slowing consumer spending and challenge industry-leading Best Buy Co. Inc.

"They're in a tough position because it is going to take them several quarters to kind of work through some of the changes that they've been making," BMO Capital Markets analyst Rick Weinhart said in an interview with The Associated Press. "You've got to be looking at this company and trying to see something that's not there today in order to be buying it."

Chief Executive Philip J. Schoonover agrees.

"Fiscal year 2009 will be a year of very hard work and focus on execution," he told investors last week. "We expect to improve our financial performance, compared with fiscal year 2008, and set the stage to return to sustainable profitability in the future."

While the company is confident the multiyear plan will work, Weinhart said the management team was guilty of trying to do too much too fast.

"You're walking a fine line between doing too much and not doing enough and falling behind Best Buy," Weinhart said.

Last week, Circuit City said its loss widened in the first quarter because sales fell more than 11 percent at established stores. It reported a loss of $164.8 million in the three months ended May 31 compared with a loss of $54.6 million a year earlier.

Rival Minnesota-based Best Buy reported a 7 percent drop first-quarter profits last week, saying net income dipped to $179 million from $192 million.

Circuit City also expects a bigger loss in the second quarter than analysts are predicting.

But Schoonover said he is encouraged by improvements Circuit City is seeing in many of its operating performance measures. The company is also suspending its dividend to keep capital available for its turnaround.

"We're on the right track, with the right strategies, the right talent and improved processes to execute a successful turnaround," Schoonover said.

Last month, Circuit City gave in to pressure from activist shareholders, essentially putting itself up for sale and agreeing to nominate dissident directors to its board.

The company hired Goldman Sachs & Co. to explore strategic alternatives ? including a sale ? to boost shareholder value. But Schoonover said the board has not yet determined a plan.

The company also announced it would open its books to Blockbuster Inc. after Blockbuster's largest shareholder, Carl Icahn, eased concerns over whether the video-rental chain could finance a purchase of Circuit City by saying he was prepared to buy the company if all else fails.

Dallas-based Blockbuster is in the process of conducting due diligence in its takeover bid of just over $1 billion; it plans to create a chain that would sell electronic gadgets and rent movies and games.

"It's our hope that the due diligence will validate the strengths we see in the possible combination," Blockbuster spokeswoman Karen Raskopf said. "But if it doesn't we'll move on and focus on our core business."

Circuit City filed papers last week with the Securities and Exchange Commission indicating it may issue stock or debt to gain "greater flexibility to respond to strategic opportunities as they arise."

Soleil Securities Group analyst Scott Tilghman said in a recent note to investors that Circuit City has several alternatives to choose from besides simply "staying the course."

"The company could be sold outright, it could enter into some strategic relationships, it could pare off noncore assets, and it can become more aggressive in rationalizing its store base," he wrote. "In each case, we believe these opportunities would benefit both Circuit City fundamentals and shareholders."

Investors like Wattles Capital Management, which holds a 6.5 percent stake in Circuit City had pressured the company.

Circuit City defused a proxy battle with Wattles by agreeing to put three of its nominees up for election at the annual meeting. The company is asking shareholders to expand its 12-member board by three seats to accommodate the Wattles nominees.

Mark J. Wattles, owner of the 32-store Ultimate Electronics chain, had criticized the company's turnaround effort and demanded the ouster of Schoonover and the entire board. The new directors may exert some of the same pressure, Weinhart said.

"It's going to put a lot of pressure on them to show a strategy and if the strategy is not working, again there's going to be a lot of pressure to change that strategy," Weinhart said. "They may actually bring some insight or some ideas that might bare some fruit over time."