“The City Revival Plan”
Circuit City Analysis and Restructuring
December 14, 2007
Columbia Business School
Turnaround Management
Professor Laura Resnikoff
Chester Han, Andrew Huml, Anand Kagalkar,
Lena Saito, Kristy Sundjaja
December 14, 2007
Circuit City Stores, Inc.
Board of Directors
9950 Mayland Drive
Richmond, Virginia
Dear Members of the Board:
We have completed our analysis of Circuit City Stores, Inc (“Circuit City”). The objective of
our work was to document a detailed study of Circuit City’s industry, market share, financial
structure, and market valuation, then define a comprehensive turnaround plan for sustained and
profitable growth.
As you have requested, we have not met with Management in the execution of our work.
Therefore, we have made certain assumptions that we have stated throughout. In addition, with
any turnaround plan, we expect minor changes to our strategy and approach throughout the
plan’s implementation.
The accompanying pages of our report include the following sections:
• Executive Summary
• Industry and Company Background
• Our Recommended Turnaround Plan – “The City Revival Plan”
This report is intended solely for the information and use of the Board of Directors and is not
intended to be and should not be used by anyone other than this specified party. Circuit City’s
external auditors and regulators may be provided with a copy of this report in connection with
fulfilling their respective responsibilities.
Yours truly,
Turnaround Management Team
Disclaimer: This analysis was developed as part of a graduate program assignment; all
information used in connection with this analysis is publicly available in annual reports, company
publications, and news media. This is a fictitious letter to the Board and for example purposes
only; Circuit City’ Board or Management were not contacted and did not solicit this analysis.
Table of Contents
Executive Summary
1.1 1.2 1.3 Overview ................................................................................................................. 1 The City Revival Plan ............................................................................................ 1 Next Steps ............................................................................................................... 2 Industry Analysis
2.1 2.2 2.3 2.4 2.5 2.6 13 Background .......................................................................................................... 13 Customers and Product Selection....................................................................... 13 Sourcing and Supply Chain ................................................................................ 14 Multi-Channel Sales Operations ........................................................................ 15 Remodeling Initiative........................................................................................... 16 Marketing ............................................................................................................. 17 Management Structure & Background ............................................................. 18 Company Initiatives ............................................................................................. 20 Financial Analysis
4.1 4.2 4.3 4.4 4.5 4.6 4.7 3 Consumer Electronics Market .............................................................................. 3 Competitive Landscape ......................................................................................... 3 New Competition.................................................................................................... 6 Existing Competition - Specialty Retailers .......................................................... 8 Industry Trends ..................................................................................................... 8 Industry Comparison Data ................................................................................. 10 Company Overview
3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 1 21 Financial Analysis / Stock Performance ............................................................ 21 Historic Operating Performance ........................................................................ 21 Capital Expenditures ........................................................................................... 26 Liquidity................................................................................................................ 26 Credit Rating ........................................................................................................ 28 Capital Structure ................................................................................................. 31 Valuation............................................................................................................... 32 Table of Contents
Restructuring Plan
5.1 5.2 5.3 37 Restructuring Overview ...................................................................................... 37 Management’s Approach .................................................................................... 37 Proposed Approach – “City Revival Plan” ....................................................... 39 A. Cost Reduction Plan ...................................................................................39 B. Expand Revenue Opportunities ................................................................43 C. Refocus Strategy .........................................................................................47
Appendix
Appendix A – Table, Analysis, Models, Etc. ...................................................................... 54 Appendix B – Industry Detailed Analysis, Financial Measures ....................................... 66 Appendix C – Board of Director Composition .................................................................. 69 Executive Summary
1
Executive Summary
1.1
Overview
Circuit City continues to falter in the computer and electronics retail
industry – an industry that has grown 8-14% annually for the last five
years (US). In two of the last four fiscal years, Circuit City was not
even profitable. The company’s recent quarterly losses of $54.6
million (Q1 2008) and $62.8 million (Q2 2008) demonstrate the
Quick Facts December 2007
continued downward trend. At the same time, Best Buy, Wal-Mart and
Revenue: $ 12 billion
Employees: 46,000
US Stores: 650 (approx.)
Canada Stores: 800 (approx.)
NYSE Ticker: “CC”
52 Week High: $25 Low: $5
Consumer Electronics Retail
Headquarters: Richmond,
Virginia, USA
Founded: 1949
www.circuitcity.com
others are recording record sales in consumer electronics and continue
to erode Circuit City’s market share.
What has Senior Management done to reverse this downward slide? we will argue not enough. While the company has a turnaround plan
in place, it lacks momentum, adequate execution and proper coverage
of the issues. Investors tend to agree, as Circuit City’s per share price
has fallen over 80% in the last two years.
1.2
The City Revival Plan
We propose a multi-faceted turnaround plan that covers several aspects of Circuit City’s business. This
“City Revival Plan” is organized into three distinct objectives:
A. Cost Reduction Plan
B. Expand Revenue Opportunities
C. Refocus Strategy
The following report details the analysis and formulation of these objectives, but in summary, each
objective has implementation costs, expected revenue gains, and targeted cost savings. Related to
Objective A, Circuit City’s Selling, General and Administration Expense (SG&A) ranks among the
highest in the industry. There are several reasons for this, but most notably is the high number of
employees per store and high relocation costs (due to poor store placement). To further reduce SG&A, it
Executive Summary
2
will be necessary to reduce headcount per store, close 75 domestic and 60 international stores, reduce
advertising spending proportionately, and minimize inventory carrying costs.
In connection with Objective B, Circuit City is operating in a growing yet increasingly competitive
market. Therefore, we have identified a number of revenue opportunities going forward, several of
which the company is prepared to address. We anticipate that the Circuit City’s firedogSM service, with
adequate investment, will grow revenues from $200 million in fiscal year 2007, to over $700 million by
fiscal year 2010. Furthermore, by increasing the company’s sourcing and sales of private label brands,
margins can be increased by 1% and an additional $1 billion in revenue can be generated by fiscal year
2010.
After Circuit City restructures and stabilizes its operations, the company must expand globally and
reduce their reliance on the US market. As part of Objective C, the company will expand to the
consumer electronics markets that are projected to grow 15-20% annually (most notably China).
Currently, Circuit City only has stores in North America, while Best Buy already has 10% of their retail
space in China and is actively testing other countries. Circuit City does not have to be the first mover in
emerging markets, but must start modest global expansion by 2010.
Lastly, Circuit City must realign their compensation structure with the industry. In particular, Senior
Management is over compensated in comparison to the much more successful Best Buy. To ensure the
turnaround is understood and embraced by Management, compensation will be tied to the overall
turnaround objectives.
1.3
Next Steps
While Circuit City has been an underperformer as of late, it still owns a strong brand, several prominent
retail locations, and operates in a growing industry. With proper execution of the City Revival Plan, the
company can regain market share, return to profitability and, in the long-term, be a global industry
leader. Circuit City’s next steps will be critical, and leadership is critical to regain investor confidence
and prepare the organization for change.
Industry Analysis
3
Industry Analysis
2.1
Consumer Electronics Market
The U.S. consumer electronics industry continues to grow, and is projected to be a $170 billion market
in 2008. This represents a 6-8% growth rate based on recent data from the Consumer Electronics
Association 1 .
The global retail market for consumer electronics is nearly $618 billion, with the U.S. accounting for
almost 24 percent of that amount 2 (note: Circuit City is primarily based in North America).
2.2
Competitive Landscape
Consumer electronics retailers are experiencing strong demand, but margins are under pressure for
another reason — competition.
Industry Analysis
4
Best Buy is considered Circuit City’s direct competitor, and domestically has a similar store format,
size, and number of stores (approximately 852 US Best Buy stores verses 642 US Circuit City stores).
Best Buy and Circuit City are considered consumer electronic specialty retailers and are described in a
following section. Wal-Mart Stores, Inc. (Wal-Mart), Target Corporation and wholesale clubs, such as
Costco Wholesale Corporation, BJ’s Wholesales Club, Inc., and Sam’s Club, also sell consumer
electronics.
It is important to note that Circuit City, Best Buy and other ‘big-box’ electronics retailers also compete
with Internet retailers that offer a wide selection of products and services. Increasingly, consumers have
the ability to conduct product research and price comparisons online, spurring additional price
competition among retailers for discretionary consumer dollars. Since physical retailers cannot compete
with online retailers on price alone, the proliferation of online retailers like Amazon.com, buy.com and
others have prompted physical retailers to utilize the Web as an additional direct-to-consumer
distribution channel with tie-ins to existing stores (i.e. real-time inventory check, online order to in-store
pick-up) and begin using broad-based merchandising strategies as a competitive advantage against
online retailers. In this report, we describe competitors that primarily operate physical retail locations
like Circuit City given the business model characteristics and similarities.
Key Competitors
Best Buy Company, Inc.
RadioShack Corporation
GameStop
Target Corporation
Wal-Mart Stores, Inc. (with Sam’s Club Wholesale)
Costco Wholesale Corporation
BJ's Wholesale Club, Inc.
Tweeter Home Entertainment Group, Inc. (bankrupt)
Of the U.S. consumer electronics market, Best Buy, Wal-Mart (without Sam’s Club), and Circuit City
make up the top three in revenue. Wal-Mart does not disclose much detail on the breakdown of their
revenue by product type, although the industry estimates that they grew consumer electronics retail sales
from $21 billion in 2005 to $22.6 billion in 2006 3
Industry Analysis
5
Top Three U.S. Consumer Electronic Retailers
Operating Revenues ($ BILLION)
Company
2006
1. BEST BUY CO INC
2. WAL-MART (Excl. Sam's C.)
3. CIRCUIT CITY STORES INC
Total
$
$
$
$
35.9
22.6
12.4
70.9
Using the annual reports and industry data to determine the overall market share in consumer
electronics, Circuit City has been losing or narrowly maintaining market share since 1998 4 . Between
1995 and 2007, the entire market has doubled from $63 billion to $148 billion, all while Circuit City has
lost market share to Wal-Mart, Best Buy and others.
Estimated Market Share in US Consumer Electronics 1998-2007
1998 CE Market Share (US)
WalBest
Circuit
Mart*
Buy
City
8%
9%
8%
Other
75%
2003 CE Market Share (US)
Best
Buy
16% Circuit
City
8%
Other
76%
Data Not Available for Wal-Mart
2007 CE Market Share (US)
WalMart*
14%
Best
Buy
21%
Circuit
City
7%
Other
58%
*Wal-Mart share data does not include Sam’s Club
Industry Analysis
6
Considering the market share of specific products, it is clear that Wal-Mart and the wholesale clubs are
gaining share in each category. Circuit City continues to lose market share in almost every product
category they compete. For example, at the close of the last quarter (Q3 2007), the following changes in
product segment market share occurred 5 :
•
Plasma TV: Category leader Best Buy grew its share of 42-inch to 60-inch plasma TVs by 1%,
while Costco gained 1% and Wal-Mart gained 1.5%, albeit off a small base. Circuit City lost
4.6% share.
•
LCD TV: In 40-inch to 60-inch sizes, Wal-Mart gained 4.5% and Costco made a 1% gain, while
Best Buy lost 2% and Circuit City lost 4.9%. In 39-inch and smaller TVs, Wal-Mart's gained 8%
while Best Buy lost 3.2% and Circuit City lost 2.7%.
•
Video Games: GameStop continues to lead in video games (their core business), garnering 5.1%
as industry emphasis shifts from consoles to software. Other share gainers were Best Buy (taking
2.3%) and Target (up .7 %), while Circuit City was flat and Wal-Mart gave up 4.1%.
•
Notebooks: Best Buy's 3.6% gain likely came from Dell and CompUSA’s loses. Other winners
were Wal-Mart, up 1.6%; Apple, up 1%; and Circuit City gained .5%.
2.3
New Competition
Wal-Mart, the discount giant and largest retailer in the world, is expanding its selection of consumer
electronics. In 2005, the chain targeted three categories to attract more upscale shoppers: apparel, home
décor and electronics. The chain, which emphasizes “Every Day Low Prices” now sells sophisticated
flat-panel televisions, often at a discount compared to retailers such as Best Buy and Circuit City. The
company remodeled the electronics departments in its existing stores in 2006 and is now adding a wider
selection of high-definition televisions and home-theater systems.
Wal-Mart’s expansion in consumer electronics has been detrimental to Circuit City and Best Buy.
Circuit City continues to struggle and closed eight US stores in fiscal year 2007. In addition, Circuit City
laid-off 3,400 of its highest-paid store staff as part of a $110 million savings program. Subsequently,
Circuit City announced an additional 800 job cuts in June. Wall Street’s reaction to Circuit City’s cost-
Industry Analysis
7
saving approach was not positive, and in November 2007, Circuit City invited the laid-off employees to
reapply given the disruption to sales (particularly of higher margin warranty products which the longertenured employees were more familiar with). This was indicative of Senior Management’s inability to
restructure the business with conviction and long-lasting benefits.
Warehouse club stores such as BJ’s Wholesale and Costco Wholesale Corp. are known for selling
everyday items in bulk. These wholesale clubs do not generate the level of revenue from electronic sales
that Best Buy, Wal-Mart and Circuit City do, although they are providing additional competition (the
warehouse clubs keep most revenue undisclosed by category, but rough estimates have Costco TV sales
alone reaching $2 billion in 2007).
Both Wal-Mart and warehouse clubs sell electronics at comparable prices to Best Buy and Circuit City,
although the consumer perception is that the discount chains have considerably lower prices. While
Wal-Mart does typically have the best price for most products, in December 2007, a sample of three
products was taken from each retailer’s website. Wal-Mart often sells different models of each brand, as
compared to the similar offerings of Best Buy and Circuit City, although the samples used the same
exact models across the retailers.
Number of
Offerings
Retailer (Dec
6, 2007)
Wal-Mart
CC
Best Buy
Sample Product
Price
Sony KDLSony TVs
37V3000
4 $
1,197.00
15 $
789.99
21 $
789.99
Number of
Offerings
Sample Product
Price
Number of
Offerings
Sample Product
Price
Vizio TVs
Vizio 32' VW32L
5 $
597.00
7 $
629.99
0 N/A
Tivo DVR
TCD652160
0 N/A
2 $
269.99
3 $
299.99
While this is a very limited sample, and may not be representative of the entire assortment of products
and prices, it identified that the product were priced comparably across Wal-Mart, Circuit City and Best
Buy. In all cases, Wal-Mart had the lowest selection or product type (i.e. Sony TVs), and not all retailers
carried the same products. No one retailer had the best selection or price on the popular products
selected. 6
This basic analysis demonstrates that Circuit City and Best Buy can, and to some extent, do complete on
price with Wal-Mart, and offer a better selection of products. While it is not advantageous to start a price
war through advertising, Wal-Mart is generally perceived as having the lowest price - which is not
always true.
Industry Analysis
2.4
8
Existing Competition - Specialty Retailers
There have been several companies that have not faired well in the consumer electronics industry as of
late. Tweeter Home Entertainment Group Inc., a retailer concentrated in the eastern US, filed for
bankruptcy protection in June 2007, stating difficult price competition. On December 7, 2007,
CompUSA Inc. was purchased by a distressed advisory and investment firm, Gordon Brothers Group
from U.S. Commercial Corp S.A.B. de C.V.. Lastly, RadioShack Corp. has closed more than 500 stores
in 2006 and 2007 in an effort to cut costs. 7
Best Buy, however, is growing and faring much better than its rivals. One reason is the company’s store
locations, which are often more centrally located than those of Circuit City and others. 8 Best Buy
continues to generate revenue from its Geek Squad unit, which provides in-store repair of items as well
as in-home installation of complex consumer electronic. Best Buy has also expanded with Best Buy
Mobile, small kiosk stores that promise better service than either cell phone provider stores or
independent retailers.
2.5
Industry Trends
The industry is trending toward support and installation services given the demand for complex
electronics. Best Buy’s Geek Squad provides computer repair, support, and installation services for
customers of US Best Buy stores. Geek Squad launched in 2005 9 to provide technical support in the
market of home entertainment systems and computers. Best Buy’s 10,000 Geek Squad members, known
as “agents,” dress in short-sleeved white shirts with clip-on-ties, black pants, and shoes. These agents fix
customer computers, install new plasma TVs (which can be purchased at Best Buy) and perform many
other technical services. This service is intended to increase revenue while differentiating its offerings
from potentially lower-cost competitors like Wal-Mart.
Best Buy also offers services to owners of small businesses that average less than 100 employees. Small
businesses spend $132 billion a year on technology goods. Nearly 200 Best Buy stores offer the Best
Buy for Business platform. Business customers receive Geek Squad service, an expanded assortment of
electronics used in the office, and technology assistance and consultants. 10
Industry Analysis
9
“Every customer has their own set of needs. Looking for a custom home
theater configuration? Syncing a new device to your computer? Want to
play the music on your computer through your home stereo? We're here
ready to serve you.” 11
In September 2006, Circuit City introduced “firedog”, its own version of technical assistance and home
installation of electronics products for consumers. Firedog generated more than $200 million in revenue
for the year ended February 2007, which should more than double in fiscal 2008 according to the
company’s 10-K. Circuit City estimates the total market for providing home theater installation and
personal computer–related services could reach $20 billion a year by 2010.
Private Labels
Consumer electronics retailers are sourcing televisions, MP3 players, and other products from low-cost
Chinese manufacturers that they, in turn, sell under their own brand names in order to supplement an
already broad product selection. Additionally, private-label products typically generate higher gross
margins than branded products. Best Buy offers its Insignia label, with prices that are usually lower
than products from manufacturers such as Sony Corp. and LG Electronics Inc. For example, in
December 2007, Best Buy offered an Insignia® - 42" 720p Flat-Panel Plasma HDTV for $809.99, while
a Panasonic - 42" 720p Flat-Panel Plasma HDTV sold for $1,149.99 (same product specifications and
similar features). Circuit City currently provides private-label products, but primarily in its InterTAN
(Canadian) segment rather than its US domestic stores.
Industry Analysis
2.6
10
Industry Comparison Data
When comparing the revenue of the specialty electronic retailers, it is clear that Best Buy has been
leading the market in revenues. As seen from the chart below, Best Buy went from comparable revenue
levels in 1996, to multiples of competitors’ revenue in 2006 12 .
Operating Revenues - Computer & Electronic Retail
40,000
35,000
Operating Revenue ($ Mil.)
30,000
25,000
BEST BUY CO INC
CIRCUIT CITY STORES INC
20,000
GAMESTOP CORP
RADIOSHACK CORP
15,000
10,000
5,000
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Year
Best Buy continues to lead US Computer and Electronic Specialty Retailers going into the 2007 holiday
season. The following chart summaries the last five quarters, through mid-2007.
Quarterly Revenue - Last 5 Quarters
$14,000.0
$10,000.0
$8,000.0
$6,000.0
$4,000.0
$2,000.0
Q2'07
Q3'07
Q4'07
Q1'08
Note Various Quarter Ends
$Q2'08
Operating Revenue ($ Mil.)
$12,000.0
BEST BUY CO
INC
CIRCUIT CITY
STORES INC
GAMESTOP
CORP
RADIOSHACK
CORP
Industry Analysis
11
Note: The comparable companies have various year ends and quarter ends. The following table lists the
periods used in our analysis.
Retailer
BEST BUY CO
INC
CIRCUIT CITY
STORES INC
GAMESTOP
CORP
RADIOSHACK
CORP
Quarter Ends - Last 5
13 weeks Ending 14 weeks Ending 13 weeks Ending
2007-06-02
2007-03-03
2006-11-25
3 months Ending 3 months Ending 3 months Ending
2007-05-31
2007-02-28
2006-11-30
26 weeks Ending 13 weeks Ending 14 weeks Ending
2007-08-04
2007-05-05
2007-02-03
3 months Ending 3 months Ending 3 months Ending
2007-06-30
2007-03-31
2006-12-31
Last Yearend
13 weeks Ending
2007-09-01
March 3, 2007
3 months Ending
February 28, 2007 2007-08-31
13 weeks Ending
2007-11-03
February 3, 2007
3 months Ending
December 31, 2007 2007-09-30
13 weeks Ending
2006-08-26
3 months Ending
2006-08-31
13 weeks Ending
2006-10-28
3 months Ending
2006-09-30
Best Buy also has gained and leads in Net Income between 1996 and 2006 and the last five quarters:
Net Income - Computer & Electronic Retail
1,600
1,400
1,200
BEST BUY CO INC
800
CIRCUIT CITY STORES INC
GAMESTOP CORP
600
RADIOSHACK CORP
400
200
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
-200
Year
Quarterly Net Income - Last 5 Quarters
$900
$800
$700
Operating Revenue ($ Mil.)
Net Income ($ Mil.)
1,000
$600
$500
$400
$300
$200
$100
Q2'07
Q3'07
Q4'07
Q1'08
$Q2'08
$(100)
$(200)
Note Various Quarter Ends
BEST BUY CO
INC
CIRCUIT CITY
STORES INC
GAMESTOP
CORP
RADIOSHACK
CORP
Industry Analysis
12
Best Buy also leads the electronic retailers in return on assets and return on equity, while the other
competitors have mixed results. Circuit City is underperforming the other retailers in both metrics.
Return on Assets (%) - Computer & Electronic Retail
16
BEST BUY CO INC
14
CIRCUIT CITY STORES INC
12
GAMESTOP CORP
RADIOSHACK CORP
10
Percent (%)
8
6
4
2
0
2002
2003
2004
2005
2006
Year
Return on Equity (%) - Computer & Electronic Retail
45
40
BEST BUY CO INC
CIRCUIT CITY STORES INC
35
GAMESTOP CORP
30
RADIOSHACK CORP
20
15
Percent (%)
25
10
5
0
2002
2003
2004
2005
2006
Year
Additional analysis demonstrates that Best Buy is leading the industry in almost every measure. Refer to
Appendix A for a breakdown of the charts and detailed data regarding the following measures: Return
on Revenues (%), Current Ratio, Debt to Capital Ratio, Dividend Payout Ratio and the Price/Earnings
Ratio (High/Low).
Company Overview
13
Company Overview
3.1
Background
Circuit City opened its first store around 1950. By 1990, the company had grown to around 500 stores.
In the 1990’s, Circuit City continued to expand its retail operation and product offerings into consumer
electronics, personal computers and appliances. In 1997, Circuit City Stores changed its business profile
by separating its existing stock into two groups: the Circuit City Group and CarMax Group which was a
tracking stock under Circuit City. CarMax was eventually separated from Circuit City Stores and
became an independent public company in 2002 through a stock dividend to existing Circuit City
shareholders and CarMax tracking stock shareholders.
CarMax was a diversification idea, developed and ‘incubated’ in 1993 by the Circuit City management
team to operate a chain of used car lots and new car franchises. Circuit City’s management team wanted
to apply a mass-merchandising business model to the used car lot business and develop a CarMax
“superstore” similar to the retailer’s existing electronics stores. Their prototype lot in Richmond,
Virginia had 500 cars on display, each no more than five model years old, and each with no more than
70,000 miles on its odometer. Prices for the vehicles were fixed, eliminating the need to negotiate
between customers and sales reps. While revenue continued to increase in the 1990’s, CarMax did not
reach profitability until 1999 when it achieved $2 billion in revenue.
After almost a decade of
incubation, in 2002 Circuit City decided to spin off CarMax to enable to the management team to focus
on its core retail electronics business. The deal was a tax-free transaction for the companies 13 .
Since the 1990’s, Circuit City has tried to refocus its business by spinning off several, non-core business
lines including the co-branded Visa credit card programs. Today, Circuit City’s principal activity is to
market branded consumer electronics, personal computers and entertainment software through the retail
stores, web and phone channels. It operates the Circuit City Superstores and the mall-based Circuit City
Express stores in the U.S. and the Source by Circuit City (SM) and licensed dealer outlets in Canada.
3.2
Customers and Product Selection
Circuit City targets the mid to high-end customers in North America. Domestically, it sells brand-name
consumer electronics, personal computers, entertainment software, and related services. According to
the latest 10-K, the company has five major sales categories:
Company Overview
-
14
Video, which includes televisions, imaging products, DVD hardware, camcorders, digital
cameras, furniture, and related accessories;
-
Information Technology, which includes personal computer hardware, telecommunications
products and related accessories
-
Audio, which includes home audio products, mobile audio products, portable audio products,
and related accessories;
-
Entertainment, which includes movie software, music software, game software, game hardware
and personal computer software; and
-
Warranty, services and other, which includes its firedog(SM) home theater installation and
services for personal computers.
In 2007, Circuit City joined with Napster to offer a new digital music service, Circuit City + Napster for
consumers. The service is powered by Napster's digital music subscription service. This alliance brings
three revenue streams to Circuit City: monthly subscription of $14.95 for unlimited access to songs on
PCs and music players, song download purchase fee of 99-cents per song, and pre-paid download cards.
3.3
Sourcing and Supply Chain
Circuit City has a relatively high dependence on a small set of suppliers. In the 2007 fiscal year, Circuit
City’s five largest suppliers for its U.S. business accounted for approximately 42% of merchandise
purchased. The major suppliers were Sony, Hewlett-Packard, Samsung, Toshiba and Apple. For its
Canada (InterTAN) business, its five largest suppliers were Rogers Wireless, Motorola, Acer, Apple and
Panasonic and the suppliers accounted for approximately 43% of the merchandise purchased. Circuit
City also increasingly sources and offers more private-label merchandise to complement its branded
product strategy. Its wholly owned subsidiary Circuit City Global Sourcing, Ltd. has offices in China,
Hong Kong and Taiwan and is responsible for procuring merchandise from a variety of best value
sources.
Since fiscal year 2007, Circuit City started revamping its supply chain organization and improving all
the main processes involved. The company’s objectives include improved in-stock positions, reduced
net-owned inventory, lower inactive/obsolete inventory and an enhanced product mix. In order to
Company Overview
15
accomplish these objectives, Circuit City is reengineering and implementing a new supply chain system
and organization which aims to align sourcing, vendor logistics, distribution, warehousing, inventory
management, the point-of-sales systems and all other supply chain processes. In early fiscal year 2008,
Circuit City outsourced its IT infrastructure operations to IBM, intending to reduce planned
infrastructure costs by approximately 16% over the term of the contract. Over time, the company
expects that it can better utilize its customer and supply chain information to react to customer demand
and improve replenishment and display of the product at the point of sale.
3.4
Multi-Channel Sales Operations
Circuit City has a multi-channel sales operation, which allows customers to shop in the retail stores
(mostly leased), online and via the telephone. In Q1 2008, the U.S. domestic operations consolidated the
management structure and its ten sales regions into eight regions. Each of these regions is comprised of
multiple districts, which are managed by district managers who, in turn, are responsible for the store
operations and are supported by the store managers.
During the summer of 2007, the company split its store associates into two categories: "product
specialists" who concentrate on sales, and "product flow teams" that concentrate on prepping the stores,
such as setting up merchandise displays. As of August 31, 2007, Circuit City’s domestic segment
domestic segment operated 652 Superstores and 13 other stores in 158 U.S. media markets. Domestic
segment Superstores are typically staffed with an average of 56 full-time and part-time Associates. In
total, Circuit City employs roughly 40,000 domestic hourly and salaried (mostly paid on hourly basis)
employees and additional personnel during peak selling seasons.
InterTAN, Inc. in Canada and is divided into four regions, which are managed by regional vice
presidents. The four regions are further divided into 21 districts, which are handled by the district
managers. The retail stores operate under the trade-name The Source by Circuit City (SM). They are
smaller than the U.S. stores and are located in malls and shopping centers. Similar to the U.S. stores,
these stores offer a wide range of electronic products and services to the consumer.
International
segment retail stores are typically staffed by 5 to 20 Associates, including full-time and part-time
commissioned sales Associates and a store manager. In Canada, the company also operates dealer
Company Overview
16
outlets which are divided into seven areas across the country. Each of these areas is managed by an area
sales manager. Dealer outlets are independent retail businesses that operate under their own trade names
but are permitted, under dealer agreements, to purchase any of the products sold by The Source by
Circuit City (SM).
Apart from the stores, the international segment also operates a website at
www.thesource.ca.
In 2007, the international segment employees over 3,000 hourly and salaried
Associates. Approximately 100 of these Associates, who are engaged in warehousing and distribution
operations, are represented by a union. As of August 31, 2007, there are altogether 800 retail stores and
dealer outlets, which consist of 508 company-owned stores, 291 dealer outlets, and 1 Battery Plus(R)
store. At this time, Circuit city is still exploring strategic alternatives for the international business,
which can potentially lead to a sale of the InterTAN operation in calendar year 2008.
Circuit City’s teleweb business is comprised of www.circuitcity.com and the company’s telephone call
center. This direct-to-customer channel provides customers with access to the same wide selection of
products and warranty services as well as 24/7 customer service. On the company’s website, shoppers
can find customer ratings and reviews of products, as well as product and technology and promotion
information. The web and retail channels are integrated in such a way that customers can view real-time
in-store inventory of products selected on www.circuitcity.com, purchase the products online, and pick
up the products in a nearby store. Under Circuit City’s 24/24 Pickup Guarantee policy, customers can
pick up their (qualifying) online purchases at their designated store within 24 minutes of purchase
confirmation, or customers will receive a $24 Circuit City gift card. In fact, in fiscal year 2007,
approximately 54% of online sales were picked up in a store.
3.5
Remodeling Initiative
Visiting a number of Circuit City superstores in the New York and Boston area, we noted that the new
store format is bright, well structured, and we were quickly greeted by a member of the sales team.
Circuit City has been remodeling its retail stores domestically since 2001, when the new superstore
format was introduced. The major changes included a brighter, more contemporary design and an open
and floor plan which enable customers to navigate the store more easily. The open floor format also
allows the company and display most of its products on the sales floor. Moreover, the company has
tried to improve product adjacencies so that customers can conveniently shop for all products and
Company Overview
17
accessories within the same product categories in the same store area. Since then, the company has
continued to refine its store prototypes. The company’s latest store prototypes include both 30,000
square foot and 20,000 square foot formats. And recently in October 2007, the company announced that
it was testing new concept stores dubbed "The City," with a new look and interactive layout. During
fiscal year 2008, the company expects more than half of the openings to be in the 20,000 square foot
format. The following table from the February 2007 10-K summarizes the progress of the company’s
remodeling effort over the last seven fiscal years.
On the recent Q1 2008 Analyst Conference call, the company discussed their pilot of new format and
operating model in 65 of their super stores which have generated more than 6% in sales per labor hour
and more than 3% in total sales versus the control group of stores. Nevertheless, management expects
the remodeling to continue gradually in 2008 with a target to relocate and open 60-65 stores in the U.S.
3.6
Marketing
In order to support its multi-channel sales operations, Circuit City began a number of brand management
initiatives in fiscal year 2007. The company is utilizing multiple marketing channels which include
newspaper advertisements, television, direct mailings and online marketing. In November 2007, the
company made a move to capitalize on the growth of social networking and launched its CityCenter
online community.
In fiscal year 2007, the company’s advertising expenses (net of specific vendor advertising
reimbursements) were $424.6 million which is approximately 3.4% Circuit City’s sales. It also offers a
rewards credit card in partnership with Chase Card Services to drive customer loyalty. In fiscal year
2008, the company expects to leverage its new information system to optimize its marketing program
and localize its newspaper advertisements in different domestic segment geographic markets.
Company Overview
3.7
18
Management Structure & Background
Management Turnover
In the past 18 months, Circuit City has undergone significant management changes and turnover:
-
In July 2007, the company named a new CFO - a position that was empty since April 2007.
-
In February 2007, the company added the positions of Executive VP of Merchandising, Services
and Marketing. A short time later, this person left after less than a year. As a result, the
Merchandising, Supply-chain, Services and Marketing teams will report directly, in the nearterm, to the Chairman and CEO (who served as the company’s top merchandising officer
between 2004 and 2006).
-
On March 23, 2006, the CEO of InterTAN resigned. The CFO took the CEO position, but then
resigned in less than a year.
The recent management turnover has resulted in significant pressure and distraction on the management
team. While there are many potential reasons for the departure of key members of Management, this
could indicate significant differences among members of Senior Management regarding the future
direction of the company and/or demoralization. This will be discussed in our approach and we believe
it is important to identify key personnel and stabilize the executive team throughout the turnaround plan.
Management’s Experience
The current management team has significant experience working in the consumer electronics and retail
industry, mostly at Best Buy and Circuit City. However, none has experience in leading and managing a
major turnaround effort. Summarized below are brief credentials of the top four officers:
-
CEO: came from Best Buy where he was the Executive VP of the customer segments between
2004 and 2006 and Executive and Senior VP position in New Business Development, Digital
Technology Solutions and Merchandising between 1996 and 2006. Prior to that, he was an
Executive VP at TOPS Appliance City, a retailer of home appliances and consumer electronics.
-
CFO: is from Yankee Candle where he was Senior Vice President, Finance and Chief Financial
Officer between 2005 and 2007. Prior to that, he was the President of Finance for Best Buy Co.,
Company Overview
19
Inc. from 2002 to 2005 and had several financial leadership positions at Sears from 1996 to
2002.
-
Executive VP, Multi-Channel Sales: appointed to the post this February, the Executive VP has
been with the company since 1983 where he started in a Circuit City store and was promoted
internally over the years.
-
Senior VP, Supply Chain and Space Planning: appointed to the post this February, the Executive
VP acted as the business lead for the merchandising systems transformation. She joined Circuit
City in 2005 after holding several inventory and supply chain management positions at Best Buy.
Management Compensation
For fiscal year 2007, the management team’s annual bonus compensation is measured and awarded
solely upon earnings per share results as prescribed by the Compensation and Personnel Committee of
the Board of Directors. The committee’s primary rationale for using EPS was to use was a widely
accepted, easily understood method that also captures revenue growth and expense management.
We question whether EPS is the most effective measure given the historically poor financial results and
the corresponding decline in shareholder value. In fact, we found the executive compensation packages
exorbitant when compared to Best Buy which has performed far better than Circuit City over time. The
following table compares the fiscal year 2007 compensation packages for the top two management
positions of Circuit City and Best Buy:
FY2007 CC
Position
Chairman, President & CEO
EVP, CFO
Non-Equity
Incentive Plan
Stock Award Option
Compensaion ($)
Salary
($)
Awards ($)
894,615
1,074,852
4,777,004
570,192
544,120
504,513
-
Other Com & Change in Pension
Value & Non-Qualified Deferred
Comp Earnings ($)
Total ($)
208,477
6,954,948
57,068
1,675,893
FY2007 BBY
Position
Vice Chairman & CEO
EVP, CFO
Board of Directors
Non-Equity
Other Com & Change in Pension
Stock Award Option
Incentive Plan
Value & Non-Qualified Deferred
Salary
($)
Awards ($)
Compensaion ($)
Comp Earnings ($)
Total ($)
1,172,995
1,289,219
453,605
2,650,969
30,116
5,596,904
597,643
1,130,530
1,038,195
847,500
9,093
3,622,961
Company Overview
20
The Board members have experience across various industries including retail, financial, branding, HR
consulting and academia. While they are relatively “independent”, only two of them sit on another
board outside Circuit City. Please refer to Appendix C for a list of the Circuit City Board Members, the
other boards the specific members are involved with, and their prior experiences.
3.8
Company Initiatives
As a company, Circuit City has undergone restructuring efforts since 2001 when it first started
remodeling its stores. The prolonged and ineffective restructuring initiatives and recent management
changes are distracting the company from operating optimally. For fiscal year 2008, Circuit City
management team stated that they would continue to focus on their long-term strategy and
transformation efforts with home entertainment and services, multi-channel and real estate serving as the
foundation for its strategic initiatives.
transformation efforts.
Management also stated that they would accelerate
Unfortunately, the company’s most recent disappointing quarterly results
demonstrate yet another failure by management to turn the business around.
Financial Analysis
21
Financial Analysis
4.1
Financial Analysis / Stock Performance
Circuit City’s stock price has fallen significantly from the beginning of 2007, approximately 70%, to
around $7.00 per share. From the second quarter of 2003 to third quarter of 2006, Circuit City performed
well compared to S&P 500. The charts illustrate the five year historic performance of Circuit City’s
stock price (red), the S&P 500 (orange), and Best Buy’s stock price (blue). Based on this information, it
is clear that Circuit City’s stock price lost considerable value over the last 18 months.
Five Year Performance of Circuit City’s Stock Price
Source: Google Financials
4.2
Historic Operating Performance
Although there isn’t one specific cause for Circuit City’s operating losses, one prominent driver is
SG&A. From 2002, Circuit City’s SG&A expense increased dramatically from 19% to 24% of sales. In
earlier years, it operated efficiently by containing its SG&A to 19% to 20% of sales. A more in-depth
analysis of SG&A reveals that Circuit City has been spending a considerable amount on remodeling and
relocating stores. It is estimated by the management that in as much as 400 out of 600 stores are either
operating inefficiently or in the wrong demographic locations. 14 Another reason for higher SG&A
expense is above average payroll costs. When we compare the average number of employees per store,
Financial Analysis
22
Circuit City employs roughly twice as many employees per store compared to Best Buy (roughly 60 vs.
30 people on average in the US).
SN&A as a % of Sales
Company
2007
1. BEST BUY CO INC
2. GAME STOP
3. CIRCUIT CITY STORES INC
4. RADIO SHACK
18.8%
18.9%
22.8%
40.4%
The following four tables and charts compare Circuit City’s and Best Buy’s operating performance
relative to gross margin, SG&A expense, EBIT and EBITDAR margin. (Note: Circuit City and Best Buy
have different fiscal year ends).
Circuit City Operating Performance
Circuit City (US$ Millions)
Revenue
Gross Profit
SG&A
EBIT
Depreciation
Amortization
Stock Based Compensation
Rent
EBITDAR
Gross Margin
SG&A (% Sales)
EBIT (% Sales)
EBITDAR Margin
2007
12,430
2,928
2,842
86
177.8
3.6
24.2
347
638.6
76.44%
22.86%
0.69%
5.14%
2006
11,514
2,810
2,596
214
160.6
2.6
26.9
322.8
726.9
75.59%
22.55%
1.86%
6.31%
2005
10,414
2,552
2,471
81
151.6
1.9
19.1
318.3
571.9
75.49%
23.73%
0.78%
5.49%
2004
9,857
2,284
2,320
-36
197.6
0
37.6
286.3
485.5
76.83%
23.54%
-0.37%
4.93%
2003
10,055
2,397
2,439
-42
159.8
0
53.3
314.4
485.5
76.16%
24.26%
-0.42%
4.83%
2004
24,548
5,871
4,567
1,304
385
0
8
468
2,165
2003
20,943
4,945
3,935
1,010
310
0
1
440
1,761
Best Buy Operating Performance
Best Buy (US$ Millions)
Revenue
Gross Profit
SG&A
EBIT
Depreciation
Amortization
Stock Based Compensation
Rent
EBITDAR
2007
35,934
8,769
6,770
1,999
509
0
121
660
3,289
2006
30,848
7,726
6,082
1,644
456
0
132
552
2,784
2005
27,433
6,495
5,053
1,442
459
0
-1
501
2,401
Financial Analysis
23
Gross Margin
SG&A (% Sales)
EBIT (% Sales)
EBITDAR Margin
75.60%
18.84%
5.56%
9.15%
74.95%
19.72%
5.33%
9.02%
76.32%
18.42%
5.26%
8.75%
76.08%
18.60%
5.31%
8.82%
76.39%
18.79%
4.82%
8.41%
Although Best Buy and Circuit City have comparable gross margins suggesting similar product mix and
purchasing power, Circuit City clearly lacks adequate cost controls.
Gross Margin - Best Buy vs. Circuit City
26.00%
24.00%
CC
BBY
22.00%
20.00%
2003
2004
2005
2006
2007
Years
SG&A Margin - Best Buy vs. Circuit City
25.00%
23.00%
21.00%
CC
19.00%
BBY
17.00%
15.00%
2003
2004
2005
2006
2007
Years
A high level of SG&A can also be seen in Circuit City’s international operations. After it was acquired
in May 2004, InterTAN stores became unprofitable soon after.
International Segment (Millions)
Net Sales
Gross Profit
SG&A
Earnings Before Tax
2007
570
188.4
208.8
(20.4)
2006
623
226.4
229.6
(3.2)
2005
454.9
182.6
148.6
34
Financial Analysis
24
Working Capital
The company funds its working capital primarily through cash and short-term investments on hand, its
revolving credit facility and trade debt. For the last five years, Circuit City invested about $560 million
(4.51% of sales) towards working capital. The following tables illustrate the working capital
requirements of Circuit City and Best Buy.
Circuit City
Minimum Cash (assumed 1% of sales)
Accounts Receivable
Merchandise Inventory
Deferred Income Tax
Income Tax Receivable
Prepaid Expense and other assets
Total Current Assets
2007
$124.3
382.6
1,636.5
34.9
42.7
47.4
2,268.3
2006
$115.1
220.9
1,698.0
29.6
5.6
41.3
2,110.5
2005
$104.1
230.6
1,455.2
31.2
23.2
1,844.3
2004
$98.6
170.6
1,517.3
22.1
1,808.5
2003
$100.6
140.4
1,409.7
64.5
18.2
1,733.3
Merchandise Payable
Expenses Payable
Accounts Payable
Accrued Expenses and other current liabilities
Accrued Compensation
Accrued Income Taxes
Deferred Tax
Total Current Liabilities
922.2
281.7
1,203.9
404.4
98.5
0.0
1,706.9
850.4
202.3
1,052.7
379.8
84.7
75.9
0.0
1,593.1
635.7
170.6
806.3
433.1
0.0
75.2
0.0
1,314.6
833.8
149.6
0.0
71.2
79.4
1,134.0
963.7
113.9
0.0
44.5
91.4
1,213.4
561.5
517.4
529.7
674.5
519.9
Best Buy
Minimum Cash (assumed 1% of sales)
Account Receivables
Merchandise Inventories
Total Current Assets
2007
$359.3
548.0
4,028.0
4,935.3
2006
$308.5
449.0
3,338.0
4,095.5
2005
$274.3
375.0
2,851.0
3,500.3
2004
$245.5
343.0
2,607.0
3,195.5
2003
$209.4
312.0
2,077.0
2,598.4
Accounts Payable
Unredeemed Gift card Liabilities
Accrued Compensation and related expenses
Accrued Liabilities
Accrued Income Taxes
Total Current Liabilities
3,934.0
496.0
332.0
990.0
489.0
6,241.0
3,234.0
469.0
354.0
878.0
703.0
5,638.0
2,824.0
410.0
234.0
844.0
575.0
4,887.0
2,460.0
300.0
269.0
724.0
380.0
4,133.0
2,195.0
222.0
174.0
538.0
374.0
3,503.0
(1,305.7)
(1,542.5)
(1,386.7)
(937.5)
(904.6)
Working Capital
Working Capital
Financial Analysis
25
Immediately, we can see that Best Buy maintains negative working capital, suggestive of a very low
cash conversion cycle, while Circuit City’s working capital looks fairly high in comparison.
Specificially, we note higher days on hand as far as inventories, receivables and payables are concerned.
In fact, the Circuit City’s average cash conversion cycle over the past four fiscal years is 35 days vs. 8
for Best Buy. Clearly, Circuit City lags behind Best Buy in its working capital management and there is
considerable room for improvement. The following table compares Circuit City with Best Buy in terms
of the working capital components of the cash conversion cycle.
Inventory, A/R, A/P DOH – Circuit City and Best Buy
2007
Inventory DOH
Circuit City
Best Buy
Inv DOH difference
A/R DOH
Circuit City
Best Buy
A/R DOH difference
A/P DOH
Circuit City
Best Buy
A/P DOH difference
2006
2005
2004
2003
Average
62.86
54.12
8.74
71.21
52.69
18.51
67.56
49.70
17.86
73.13
50.95
22.18
67.19
47.39
19.80
68.39
50.97
17.42
11.23
5.57
5.67
7.00
5.31
1.69
8.08
4.99
3.09
6.32
5.10
1.22
5.10
5.44
(0.34)
7.55
5.28
2.26
46.55
51.55
(5.00)
42.94
50.00
(7.05)
37.73
48.66
(10.93)
39.63
46.75
(7.12)
-
41.71
49.24
(7.53)
Financial Analysis
4.3
26
Capital Expenditures
Circuit City’s capital expenditures primarily include spending for the construction of new stores and
remodeling and relocation of existing stores. These expenditures have been funded through internally
generated funds, landlord reimbursements, sale-leaseback transactions and long-term debt. A majority of
the capital expenditures (as much as 95%) were spent in expanding/enhancing the domestic operations.
Circuit City Capital Expenditures
Capital Expenditure ($Millions)
Capital Expenditure
Sale of PP&E
Net Capital Expenditure
Net Growth
2007
285.7
38.6
247.1
24.1%
2006
254.5
55.4
199.1
22.3%
2005
269.2
106.4
162.8
26.0%
2004
175.8
46.6
129.2
112%
2003
150.7
89.9
60.8
Circuit City Store Growth
Segment
Domestic
International
Total
4.4
2007
654
509
1163
2006
631
540
1171
2005
617
531
1148
2004
2003
607 626
◄Acquisition of InterTAN
607 626
Liquidity
The primary sources of liquidity for Circuit City are cash and short-term investments, borrowing
capacity under its $500 million credit facility and landlord reimbursements. The major uses of liquidity
include operational expenditures, capital expenditures, and share purchases. The following three tables
illustrate the company’s five-year historic cash flows.
Circuit City Five Year Historic Cash Burn
Capital Expenditure
Cash Flow From Operating Activities
Cash Flow From Investing Activities
Cash Flow From Financing Activities
Cash Due To Exchange Rate &
Divestment
Net Cash Flow
Beginning Cash Balance
Ending Cash Balance
2007
2006
2005
2004
2003
316.34
(334.71)
(160.78)
4.32
364.94
(593.88)
(318.43)
(16.32)
455.88
(81.04)
(276.39)
(2.27)
(125.51)
(135.34)
(89.08)
248.74
(163.11)
(90.87)
(30.75)
(78.85)
(174.83)
315.97
141.14
(563.69)
879.66
315.97
96.19
783.47
879.66
(101.20)
884.67
783.47
(363.58)
1248.25
884.67
Financial Analysis
27
Circuit City Historic Five Year Cash Flows ($ Millions)
$600.0
$400.0
$200.0
$0.0
($200.0)
($400.0)
2003
2004
2005
2006
2007
Operating
Investing
($600.0)
Financing
Other
($800.0)
Circuit City Historic Five Year Cash Burn ($ Millions)
Net Cash Flow
200.0
100.0
0.0
(100.0)
(200.0)
(300.0)
(400.0)
(500.0)
(600.0)
2003
2004
2005
2006
2007
Financial Analysis
4.5
28
Credit Rating
On a relative basis, we compared the snapshot (latest twelve months through August 2007) credit
statistics of Circuit City to a selected peer group of various publicly-traded retail competitors,
highlighting the business diversity and financial strength of the various players that Circuit City
competes against. Notably, only two competitors, Conns (a southern regional retail electronics chain)
and PC Mall (an online consumer electronics and IT equipment company) do not have corporate credit
ratings from the nationally recognized credit rating agencies. Similarly, at the time of this analysis,
Circuit City does not have formal ratings either. Therefore, we needed to use judgment to arrive at a
prospective ‘Implied S&P Rating’ which incorporates statistics, size, and business model comparisons,
and other cross-sectional qualitative factors (e.g. brand, geographic diversity).
Based on our evaluation of the above, we believe S&P would rate Circuit City below investment grade
at BB with a negative outlook. This is comparable to companies in the peer group including RadioShack
Corporation, GameStop Corp and Amazon. While Circuit City remains unprofitable at the operating
profit level through the latest twelve months (primarily as a result of the $92 million write-down of
InterTAN goodwill), we believe S&P would look favorably at the company’s strong net cash and
investments position of $365 million. This is enhanced by the Circuit City’s committed revolving credit
facility of $500 million which, when taken together, would mitigate most liquidity concerns that S&P or
other credit rating agencies would have.
As a result of the Company’s excess liquidity, most of the credit stats for Circuit City, exhibit very
strong levels, particularly those in the coverage and leverage categories.
Nevertheless, given the
company’s history of unsuccessful restructuring efforts and management’s inability to prove that they
can manage a highly promotional and consumer-driven business effectively, we believe S&P would
provide a negative outlook on the Company. An additional consideration in this analysis is the
accounting treatment of non-cancelable leases which most ‘brick-and-mortar’ retail companies utilize.
The accounting treatment is to expense rental payments rather than capitalizing the lease obligations. As
we discuss in the Valuation section, this treatment distorts comparisons across companies that may treat
leases differently and also favorably improves the credit statistics.
Financial Analysis
29
One way to remove the effects of this distortion is to employ a methodology favored by S&P called the
Lease Analytics Method. This method examines the future five-year, non-cancelable lease stream found
in every 10-K and allows an analyst to present value these future commitments and treat them
collectively as debt 15 (similar to how capital leases are accounted for). We employed this same
methodology and re-cut our analysis of the relative credit statistics for all the peer group companies
including Circuit City.
As one would expect, the credit stats for all companies including Circuit City are worsened in fairly
dramatic form. It would be fair to state that most companies in this peer group, if forced to account for
all operating leases as debt, would have to shave at least a notch or two from their current rating. Circuit
City fairs no worse than its peers in this regard, with our belief that S&P would notch the original
implied BB rating two full notches to CCC, an extremely risky near-default position.
In this scenario, given the lack of full interest coverage and high levels of pro forma leverage, we don’t
believe Circuit City would be able to sustain this position for very long, even in light of its strong net
cash position. This reflects part of the reason why a leveraged buy-out of the Company would prove
disastrous. At first glance, the combination of its strong cash position and its stock price of $7.44 per
share trading below tangible book value of $8.80 per share might entice would-be bidders of the
company; however, when one considers the economic cost of maintaining the future lease obligations
($2.1 billion for Circuit City), it becomes apparent that the company cannot take on further debt
obligations in its current unstable financial condition without real assets or other forms of collateral to
borrow against (e.g. real estate). See Appendix A for full analysis and statistics.
Financial Analysis
30
SUMMARY: PRESENT VALUE OF OPERATING LEASES ANALYTICS
Amounts in $MMs
Company
Best Buy Co. Inc.
RadioShack Corp.
GameStop Corp.
Office Depot, Inc.
OfficeMax Inc.
Staples Inc.
Conns Inc. [3]
hhgregg, Inc.
Costco Wholesale Corp.
Target Corp.
Wal-Mart Stores Inc.
Amazon.com Inc.
PC Mall Inc.
Circuit City Stores Inc.
PV Debt [1]
$5,658
787
710
2,914
1,660
4,028
93
150
1,212
1,765
7,662
536
7
$2,111
Book Acctg
Rate [2]
3.4%
8.5%
9.1%
9.2%
6.5%
9.8%
7.0%
10.1%
5.4%
5.4%
4.7%
6.0%
7.8%
Incremental
Interest Exp.
$192
67
64
267
109
397
7
15
66
96
364
32
1
1st-Yr Lease
Payment
$741
211
219
503
342
677
18
28
137
142
842
129
4
Implied
Depreciation
$549
144
155
236
233
280
11
13
72
46
478
97
3
12.8%
$271
$350
$79
Source: Forward minimum noncancelable lease payments obtained from individual company SEC filings
[1] Present value of operating leases calculated using S&P Lease Analytics Methodology
[2] Book accounting interest rate derived from LTM interest expense / avg. debt, adjusted for FY capitalized interest.
These rates also represent the discount rates to present value the forward lease commitments per S&P Lease
Analytics.
[3] Estimated (vs. calculated) interest rates, given nominal debt balances
Discussion of Amended and Restated Credit Agreement 16
On July 8, 2004, Circuit City and its subsidiaries including the then-recently acquired InterTAN Canada
Ltd., entered into a $500 million Credit Agreement with Fleet National Bank, Bank of America, GE
Capital and others to provide support for letters of credit and for short-term borrowing requirements.
The facility is scheduled to mature in June 2009. Loans are secured by Circuit City’s accounts
receivable and inventory and the Company and its subsidiaries can borrow loans that bear an interest
spread over LIBOR or over the prime rate. The applicable spreads were listed as CONFIDENTIAL in
the credit facility so full all-in rates were unavailable. The maximum credit extensions, including loans
and outstanding letters of credit, permitted under the credit facility are determined by calculating a
borrowing base that is a percentage of the company’s eligible inventory and accounts receivable. The
facility maintains separate sub-limits for each of the Domestic ($400 million) and International ($100
million) and at August 31, 2007, Circuit City had no short-term borrowings, and outstanding letters of
credit were $58.1 million, leaving $441.9 million available for borrowing.
Financial Analysis
31
Major Affirmative Covenants:
ƒ
Provide regular financial statements and Borrowers’ Certificate in timely fashion;
ƒ
Provide notice of Material Events;
ƒ
Maintenance of properties and Insurance on properties
Major Negative Covenants:
ƒ
Cannot incur indebtedness relating to the acquisition of fixed or capital assets exceeding $150
million
ƒ
Limit unsecured indebtedness to $300 million
ƒ
Limitations on acquisitions ($5 million singly or $25 million cumulatively) and investments not
to exceed $50 million in any fiscal year
ƒ
4.6
Limitations of sale of non-collateral assets to $50 million
Capital Structure
As of December 12, 2007, Circuit City’s enterprise value was $890 million. This value was less than the
$1.2 billion in equity market value because Circuit City held large amount of cash and short-term
investments on its balance sheet. Its debt balance of $59 million to equity ratio is approximately 6.6%
and its equity market value over this past year has dropped by 75% from $4 billion to a little over $1
billion. The following table illustrates Circuit City’s historic capital structure. To determine the lease
equivalent debt we utilized S&P’s Lease Analytics methodology which was described previously.
Circuit City Five Year Historic Capital Structure
Capital Structure (March 31st)
Total Debt (MM)
Market Value Of Equity
Debt/Equity Ratio
Total Shares Outstanding (MM)
2007
50
4076
1.23%
170.7
2006
52
3037
1.71%
175.1
2005
20
2532
0.8%
188.3
At February 28, 2007, Circuit City had following future minimum operating lease payments net of
sublease income. In calculating net lease obligations, we subtracted the sublease income (under the
assumption that the sublease party is sufficiently credit worthy) and ultimately determined the lease
equivalent debt to be $2.1 billion utilizing a book discount interest rate of 12.8%.
Financial Analysis
32
Circuit City Future Minimum Lease Payments
Millions
Minimum Lease
Commitments
Sublease Income
Net Lease Obligation
Total Minimum Lease
Interest Rate
Lease Equivalent Debt
4.7
2008
2009
2010
2011
2012
Thereafter
384
34
350
3,870
12.8%
2,111
384
33
351
382
33
349
370
32
338
365
31
333
2,381
232
2,148
Valuation
Relative Valuation
Despite recognizing more than $12.1 billion in revenue through the latest twelve months ended August
31, 2007, due to poor management, inconsistent profitability and repeated failures to meet Wall Street’s
expectations, Circuit City currently maintains market and enterprise value multiples of LTM Revenue
and EBITDA of 0.1x and 8.9x, respectively and 2008 estimated Revenue and EBITDA multiples of 0.1x
and 7.8x. The seemingly typical looking EBITDA multiples are not indicative of strong performance,
however, since Circuit City’s LTM and 2008E EBITDA margins are 0.8% and 0.9%, respectively.
While the low revenue multiples are reflective of poor operating profitability and margins of Circuit
City, this is also symptomatic of the retail industry at large as well (See Appendix A). Most companies
in the retail industry generate operating (EBIT) margins lower than 10%. In fact, our comparison of
Circuit City’s competitors, all of whom are characterized as retailers (Specialty, Regional, Discount,
Online), indicate that the average operating margin across the peer group is 5.7% through the latest
twelve months.
When the company’s performance is analyzed side-by-side with other retailers in our selected peer
group, Circuit City lags across every measure ranging from historical CAGR (compounded annual
growth rates), profitability and returns, thereby producing lower valuation metrics. EBITDA margins
for the peer group drive only slightly higher with an industry average of 7.3%, suggesting that
replacement costs through depreciation expenses are generally moderate. This is primarily attributable
to the fact that most retail companies in our selected peer group rent their stores through long-term
leases rather than purchase the real estate outright. The corresponding accounting treatment is to
Financial Analysis
33
expense the rental payments through the income statement rather than capitalizing the lease onto the
balance sheet and depreciating the asset over time. This accounting distortion tends to boost creditrelated statistics and also increases return measures like ROC (return on capital) since the capital base is
unencumbered by assets placed onto the balance sheet.
See Appendix A for a full trading and
performance valuation of Circuit City relative to our selected peer group.
Projected Cash Burn Analysis
While it is clear that Circuit City is experiencing tremendous headwinds with regards to competitive
pressures and operational challenges, its $365 million net cash and short-term investments position, and
$500 million credit facility (with $442 million of availability as of August 2007) are sufficient to ensure
that the Company remains viable, even with the performance issues.
We have run a separate Status Quo forecast and analysis, with underlying revenue, cost and investment
assumptions replicating fiscal year 2007 performance. The resulting EBITDA margins increase from
2.2% in 2008 to 3.0% by 2012, primarily resulting from operational leverage as more stores are opened.
This analysis also assumes that Circuit City continues to repurchase approximately $200 million worth
of its own shares each and every year throughout the forecast period, similar to its actual historical
record. A summary of the corresponding cash flow outputs are shown below.
STATUS QUO CASH BURN ANALYS IS
PROJECT IONS
2 009
2 010
20 11
( $439.3)
$ 375.4
($ 107.8)
(439.3)
375.4
( 107.8)
486.8
47.5
422.9
$47.5
$ 422.9
$ 315.2
$17.0
$1.7
$14.8
Net Ca sh Flow ( Operating + Investin g + Fin ancing)
Increa se (de cre ase ) i n cash & equivalen ts
Cash & e quivalents a t begin ning of year
Cash & equi vale nts at e nd of year (excl. ST in vest)
Inte rest income on cash & e quivalents
2008
$345.5
345.5
141.2
$486.8
$4.9
Short-term inve stments
Beg inning ba lance
S ales (Purchases) of in vestment sec.
End ing Balan ce
Inte rest income on short-term i nve stments
$598.3
413.2
$185.2
$20.9
$185.2
(41.0)
$226.2
$6.5
$ 226.2
226.2
$0.0
$7.9
Revolver
Beg inning ba lance
Availab le cash flow after req. a morti zation
B orrowings / (Pa ydo wn)
End ing balan ce
Inte rest expense on Re vol ver
$0.0
(228.0)
228.0
$228.0
$0.0
$228.0
267.2
(228.0)
$0.0
$16.0
$0.0
(249.5)
249.5
$ 249.5
$0.0
$0.0
$0.0
$0.0
$ 249.5
(7.0)
7.0
$ 256.5
$17.5
201 2
$ 18.8
18.8
3 15.2
$3 33.9
$ 11.0
$0.0
$0.0
$0.0
$2 56.5
(79.5)
79.5
$3 36.1
$ 18.0
Financial Analysis
34
As we can see, throughout the projected period, Circuit City builds up a substantial amount of debt
under the revolver and has exhausted the short-term investments completely, yet continues to maintain
sufficient liquidity with strong cash balances of $334 million by 2012. Additionally, even if the
company were to do worse than the assumed status quo, it can always seek to hold more cash by
curtailing the activities of its share repurchase program (which management indicated it would do in its
most recent 10-Q as a result of their “desire to maintain a strong cash position as the business was
undergoing a significant amount of change and as we faced an uncertain macroeconomic environment”).
Finally, the company could also reduce or completely eliminate its dividend policy. We do not
recommend this course of action since the cash consumption of approximately $20 - $24 million per
year (with a $0.04 / quarter dividend) represents a relatively nominal amount while the investor reaction
of cutting the dividend would potentially cripple an already battered stock price.
Liquidation Analysis
Before turning to the Discounted Cash Flow Analysis, we wanted to establish a floor value for Circuit
City based on its latest balance sheet (August 2007), with the full expectation that this value represents
at best, a theoretical one since Circuit City is not facing bankruptcy, let alone a Chapter 7 liquidation.
However, we deemed this exercise necessary in order to compare values across multiple methodologies.
Based on reasonable estimates of recovery rate percentages, we derived Low – High scenarios which
yielded net proceeds from asset sales of approximately $1.6 billion to $2.0 billion before distribution to
claimants.
As we can see from the table below, however, in either of the Low or High scenarios, equity holders are
left with nothing, indicating convincingly that Circuit City is better off alive as a going concern. Forced
liquidation would destroy tremendous value to both creditors and equity holders.
Net Liquidation Proceeds Available for Distribution
Distribution of Proceeds
Claims
Merchandise payable and expenses
Employee salaries and expenses
Debt (incl. capital and finacing leases)
Lease costs
Income taxes
Other
Equityholders
$1,593.3
Unaudited
8/31/2007
$1,403.4
429.2
59.0
352.6
21.1
135.1
Claimant Recovery %
Low
High
100.0%
44.3%
0.0%
0.0%
0.0%
0.0%
100.0%
100.0%
100.0%
18.6%
0.0%
0.0%
$1,957.3
Claimant Recovery ($)
Low
High
$1,403.4
189.9
-
(See Appendix A for full analysis and explanations for recovery percentages)
$1,403.4
429.2
59.0
65.7
-
Financial Analysis
35
Income Statement, Cash Flow & Discounted Cash Flow (DCF) Analysis
Our analysis of value based on projected free cash flows yielded positively encouraging results. The
underlying operational assumptions behind the forecast, investments and corresponding cash flows
represent the outcome of our team’s specific recommendations (which are described in detail in the next
section) regarding Circuit City’s strategic and competitive challenges.
Our forecast, then, is the
actualization of targeted strategic and tactical decisions to improve profitability, free up capital and
ultimately enhance cash flows.
A significant aspect of our recommendation is to close down 75 domestic Superstores and 60 companyowned international stores by 2009. While this may seem severe, based on our analysis of the
company’s operational and competitive positioning, we believe strongly that Circuit City must excise
the ‘bad apples’ immediately in order to reap the ensuing positive gains quickly. The Company’s
current ‘slow-roll’ approach to selectively choosing stores for Remodeling, Relocation and Closure
ultimately conveys a lack of urgency on the part of management and fundamentally fatigues employees
who have been loyal to Circuit City in anticipation of improved performance, fewer episodic layoffs or
changes to compensation structure.
These closures would send a clear signal to Circuit City’s
competitors, employees and investors that the Company is serious about managing its position and
operations to enhance value.
As a result of this major decision, we anticipate and have modeled a net operating loss for fiscal year
2009 in anticipation of improving financial results beginning in 2010. As a financial consideration, we
have also assumed dividends remain at their current levels and that the company continues with its share
repurchase program beginning in 2009, but with a reduced amount of $150 million each year. Based on
the cash flow characteristics of our planned turnaround program, we believe Circuit City can easily
support these important measures which ultimately return value back to shareholders. The combination
of our recommendations yields increasing EBITDA levels from $176 million in 2008 to $852 million by
2012, a 48% compound annual increase in profits despite only a 2.5% compound increase in net sales
over the same period. The corresponding margins also expand from 1.4% in 2008 to 6.1% in 2012,
again reflecting the cost improvement aspects of our plan. With the recommended restructuring plan,
one can note the improving financial condition of the company as evidenced by stronger credit statistics
over time.
Financial Analysis
CREDIT RATIOS
EBIT / Interest
EBITDA / Interest
(EBITDA - Capex) / Interest
Free Cash Flow / Debt
Debt / EBITDA
FFO / Debt
Total Debt / Capital
Pre-tax ROC
36
HISTORICAL
2005
2006
19.6
68.3
54.0
120.3
(4.7)
39.3
6.1
1.4
0.1
0.2
5.6
4.0
1.0%
4.0%
4.1%
10.6%
2007
(3.4)
116.0
(72.1)
0.5
0.3
6.3
3.1%
-0.3%
2008
(3.7)
38.1
(31.5)
(2.5)
0.3
4.6
2.8%
-0.9%
PROJECTIONS
2009
2010
(27.5)
142.9
19.8
197.6
(21.5)
145.0
1.0
11.0
0.5
0.1
3.0
13.4
2.8%
2.4%
-7.2%
29.2%
2011
164.5
225.9
159.7
13.2
0.1
15.4
2.0%
28.1%
2012
208.0
277.2
198.9
14.3
0.0
18.9
1.6%
29.1%
The resulting free cash flows arising from the business restructuring resolves itself into tangible value
creation with our estimate of Circuit City’s price per share of $22.45, which is approximately 3x the
current value of its shares. This assumes a terminal growth rate of 3.0% and a discount rate of 12.5%.
While our weighted average cost of capital (WACC) analysis calculates a rate of 11.4% for Circuit City
based on the betas of the selected peer group, we believe this rate understates the Company’s risk profile
given: 1) its current turnaround mode, 2) the backdrop of a possible economic slowdown in the US in
calendar 2008 and 3) its own historical levered beta of 1.38 which is higher than the group average
levered beta of 1.28 (and used in the WACC calculation). For these reasons, we utilized the higher rate
of 12.5%, ultimately deciding to take the WACC calculation into consideration when formulating the
final rate. We also charted a sensitivity table highlighting how the price per share is a function of both
discount rate and terminal growth. (See Appendix A for WACC analysis)
While this estimate of value is fundamentally sound, there are major obstacles to overcome in reaching
this increased value. Management needs to signal to investors that they are committed to this plan. The
transparency of quarterly earnings reports provides a forum to discuss milestones and performance
targets associated with the plan which can be tracked by the investment community. Correspondingly,
management needs to be focused on execution as this will be the ultimate test of whether management
can restore the confidence of its various stakeholders in this new plan. The inability of management to
consistently execute has negatively impacted its share price over time and has frustrated its shareholders,
as evidenced by Highfields Capital Management’s (a public/private investment vehicle based in Boston,
MA) proposal to take over the company back in early 2005 for $17.00 per share, which represented a
20%+ premium to the prior day closing price. Unless the company can regain the confidence of its
investor base by executing consistently and remaining committed to the transparent nature of the plan, it
is unlikely that Circuit City’s share price will reach our estimated DCF value of approximately $22.00.
Restructuring Plan
37
Restructuring Plan
5.1
Restructuring Overview
Circuit City requires a detailed and structured approach to their turnaround. Management’s approach
does not provide the framework, incentive structure, and proper focus to execute necessary action. In the
following sections we outline Management’s approach and our proposed approach – “The City Revival
Plan”.
The City Revival Plan has three distinct objectives, and each objective has implementation costs,
expected revenue gains, and/or targeted cost savings. Please refer to the analysis for each action plan,
but in summary, we are proposing the following objectives:
A. Cost Reduction Plan
• Close Stores - Reduce SG&A by closing 75 domestic and 60 international stores.
• Store Placement - Perform a more thorough due diligence before opening new stores to
avoid future relocation and closing expenses.
• Reduce Inventory – Leverage existing and roll-out new rPOS system to reduce inventory
levels and carrying costs.
• Reduce Advertising – Gradually reduce advertising spend by $160 million (off the $425
million) while stores are closed. Monitor reductions in conjunction with sales.
• Enhance Collection Practices – Best Buy has roughly half the A/R DOH.
B. Expand Revenue Opportunities
• firedog – Grow firedog business to $700 million by 2010.
• Private Label - Increase private label sales to $1.1 billion by 2010.
• Suspend Domestic Store Revitalization Program
C. Refocus Strategy
• InterTAN – Retain the business unit and include in the turnaround plan.
• Global Expansion (Long Term) – Explore global expansion opportunities.
• Human Capital Compensation – Re-align compensation system.
5.2
Management’s Approach
Since fiscal year 2007, Circuit City’s management team has been reiterating that the company is in the
midst of multi-year turnaround. However, management hasn’t outlined a clear turnaround strategy or
specific action plan which enables the company to achieve the goal of improved operational
performance. Management explains that the current turnaround is to improve customer experience in a
multi-channel operation, thus requiring changes in every single division. Indeed it is a broad plan,
Restructuring Plan
38
forcing both management and associates to expend significant time and resources, consequently
distracting the company from operating efficiently. Moreover, management continues to change its plan,
which has turned into a constantly evolving, interminable turnaround while operational and financial
performance continues to deteriorate. The following management initiatives are currently underway:
(1) Remodeling the Retail Stores and Operation
•
The company introduced the Domestic Segment Superstore Revitalization plan in fiscal year
2001.
•
Retail operation changes have been made as well. During fiscal year 2008 Q1, the company
reduced the domestic operating regions from ten to eight
•
During fiscal year 2008 Q2, the company changed the retail standard operating platform to
improve customers’ in-store experience and rolled out new procedures to more than 650
stores: trained over 40,000 Associates for new operating processes and created two to three
customer focus areas allowing boundary-less selling. The initial results of the new operating
model has been positive as evidenced by 65 regional and district learning centers. This group
outperformed the control stores by more than 6% in sales per labor hour and more than 3% in
total sales. There are also improvements to store growth profit margin and average daily
close rates.
•
Retail point-of-sale system (RPOS) had been rolled out to 134 stores by fiscal year 2008 Q2.
This supports store-level inventory, scheduling of services, warranty sales and credit
applications as well as point of sale transactions. RPOS implementation is a lengthy process
and requires changes in every store management system and while the initial plan was to
complete roll out all over the stores before the 2008 holiday season, the implementation has
been paused at that point to minimize disruption to holiday sales.
(2) Sell the International Segment
•
Circuit City is exploring strategic alternatives including a possible sale for InterTAN, Inc.,
the company’s international segment.
Restructuring Plan
39
(3) Implement IT infrastructure
•
Earlier in fiscal year 2008, the company outsourced its IT infrastructure operations to IBM.
(4) Firedog Service
•
During fiscal year 2007 Circuit City introduced firedog(SM) services, a new brand for hometheater installations and PC services.
5.3
Our Proposed Approach – “City Revival Plan”
The following three sections detail the City Revival Plan - first focusing on cost saving initiatives (A),
expanding revenue opportunities (B), then redefining the short and long term strategies (C).
A. Cost Reduction Plan
Our cost reduction plan to turnaround Circuit City directly addresses the deteriorating SG&A expense
category which currently includes the following components.
1. Payroll, fringe benefit costs and stock-based compensation expense
2. Occupancy costs of store and corporate facilities
3. Depreciation related to store and corporate assets
4. Advertising
5. Vendor allowances to promote a vendor’s products
6. Costs related to relocating and remodeling store distribution centers and locations
7. Professional service fees
8. Other administrative costs, such as credit card service fees, supplies, and bad debt.
Of these components the major contributors to SG&A expense are occupancy costs, advertising, and
remodeling and relocating expenses. We address these major components in the following sections.
Restructuring Plan
40
Savings from Store Relocation and Closing
Costs related to relocation/remodeling of stores can be reduced by conducting proper due diligence with
respect to underlying demographics and profitability before opening new stores. Based on the
company’s history of closing and relocating stores (average of 10 stores closed annually and average of
16 stores relocated annually from 2003-2007), it is clear that Circuit City can be more selective and
thoughtful as it relates to new store locations.
Relocations cost the company a significant amount in severance expense, ineffective store specific
advertisement, inventory write downs and actual relocation expenses. On average, we estimate that
Circuit City expenses approximately $0.7, $1.4 and $3.1 million to open, relocate, and close a store
respectively (See Appendix A for Per Store Expenses) which does not include the capital expenditures
relating to some of these activities. This number of annual relocations is staggering compared to Best
Buy’s historical performance. Best Buy has closed or relocated roughly two stores annually in the last
two years.
Management estimates that Circuit City currently has about 400 of its stores operating inefficiently or in
undesired locations 17 . In light of this situation, we recommend closing about 75 under-performing stores
within one year. This will not only free up a significant amount of capital but also will reduce
occupancy and rental expenses in underperforming markets. While these closures save SG&A expense
they also reduce Circuit City’s aggregate revenues. On an average Circuit City spends annually about
$3.5 million per store in store expenses and $486 thousand in general and administrative expenses ($4
million in total). We propose to close 75 domestic (closing cost of $3.1 million per store) and 60
international underperforming stores (closing cost of $250 thousand per store – significantly smaller
than domestic superstore). These closures will save Circuit City about $75 million in the current year or
reduce SG&A expense by 2.7%. In Objective B of the City Revival Plan, we will also detail the effect
of the store closing on projected revenue and net income through 2010.
Another major SG&A expense component is the advertising expense. Circuit City has historically spent
about 3.6% of its revenue on advertising. Best Buy spends about 1.9% of its revenues on advertising.
The following table compares the advertising expenses of both companies.
Restructuring Plan
41
Advertising Expense – Circuit City & Best Buy
Circuit City
Revenue
Advertising
%age
Best Buy
Revenue
Advertising
%age
2007
2006
2005
12430
425
3.50%
11514
432
3.75%
10414
366
3.51%
35934
692
1.92%
30848
644
2.08%
27433
597
2.17%
Best Buy’s lower advertising/revenue percent could be explained by the size of Best Buy’s operations
and its brand image in the marketplace. However, we believe that with centralized planning and efficient
allocation of advertising resources, Circuit City can reduce its advertising expense to about 2.3% of its
revenues without a significant impact to sales. This reduction will decrease SG&A expense by $160
million or 5.8% in the current year.
Working Capital Management
Circuit City can further achieve reductions in investment through better management of its working
capital. Currently, the company has invested about $800 million in its working capital. Sustainably
reducing its working capital will have direct impact on the company’s return on capital metrics and
correspondingly, valuation. The major components of working capital include inventories, receivables
and payables. Following table compares Circuit City with Best Buy with respect to working capital
management.
Working Capital Target
Current
Inventory DOH
Circuit City
Best Buy
Inv DOH difference
A/R DOH
Circuit City
Best Buy
A/R DOH difference
A/P DOH
Circuit City
Best Buy
A/P DOH difference
Target
62.86
54.12
8.74
56.60
54.12
2.48
11.23
5.57
5.67
7.30
5.31
1.99
46.55
51.55
(5.00)
47.80
50.00
(2.2)
Restructuring Plan
42
We believe that Circuit City can utilize its improved IT infrastructure to better predict consumer demand
in real-time to reduce its inventory levels to a manageable level. Currently about 124 stores have
advanced IT systems that feed into Circuit City’s supply-chain management decisions. We recommend
that Circuit City upgrade the remaining stores with these systems over the course of 3-4 years. We
believe this system-wide rollout can reduce inventory days on hand from 63 days to 56 days by 2012.
Achieving this target will free up about $165 million in working capital and save $20 million (12.5%
cost of capital X $165 million) in inventory holding costs and another $5 million in inventory
obsolescence / write down costs.
We also recommend that Circuit City implement stronger receivables collection policies to reduce its
bad debt expense by $10 million or by 50%. Thorough diligence on new store locations should help
augment receivables collections since the demographics are also likely to become more favorable.
Reaching the following target days on hand will free up about $330 million in cash.
Cash Freed
Inv DOH
A/R DOH
A/P DOH
Inventory
A/R
A/P
Cash Used
Cash Freed
Current
62.86
11.23
46.55
1636.51
382.56
1203.91
815.15
329.40
Target
56.60
7.30
47.80
1473.46
248.60
1236.32
485.75
If this capital reduction plan is implemented, Circuit City can achieve a total savings of about $270
million going forward. This savings amounts to about 2.26% sales or 10% of SG&A expense. Overall,
we anticipate the cost reduction will be 2.16% of sales. Following table provides the cost savings
breakdown.
SG&A Component Cost Savings
Inventory Management
Bad Debt Expense
Store Expenses
Advertising Expenses
Current
25
10
75
160
Restructuring Plan
43
Total Cost Savings
270
B. Expand Revenue Opportunities
Customer Service --firedogSM
The brand firedogSM was launched in September 2006, which provides services such as home theater
installation and consumer PC-related services. These services not only increase the average ticket price
per customer, but also provide Circuit City with the flexibility to used bundled pricing as a mechanism
to combat price competition. The growth of these services is also significantly higher than the overall
product market for consumer electronics. As such, it is imperative for Circuit City to effectively roll-out
a coherent strategy to strengthen its business through firedogSM services. We build our assumptions for
firedogSM related business as follows:
SM
Estimation for firedog
business
fiscal year
market size $MM
CC sales $MM
market share
average of price
growth
1.5
number of deals
deals per business day
deals per store
per business day
hours per deal
full time staff per store
annual cost per full time staff
2007
5,926
200
3.4%
$176.83
2008
8,889
400
4.5%
$176.83
2009
13,333
600
4.5%
$176.83
2010
20,000
900
4.5%
$176.83
1,131,057
2,262,113
3,393,170
5,089,754
4,524
1,762
7.0
3.0
1.0
9,048
3,524
14.1
3.0
1.5
13,573
5,285
21.1
3.0
2.0
20,359
7,928
31.7
3.0
2.0
$45,000
$45,000
$45,000
$45,000
annual full time cost total
full time staff work hours per day
contractor work hours per day
hourly payroll for contractor
hourly payroll total
$28,890,000
7.0
14.1
$25
$56,741,740
$43,335,000
7.0
31.8
$25
$127,527,230
$57,780,000
7.0
49.4
$25
$198,312,720
$57,780,000
7.0
81.1
$25
$325,556,580
other cost
NOI
$40,000,000
$74,368,260
37.2%
$80,000,000
$149,137,770
37.3%
$120,000,000
$223,907,280
37.3%
$180,000,000
$336,663,420
37.4%
20%
Source: Turnaround Team Estimation
Restructuring Plan
-
44
Market size: The company assumes the market to be $20 billion by fiscal year 2010. We assume
the yearly growth to be multiple of 1.5 as an extrapolation of the company’s market sizing
estimates.
-
Market share: We conservatively estimate the maintenance of Circuit City’s initial market share
after fiscal year 2008 while the market grows rapidly.
-
Average of price: $176.83. We calculate the average of Home Theater Installation top sellers as
$244, Computer Services as $64 and took the weighted average of each category sales in
domestic segment. Portion of Car Electronics Installation are considered to be small, based on
related product market size.
Percent of domestic segment net sales by category
Years Ended Februrary 28
2006
2005
2007
42%
42%
39%
25%
25%
28%
15%
15%
14%
11%
11%
12%
7%
7%
7%
100%
100%
100%
Video
Information technology
Audio
Entertainment
Warranty, services and other
Net Sales
Source: Circuit City Stores, Inc. Form 10-K
Based on reasonable and conservative assumptions, we can see that this business is highly profitable,
much more so than the existing product business, with net operating income (NOI) margins of 37%.
To support the in-store business growth,
we recommend negotiating an alliance with
telecommunications companies like Verizon or AT&T. Since these companies are aiming to
aggressively to take market share away from cable companies in the competitive HDTV market, we
believe it would be a win-win strategy to forge an alliance whereby firedogSM provides installation
services for the telcos. Circuit City can offer their customers the convenience of one-stop service
(arrange and set up the purchase and installation of products in one day) while facilitating the service
offering with Verizon on the back-end so that the customer experiences a seamless transaction. This is
Restructuring Plan
45
similar to Circuit City’s partnership with Comcast, but Verizon (with FIOS service) and others present
additional opportunities.
Private Label
The company’s major competitors such as Wal-Mart and Best Buy have been offering private label for
flat panel TVs, DVD players, MP3 players and other consumer electronics. Circuit City sells most of
their private-label and brand-name consumer electronics mix in Canada, its International Segment. We
assume the significant difference in gross margins between Circuit City’s domestic and international
segment is related to the product mix: Canada is keeping average margins of 36.6% during the most
recent fiscal year. Improving gross margin is one of the crucial issues for the company to return to
profitability; the domestic segment margins dropped to 19.8% in three months ended August 31, 2007
from 23.1% last year. Though we recommend caution to prevent aggressive changes in the company’s
sourcing operations during the turnaround phase, we believe it prudent to begin selling more private
label products as soon as possible. Our projections are as follows:
,
$billion
fiscal year
growth
7.0%
Consumer electronics market size U.S.
growth
50.0%
private label
private label %
CC sales total (including Canada market)
private label sales
private label %
gross margin of private label products $million
gross margin of private label products %
additional cost to introduce products in U.S. $million
sourcing
advertisement
2007
160.3
8.0
5.0%
12.4
0.2
2.0%
112
45.0%
0
0
0
2008
170.1
12.0
7.1%
12.3
0.2
2.0%
98
40.0%
0
0
0
2009
182.0
18.0
9.9%
13.2
0.5
4.0%
200
38.0%
20
10
10
2010
194.7
27.1
13.9%
14.3
1.1
8.0%
401
35.0%
20
10
10
Suspend the Domestic Superstore Revitalization Plan
Circuit City has continued making business changes in the midst of a multi-year turnaround.
Unfortunately, significant improvements in the company’s operational or financial performance remain
to be seen. What is worth noting is that Senior Management seems too focused on making incremental
changes and re-engineering processes without considering the broader strategy for turning the entire
business around. While incremental changes can have beneficial impacts to the organization as a whole,
Restructuring Plan
46
this assumes that the other aspects of the organization are operating at or near peak efficiency levels,
which Circuit City is clearly not. Rather, these changes and constant restructurings are affecting the
output and morale of the individuals who work at Circuit City. For example, the already-trained
Associates are constantly adjusting their sales processes and procedures each time a new system or
structure gets rolled out. These changes on site distract the Associates from paying attention to set an
optimal product mix to each customer, thereby impacting sales and potentially squeezing the company’s
margins. Circuit City should also stop testing its new retail store format and roll it out to the optimal
numbers of stores immediately.
The positive news is that the 20,000 square foot format is outperforming other stores at the start of fiscal
year 2008. The 65 pilot stores, which had completed installation of the new operating model early,
demonstrated its effectiveness by outperforming the control stores more than 3% in total sales. A 3%
gain on domestic sales at new stores could be anywhere from $0.5-1 million annual revenue gain per
new store (estimated). Our estimation for Superstore remodeling activity costs are detailed in the
following table.
Restructuring Plan
47
Domestic Segment Superstore Revitalization related cost estimation
Activities and related action
Cost estimation
Superstore Openings
Lease store sites
construct the building
hire and train Associates for the new location
Pre-open expenses
Capital expenditure
Total cash out
$0.7
$3.9
$4.6
Relocation expenses
(average lease impairment expense $0.9)
Capital expenditure
$1.4
Total cash out
$2.9
Remodel expenses
Capital expenditure
$0.4
$0.0
Total cash out
$0.4
Closures expenses
$3.1
Total cash out
$3.1
Superstore Relocation
close store (store-closing sale)
termination of previous lease
starting next lease
construct the building
move in-store PP&E and inventory
move and train Associates for the new location
Superstore Remodel
close store for approximately 1 month
remodel the building
move in-store PP&E and inventory
move and train Associates
Superstore Closures
close store (store-closing sale)
termination of lease contract
write off book value of PP&E*
write off book value of inventory*
other expenses (removing or demolition cost)
reduce staff, severance pay
$1.5
Source: Turnaround Team Estimate
1. Expenses estimation are based on historical data from 10-K, FY2003 to FY2007.
2. Capital expenditure estimation are based on data from 10-K, FY2007.
*Some expenses would not cause cash outs, but we ignore it as for the valuation.
C. Refocus Strategy
The final stage of the City Revival Plan considers the short and long-term strategy of the company, and
the incentive structure of Senior Management. In the short-term, we believe Circuit City should retain
and turnaround InterTAN rather than selling the recent operation. In the long term, Circuit City should
learn from Best Buy’s global expansion success or failures, then expand appropriately. All of this must
be completed while combating the domestic market share losses to Best Buy and other discount retailers.
To ensure Senior Management is adequately motivated to see through the execution of these strategies,
and the overall turnaround plan, we conclude with the “Performance Driven Human Capital Strategy”.
Restructuring Plan
48
Short-Term Strategy
As previously mentioned, the acquisition of InterTAN was completed by Circuit City in May 2004 for
$259.3 million. InterTAN operates in Canada under the banner “The Source by Circuit City” (509
stores) and “Battery Plus” (1 store). The company also maintains relationships with dealer outlets (296
stores) which typically operate under their own trade names. The following is an excerpt from the fiscal
year ended February 28, 2007 10-K:
International segment stores operating under the trade name “The Source By Circuit City” typically have a
small store format and are strategically located in malls and shopping centers. Each store provides readily
available products and services to meet a wide range of consumer electronic needs. Dealer outlets are
independent retail businesses that operate under their own trade names but are permitted, under dealer
agreements, to purchase any of the products sold by The Source By Circuit City. The dealer agreements
contain a sub-license permitting the dealers to designate their consumer electronics department or business
as a The Source By Circuit City dealer. International segment retail stores are typically staffed by 5 to 20
Associates, including full-time and part-time commissioned sales Associates and a store manager. At
February 28, 2007, the international segment had 3,071 hourly and salaried Associates.
It appears Circuit City Management is considering selling the acquisition, which analysts considered to
be overpriced when Circuit City acquired it. The following is an excerpt of Phil Schoonover, Chairman,
President and CEO, in the September 20, 2007 Earnings Conference Call:
Next, an update on InterTAN. The new leadership team is solidly in place in Canada and gaining traction. InterTAN
improved its pretax profit performance despite lower sales. We are continuing to explore strategic options to maximize
shareholder value but the current challenges in the credit markets we do not expect any action regarding InterTAN will
occur before the holidays.
We believe Circuit City must change their approach to InterTAN and avoid announcing a potential
divesture. InterTAN will not garner fair value given the credit conditions of the U.S. market, weak
economic outlook through mid-2008, and the inability of Circuit City to realize the expected synergies
that include additional management expertise, sourcing synergies, and increased internet sales in
Canada. Circuit City paid a 14% premium for InterTAN, and while this is a sunk cost, we believe the
above factors make it unlikely that a new buyer would consider paying a premium 18 .
Based on a summary review of the financials, it is difficult to determine how Circuit City came to the
initial $259 million acquisition price ($150-$175 million appears more reasonable based on a discounted
cash flow estimate with the limited information available). The current InterTAN valuation will likely
Restructuring Plan
49
be much less than the purchase price given the declining net income (see below) and inventory writedowns: “Results also include $3.3 million…of international segment net sales, for inventory write-offs
associated with plans to exit certain product lines, clearance sales” 19 We estimate that InterTAN could
be valued as low as $100-$150 million, which appears inline with the accountants estimate given the
$92 million impairment for the international segment’s goodwill 20 .
InterTan Data - Pre and Post CC
$700.0
$600.0
$500.0
$400.0
$300.0
$200.0
Net Sales
Net Income (loss)
$100.0
$1999
2000
2001
2002
2003
2005
2006
2007
$(100.0)
$(200.0)
InterTAN ($mil, post and pre-CC)
Net Sales
Net Income (loss)
InterTAN ($mil, pre-CC)
Cash, end of year
Total Stockholder’s Equity
2007
$ 570.2
$(107.3)
$
$
2006
$ 540.2
$ (7.3)
2005
$ 398.9
$ 15.9
$
$
2003
2002
2001
2000
1999
403.5 $ 393.8 $ 468.7 $ 484.2 $ 500.0
7.7 $
13.5 $
23.5 $
25.1 $ (24.0)
2003
2002
2001
TOTAL
10.3 $
14.6 $
86.2 $ 111.1
97.4 $
88.4
Furthermore, the sale of InterTAN would be considered another Senior Management failure that
continues to erode analyst and investor confidence. Also consider the fact that Brian Levy, InterTAN’s
CEO, recently resigned from Circuit City effective March 23, 2006 with an annual salary of $3.1 million
and was paid out $2.5 million at resignation. 21 While we cannot speculate regarding the reason for his
resignation, one of the key benefits of acquiring InterTAN was gaining the management expertise
(according to Circuit City pre-acquisition statements); thus Mr. Levy’s resignation is not likely a
positive indicator.
Lastly, Circuit City spent considerable expense to build the “The Source by Circuit City” brand, which
has value in the market and can be built upon. This value is demonstrated by the increasing revenue. The
Restructuring Plan
50
actual issue with InterTAN appears to be poor cost management, demand planning and inventory
management.
As a result of the above, we believe that InterTAN should remain a key asset of Circuit City, and it will
be included and held to the standards of the City Revival Plan. There is limited information provided by
Circuit City regarding InterTAN, although it is clear the following actions must be taken:
•
Reduce InterTAN SG&A: While InterTAN operates on a different model (small stores) than
Circuit City and Best Buy, their SG&A was $208.8 million, or 36.6% of sales. Much higher
than Circuit City Stores (22%) or Best Buy (18%), although below the comparable RadioShack
stores (40%) (note: some InterTAN stores were previously branded RadioShack). By reducing
SG&A to a target of 30%, there will be a savings of $13 million.
•
Close Unprofitable InterTAN Stores: We recommend closing 60 unprofitable stores (without
store by store data, we assume the same percentage of InterTAN stores will need to be closed
as compared with Circuit City US stores). The cost of closing the stores was detailed in part A,
but we expect these unprofitable stores will eliminate the need for the goodwill impairment of
$92 million.
•
Better Anticipate and Plan for Consumer Demand: As mentioned, Management took a $3.3
million write-down on inventory. This is $3.3 million that could have been avoided or greatly
reduced with better demand planning and inventory management.
•
Realize Synergies Anticipated with Acquisition: There were three key synergies for Circuit
City stores sited during the acquisition: gaining key management, private-label product best
practices, and sourcing strategies were among the most cited. Management should ensure strict
goals are in place to realize these synergies and cost savings. At a minimum, if they have not
already been fully implemented, they could expect $0.1-1 million additional in savings.
These savings could amount to over $108 million and while InterTAN posted a $107 million loss in
fiscal year 2007, with our approach the business could potentially become profitable.
Restructuring Plan
51
Long-Term Strategy
Best Buy has a much larger international footprint than Circuit City, and they continue to expand. At
March 3, 2007, Best Buy operated 135 Five Star stores in China and one Best Buy store in Shanghai.
This amounts to 10% of Best Buy’s total retail floor space. 22 Best Buy also plans to open test stores in
Mexico and Turkey. While the US consumer electronics market shows signs of increased growth at 8%,
it has become increasing more competitive and does not compare with the 15-20% growth rates
expected in selected international markets (refer to analysis below). Therefore, Circuit City must
implement a long term global expansion strategy after it becomes more financially stable from the
turnaround.
Circuit City does not necessary have to be the first mover in the global market marketplace. There is an
opportunity to leverage Best Buy’s international expansion lessons learned, and allow Best Buy to
complete its own market tests. After Best Buy has opened stores in Turkey and Mexico, Circuit City
should monitor their success or failure closely. If they are successful, and with the expectation Circuit
City will be successfully turned around by 2011 with this plan, they should begin to expand globally.
There are several benefits to a global expansion strategy including market share capture, hedging of
currency concerns (due to a weakening US dollar) and increasing purchasing power. Regardless of the
ancillary benefits, the higher growth rates of the international markets justify the expansion, as we can
see with China’s market.
China’s estimated population was 1.3 billion in July 2007. 23 Since 1985, urban real per-capita
disposable incomes have risen from ~$252 in 1985 to $1,036 per annum in 2005 24 . Data on proportion
of the population traveling abroad are limited, but the McKinsey Global Institute estimated similarly that
1.9 million urban households could be considered “Global,” with annual household incomes greater than
200,000 rmb (~$25,000). An article published in The Economist in April 2007 suggested that there are
approximately 120 million Chinese consumers (of which ~320,000 were dollar millionaires) who can
easily afford consumer electronics.
In 2006, the consumer electronics market in China was
approximately $60 billion 25 , and with an expected annual market growth between 15 and 20 percent
through 2008, could grow to a market size in excess of $100 billion. While any international expansion
strategy is risky and we don’t presume to simply replicate the existing domestic retail strategy offshore,
we do believe the risk-reward line favors moving to a global retail strategy. We recommend that Senior
Management remain prudent about moving too aggressively, but with a keen eye towards the success or
Restructuring Plan
52
failure of Best Buy and other international retailers, we urge Circuit City management to develop an
international expansion strategy consistent with local cultures and business practices.
Lastly, Circuit City must consider the increasing competition with Wal-Mart and wholesale clubs. In the
end, the most efficient producer typically is the most successful. Several items noted in the City Revival
Plan will allow Circuit City to be more efficient and better complete with Wal-Mart, but Circuit City
should also build upon better product mix, service, and comparable prices in their marketing campaigns.
Performance Driven Human Capital Strategy
An effective human capital strategy will be critical to motivating Senior Management and completing
the City Revival Plan. Currently, we question the effectiveness of the present human capital strategy and
the capability of the current CEO to accomplish the turnaround plan. We would advise the Board of
Directors to take the following actions to truly align compensation with short- and long-term business
objectives and the interests of shareholders; attract, motivate, reward and retain contributing executive
leadership, and reward achievement of high levels of performance:
a. Lower Base Compensation and Implement Indexed Performance Bonus: Given the poor
performance of Circuit City and the short-term turnaround objective, we recommend lowering
the base compensation of the executive leaders to a level that is between the 50th and 75th
percentile of compensation levels for comparable positions as reported by our peer group of
companies (similar to the current Best Buy structure). We can maintain the maximum
performance bonus as a percentage of base compensation, i.e., 200% of CEO today. However,
instead of using EPS performance as the performance metric, the Board should index Circuit
City performance relative to peer group performance as well as the company’s own historical
performance. We would recommend a combination of metrics which include revenue growth
rates, operating margins, and prudent capital allocation measures like ROC (return on capital).
b. Consider a CEO Replacement: While the current CEO has significant retail experience, we are
not confident that he is the right person for the turnaround situation. Since his appointment in
2006, Circuit City has had multiple missteps such as firing high performance sales employees
and in turn rehiring them within months. There is a no clear vision or turnaround plan. On the
Restructuring Plan
53
recent analyst conference call, the CEO focused on explaining why they failed to deliver but did
not articulate a clear plan to correct the poor results. We would recommend putting him on a
short leash and start looking for a replacement with retail turnaround experience by the end of
fiscal year 2008 if we do not see any significant improvement.
c. Search for CMO and EVP of Merchandising and Services More Diligently: The Board
should quickly find the replacement for the CMO and Executive VP of merchandising and
services positions. The Board should strive to avoid short-term management turnover so the
search needs to be thorough and careful. We would not recommend combining these two
positions as the company previously did. Given our turnaround plan, the CMO should focus on
the refocused marketing strategy while the Executive VP of merchandising and services should
focus on a number of the cost and revenue initiatives. The first job is responsible for driving
traffic and maximizing ROI of marketing expenses; the second job is responsible for closing
sales and driving profits.
The performance driven culture should flow from the top to the bottom of the company. Apart from
commissions, sales employees and supervisors should be rewarded for identifying cost reduction
measures, revenue growth opportunities and sharing best practices across stores. The management team
will need to communicate this system clearly, and align the culture and employees towards the
turnaround objectives.
Appendix
6.1
54
Appendix A – Table, Analysis, Models, Etc.
CREDIT RATIOS (PER STANDARD S&P RATINGS METHODOLOGY)
Amounts in $MMs
Company
Best Buy Co. Inc.
RadioShack Corp.
GameStop Corp.
Office Depot, Inc.
OfficeMax Inc.
Staples Inc.
Conns Inc.
hhgregg, Inc.
Costco Wholesale Corp.
Target Corp.
Wal-Mart Stores Inc.
Amazon.com Inc.
PC Mall Inc.
Total
Debt
$1,977
383
706
631
1,854
330
0
119
2,222
14,138
47,437
1,273
65
High:
Average:
Median:
Low:
EBITDA /
Interest
56.7
11.6
6.7
17.1
3.8
47.1
NM
5.3
34.3
10.9
14.4
10.7
7.1
Coverage Ratios
(EBITDA - Cpx) /
EBIT /
Interest
Interest
38.7
44.7
10.4
8.9
4.6
5.1
9.1
12.2
2.3
2.7
35.3
38.1
NM
NM
3.4
4.5
12.7
25.5
4.2
8.4
6.5
11.2
8.1
7.6
6.6
5.9
Free Cash
Flow / Debt
56.8%
130.4%
36.9%
4.7%
-6.0%
270.3%
NM
15.2%
31.1%
2.8%
9.2%
62.8%
8.5%
Leverage Ratios
Total Debt / Total Debt /
EBITDA
Capital
0.8
36.6%
0.8
35.3%
1.4
31.4%
0.6
17.4%
4.0
45.9%
0.2
5.7%
0.0
0.1%
1.6
67.8%
1.0
20.4%
2.0
46.7%
1.7
42.0%
1.6
62.6%
2.5
47.4%
Profitability
Pre-tax
ROC
37.3%
34.3%
17.1%
19.5%
8.1%
27.6%
19.6%
36.8%
14.9%
17.8%
19.2%
28.6%
15.5%
56.7
18.8
11.3
3.8
38.7
11.8
7.3
2.3
44.7
14.6
8.6
2.7
270.3%
51.9%
23.1%
-6.0%
4.0
1.4
1.4
-
67.8%
35.3%
36.6%
0.1%
37.3%
22.8%
19.5%
8.1%
73.1
NM
NM
-80.9%
0.6
3.5%
-5.4%
S&P Credit Rating
Rating
Outlook
BBB
Stable
BB
Negative
BB
Stable
BBBNegative
BBStable
BBB+
Stable
None
None
B+
Stable
A
Stable
A+
Stable
AA
Stable
BB
Positive
None
None
Implied S&P Rating
Circuit City Stores Inc.
$59
BB
Negative
Source: Capital IQ unadjusted data
All companies' base performance data is through the latest twelve months as of the last reported financial statements
SUMMARY: PRESENT VALUE OF OPERATING LEASES ANALYTICS
Amounts in $MMs
Company
Best Buy Co. Inc.
RadioShack Corp.
GameStop Corp.
Office Depot, Inc.
OfficeMax Inc.
Staples Inc.
Conns Inc. [3]
hhgregg, Inc.
Costco Wholesale Corp.
Target Corp.
Wal-Mart Stores Inc.
Amazon.com Inc.
PC Mall Inc.
Circuit City Stores Inc.
PV Debt [1]
$5,658
787
710
2,914
1,660
4,028
93
150
1,212
1,765
7,662
536
7
$2,111
Book Acctg
Rate [2]
3.4%
8.5%
9.1%
9.2%
6.5%
9.8%
7.0%
10.1%
5.4%
5.4%
4.7%
6.0%
7.8%
Incremental
Interest Exp.
$192
67
64
267
109
397
7
15
66
96
364
32
1
1st-Yr Lease
Payment
$741
211
219
503
342
677
18
28
137
142
842
129
4
Implied
Depreciation
$549
144
155
236
233
280
11
13
72
46
478
97
3
12.8%
$271
$350
$79
Source: Forward minimum noncancelable lease payments obtained from individual company SEC filings
[1] Present value of operating leases calculated using S&P Lease Analytics Methodology
[2] Book accounting interest rate derived from LTM interest expense / avg. debt, adjusted for FY capitalized interest.
These rates also represent the discount rates to present value the forward lease commitments per S&P Lease
Analytics.
[3] Estimated (vs. calculated) interest rates, given nominal debt balances
RE-CAST CREDIT RATIOS FOR CAPITALIZED OPERATING LEASES (PER S&P LEASE ANALYTICS METHODOLOGY)
Amounts in $MMs
Company
Best Buy Co. Inc.
RadioShack Corp.
GameStop Corp.
Office Depot, Inc.
OfficeMax Inc.
Staples Inc.
Conns Inc.
hhgregg, Inc.
Costco Wholesale Corp.
Target Corp.
Wal-Mart Stores Inc.
Amazon.com Inc.
PC Mall Inc.
Adj.
Debt
$7,635
1,169
1,416
3,545
3,514
4,358
94
269
3,434
15,903
55,099
1,809
72
High:
Average:
Median:
Low:
EBITDA /
Interest
11.6
5.1
4.1
3.9
2.5
5.4
11.9
3.1
17.4
9.6
12.3
7.8
6.3
Coverage Ratios
(EBITDA - Cpx) /
EBIT /
Interest
Interest
5.9
9.3
3.3
4.0
1.9
3.2
1.7
3.0
0.7
1.9
3.6
4.5
8.0
10.0
1.7
2.7
6.2
13.1
3.7
7.4
5.4
9.6
5.1
5.6
5.0
5.3
Free Cash
Flow / Debt
14.7%
42.7%
18.4%
0.8%
-3.2%
20.5%
-9.4%
6.7%
20.1%
2.5%
7.9%
44.2%
7.6%
Leverage Ratios
Total Debt / Total Debt /
EBITDA
Capital
2.8
69.1%
2.1
62.5%
2.5
47.8%
2.8
54.2%
6.2
61.6%
1.8
44.5%
1.2
23.7%
2.9
82.7%
1.5
28.3%
2.2
49.6%
2.0
45.7%
2.1
70.4%
2.8
50.0%
Profitability
Pre-tax
ROC
19.9%
23.5%
15.1%
14.9%
7.7%
20.3%
16.6%
24.5%
14.0%
17.1%
18.2%
23.9%
15.1%
17.4
7.8
6.3
2.5
8.0
4.0
3.7
0.7
13.1
6.1
5.3
1.9
44.2%
13.4%
7.9%
-9.4%
6.2
2.5
2.2
1.2
82.7%
53.1%
50.0%
23.7%
24.5%
17.7%
17.1%
7.7%
1.4
(0.1)
0.7
-2.2%
5.9
57.0%
4.7%
Implied S&P Rating
Circuit City Stores Inc.
$2,170
Source: Capital IQ unadjusted data plus pro forma adjustments to account for additional debt from operating lease capitalization
All companies' base performance data is through the latest twelve months as of the last reported financial statements
CCC
Negative
91.28
10.72
$7.44
Online CE Retailers
Amazon.com Inc.
PC Mall Inc.
Circuit City Stores Inc.
$1,254
37,897
143
30,468
44,184
193,152
$889
37,261
198
29,404
57,695
238,071
450
568
22.5%
49.3%
27.6%
26.6%
12.1%
High:
Average:
Median:
Low:
$12,144
23.1%
12.1%
12.3%
33.7%
24.2%
38.0%
30.9%
26.6%
30.1%
25.4%
28.7%
24.0%
49.3%
0.8%
11.4%
7.3%
6.7%
2.3%
6.3%
2.3%
3.4%
11.4%
7.5%
9.9%
6.6%
8.5%
6.4%
5.1%
10.2%
6.7%
11.2%
LTM Performance
Gross % EBITDA %
13,149
1,103
64,400
61,401
370,449
720
1,161
5,933
15,504
9,141
19,334
$38,049
4,346
$21,744
2,365
9,732
4,564
3,645
15,953
Revenue
Source: Unadjusted data obtained from Capital IQ (12/12/2007)
[1] CY 2008 estimates obtained from Thomson One First Call (12/11/2007)
70.19
53.18
48.23
473
450
Regional (Domestic) CE Retailers
Conns Inc.
19.72
hhgregg, Inc.
13.97
Discount Retailers
Costco Wholesale Corp.
Target Corp.
Wal-Mart Stores Inc.
9,435
4,105
1,856
16,652
58.62
15.04
24.61
23.55
Specialty CE/IT Retailers
GameStop Corp.
Office Depot, Inc.
OfficeMax Inc.
Staples Inc.
Price
Market
12/12
Value
Primary CE (Consumer Electronics) Retailers
Best Buy Co. Inc.
$50.84
$21,240
RadioShack Corp.
18.30
2,399
Enterprise
Value
SELECTED PUBLIC COMPARABLE COMPANIES
Amounts in $MMs
-0.8%
8.8%
5.7%
5.6%
1.9%
4.4%
1.9%
2.5%
8.8%
5.8%
8.2%
5.6%
6.5%
4.5%
3.6%
8.2%
$12,656
18,241
1,481
70,806
70,096
406,208
940
1,492
7,867
15,860
9,429
21,117
$42,294
4,087
0.9%
11.6%
7.8%
7.7%
3.8%
7.9%
NA
3.8%
10.8%
7.4%
8.9%
5.8%
9.8%
5.9%
5.1%
10.2%
7.1%
11.6%
-0.3%
9.1%
5.7%
5.6%
2.2%
4.3%
2.2%
3.0%
8.4%
5.8%
7.7%
4.9%
7.2%
3.6%
3.4%
8.4%
5.6%
9.1%
PERFORMANCE DATA
CY 2008 Performance Est. [1]
Revenue EBITDA % EBIT %
5.3%
8.6%
EBIT %
7.9%
49.9%
13.7%
11.9%
0.9%
26.7%
5.1%
10.2%
12.3%
10.5%
15.1%
12.1%
49.9%
6.7%
2.8%
11.9%
13.5%
0.9%
9.3%
49.9%
14.1%
14.1%
-14.3%
19.7%
20.9%
6.2%
15.6%
11.2%
13.7%
20.6%
49.9%
11.1%
-4.1%
18.6%
14.1%
-14.3%
41.3%
48.3%
16.4%
15.3%
-21.2%
12.9%
31.9%
5.3%
17.1%
10.9%
12.6%
24.3%
48.3%
14.5%
18.4%
22.4%
15.3%
-21.2%
3-Year Historical CAGR (FY)
Revenue EBITDA % EBIT %
-2.3%
19.9%
13.1%
12.6%
5.4%
12.6%
7.2%
8.3%
12.4%
13.1%
15.0%
19.5%
12.1%
10.2%
5.4%
18.1%
16.4%
19.9%
-5.4%
37.3%
22.8%
19.5%
8.1%
28.6%
15.5%
14.9%
17.8%
19.2%
19.6%
36.8%
17.1%
19.5%
8.1%
27.6%
37.3%
34.3%
RETURNS
Pre-tax LTM EBIT
ROA
ROC
0.1 x
2.8 x
0.8 x
0.6 x
0.2 x
2.8 x
0.2 x
0.5 x
0.9 x
0.6 x
0.6 x
0.5 x
1.6 x
0.3 x
0.4 x
0.8 x
0.6 x
0.5 x
8.9 x
45.3 x
11.6 x
8.1 x
4.6 x
45.3 x
7.8 x
13.4 x
8.2 x
8.6 x
6.3 x
7.5 x
19.3 x
4.6 x
7.9 x
8.1 x
8.5 x
4.9 x
NM
64.1 x
15.4 x
10.7 x
6.4 x
64.1 x
9.4 x
18.0 x
10.7 x
11.0 x
7.6 x
8.8 x
25.3 x
6.5 x
11.1 x
10.0 x
10.8 x
6.4 x
VALUATION
Enterprise Value / LTM
Revenue EBITDA
EBIT
0.1 x
2.0 x
0.7 x
0.5 x
0.1 x
2.0 x
0.1 x
0.4 x
0.8 x
0.6 x
0.5 x
0.4 x
1.2 x
0.3 x
0.4 x
0.8 x
0.5 x
0.6 x
7.8 x
25.8 x
9.1 x
7.5 x
4.9 x
25.8 x
NA
11.0 x
7.6 x
7.9 x
5.4 x
6.5 x
12.7 x
4.9 x
7.6 x
7.4 x
7.3 x
5.0 x
NM
47.3 x
12.5 x
9.1 x
6.1 x
47.3 x
6.1 x
14.0 x
9.8 x
10.1 x
6.2 x
7.8 x
17.3 x
7.9 x
11.3 x
9.0 x
9.1 x
6.3 x
METRICS
Enterprise Value / CY 2008E
Revenue EBITDA
EBIT
CC
AMZN
MALL
COST
TGT
WMT
CONN
HGG
GME
ODP
OMX
SPLS
BBY
RSH
Ticker
Appendix
55
Appendix
56
CIRCUIT CITY STORES LIQUIDATION ANALYSIS
Amounts in $MMs
Balance Sheet: Book Value
Assets to Be Liquidated
Cash & equivalents
Short-term investments
A/R, net
Merchandise inventory
Deferred income taxes
Income tax receivable
Prepaid expenses & other
Property & equipment, gross
(Accum. depreciation)
Property & equipment, net
Actual
Unaudited
8/31/2007
Estimated
% Recovery
Low
High
Estimated
Liquidation Value ($)
Low
High
Note Ref.
$130.9
293.5
305.0
1,833.2
107.2
103.5
73.9
100.0%
100.0%
85.0%
35.0%
100.0%
100.0%
95.0%
45.0%
$130.9
293.5
259.2
641.6
$130.9
293.5
289.7
825.0
[1]
[1]
[2]
[3]
85.0%
10.0%
95.0%
10.0%
88.0
7.4
98.3
7.4
[4]
2,355.5
(1,381.1)
974.4
25.0%
35.0%
588.9
824.4
[5]
[6]
Deferred income taxes
Goodwill
Intangible assets, net
Other long-term assets
26.6
134.9
18.8
35.6
30.0%
5.0%
35.0%
5.0%
5.7
1.8
6.6
1.8
Total Asset Proceeds
$4,037.5
50.0%
61.4%
$2,016.9
$2,477.5
$60.5
252.1
110.9
$423.5
$74.3
309.7
136.3
$520.3
$1,593.3
$1,957.3
Less: Estimated Costs of Liquidation
Trustee Fees @ 3.0%
Wind Down Costs - SG&A / Operations
Professional Fees @ 5.5%
Subtotal
0.03
0.125
0.055
Net Liquidation Proceeds Available for Distribution
Distribution of Proceeds
Claims
Merchandise payable and expenses
Employee salaries and expenses
Debt (incl. capital and finacing leases)
Lease costs
Income taxes
Other
Equityholders
Unaudited
8/31/2007
$1,403.4
429.2
59.0
352.6
21.1
135.1
Claimant Recovery %
Low
High
100.0%
44.3%
0.0%
0.0%
0.0%
0.0%
100.0%
100.0%
100.0%
18.6%
0.0%
0.0%
Claimant Recovery ($)
Low
High
$1,403.4
189.9
-
$1,403.4
429.2
59.0
65.7
-
Note References:
[1] Cash and liquid, short-term investments can be realized at face value. Going into the holiday season, it's likely balance has shrunk from higher
advertising costs and working capital; however, likely to be replaced with short-term A/R. Therefore, balance taken at face value.
[2] A/R primarily from credit card payment processors (Visa, MC, Amex) which are short-term in nature (<10 days) and have very low risk
[3] Inventory in salable condition can be sold in orderly fashion to combination of consumers and other retailers
[4] Government receivable generally collectible and carries low risk
[5] Company has land and buildings of $307M and furniture, fixtures & equipment of $1,075M (per FY 2007 10-K)
[6] Intangibles like trade names of Circuit City and InterTAN, and other contractual agreements could reasonably yield nominal value
Appendix
57
REVENUE / COST / INVESTMENT BUILDUP: TURNAROUND PLAN
Amounts in $MMs
Rev enue Model Ass um ptions
DO MES TIC SEGMENT
New Super store format (sq. fe et size in 00 0s)
New Su persto re forma t Sell ing sq . ft. % [1]
Old store format (sq . feet size in 0 00s)
Old store fo rmat Se lling sq. ft % [1 ]
Fiscal Year
Beginn ing Supe rstores
Sup erstor e O pening s
Relocations
Remodels
Closures
Total End ing Supe rstore s
Avg . sales / Avg. S uperstore ($MM)
% growth
Total Sq Ft. (000s)
Selling S q. Feet ( 000s)
% Se lling sq. ft. of Total
Net sa les / total sq. ft. (actual dollar s)
Net sa les / se lling sq. ft. (actu al dollars)
Net Do mestic Sales
% growth
Cost of S ale s a nd SG&A
Cost o f sales
SG&A E xpen se s
Store expenses (excl. closur es & Dep & Amort.)
Gen eral & administrative (e xcl. closures)
Stock-based compensation
Depreciation & amortization
Store closures
Remodel expenses
Relocation expenses
Pre -openin g e xpen se s
Total SG &A exp enses
20 .0
80.0%
30 .0
60.0%
H ISTO
2005
599
31
28
1
19
612
R ICAL
20 06
6 12
18
10
4
6 26
2007
626
23
12
2
8
642
2 008
6 42
45
19
2
2
6 85
PROJECTI ONS
2009
2010
685
610
2
5
10
7
7
75
610
612
2 011
612
8
11
7
620
2 012
6 20
12
10
7
6 32
$16 .5
$17.7
7.2%
$18 .7
5 .5%
$18.1
-3.5%
$18.5
2 .5%
$19.9
7.5%
$20.8
4.5%
$21.6
4.0%
20,923
12,953
61.9%
$479
$773
2 0,7 28
1 2,9 90
6 2.7 %
$5 29
$8 45
21,173
13,244
62.6%
$560
$895
2 2,0 13
1 3,9 28
6 3.3 %
$5 44
$8 60
19,763
12,578
63.6%
$606
$953
19,803
12,610
63.7%
$614
$964
19,963
12,738
63.8%
$ 641
$1,005
2 0,2 03
1 2,9 30
6 4.0%
$6 70
$ 1,0 47
$ 10,974.0
9.6%
$11,859 .6
8 .1%
$ 11,977.0
1.0%
$11,980.4
0 .0%
$12,152.9
1.4%
$12,803.8
5.4%
$ 13,532.1
5.7%
2005
$7,629 .0
20 06
$8,369.5
2007
$9,119 .6
2 008
$9,246.3
2009
$9,165.0
2010
$9,236.2
2 011
$9,730.9
2 012
$ 10,284.4
$1,838 .1
226 .4
18 .5
143 .9
47 .4
0 .3
40 .8
15 .8
$2,331 .2
$1,936.1
252.5
25.9
149.3
7.1
9.0
$2,379.9
$2,081 .3
304 .7
22 .5
165 .9
38 .4
0 .7
4 .5
14 .8
$2,632 .8
$2,131.9
323.4
35.9
179.7
6.1
0.8
26.8
32.7
$2,737.3
$2,132.5
323.5
35.9
179.7
230.4
2.8
7.0
$2,911.8
$1,944.5
255.2
36.5
182.3
2.8
14.1
1.5
$2,436.8
$2,048.6
256.1
38.4
192.1
2.8
15.5
5.8
$2,559.3
$2,097.5
270.6
40.6
203.0
2.8
14.1
8.7
$2,637.3
$10,014 .6
Costs (% o f Domestic Sale s)
Cost of sale s
Store expenses (excl. closur es & Dep & Amort.)
Gen eral & administrative (e xcl. closures)
Stock-based compensation
Depreciation & amortization
Store closures
Remodel expenses
Relocation expenses
Pre -openin g e xpen se s
Total costs
76.2%
18.4%
2.3%
0.2%
1.4%
0.5%
0.0%
0.4%
0.2%
99.5%
7 6.3 %
1 7.6 %
2.3 %
0.2 %
1.4 %
0.0 %
0.0 %
0.1 %
0.1 %
9 8.0 %
76.9%
17.5%
2.6%
0.2%
1.4%
0.3%
0.0%
0.0%
0.1%
99.1%
7 7.2 %
1 7.8 %
2.7 %
0.3 %
1.5 %
0.1 %
0.0 %
0.2 %
0.3 %
10 0.1 %
76.5%
17.8%
2.7%
0.3%
1.5%
1.9%
0.0%
0.1%
0.0%
100.8%
76.0%
16.0%
2.1%
0.3%
1.5%
0.0%
0.0%
0.1%
0.0%
96.1%
76.0%
16.0%
2.0%
0.3%
1.5%
0.0%
0.0%
0.1%
0.0%
96.0%
7 6.0%
1 5.5%
2.0%
0.3%
1.5%
0.0%
0.0%
0.1%
0.1%
9 5.5%
EBIT
% margi n
$54 .4
0.5%
$ 224.6
2.0 %
$107 .2
0.9%
($6.5)
-0.1 %
($96.5)
-0.8%
$479.9
3.9%
$513.6
4.0%
$ 610.4
4.5%
Appendix
58
REVENUE / COST / INVESTMENT BUILDUP: TURNAROUND PLAN
Amounts in $MMs
INTERNATIONAL SEGMENT
International Sales
% growth
Cost of sales
SG&A Expenses
Store expenses (excl. closures & Dep & Amort.)
General & administrative (excl. closures)
Stock-based compensation
Depreciation & amortization
Store closures
Total SG&A expenses
2005
$398.9
2006
$540.2
35.4%
2007
$570.2
5.6%
2008
$527.4
-7.5%
2009
$532.7
1.0%
2010
$468.8
-12.0%
2011
$496.9
6.0%
2012
$526.7
6.0%
232.3
334.2
381.8
353.4
356.9
302.4
315.5
331.8
$101.8
27.5
0.7
9.5
$139.5
$136.2
64.7
1.0
13.9
$215.8
$143.1
38.1
1.7
15.6
10.3
$208.8
$132.9
36.9
1.4
13.2
$184.4
$133.7
32.0
1.4
11.2
12.1
$190.4
$114.9
23.4
1.3
8.4
$148.0
$121.7
24.8
1.3
8.9
$156.9
$129.0
26.3
1.4
9.5
$166.3
Costs (% of International Sales)
Cost of sales
Store expenses (excl. closures & Dep & Amort.)
General & administrative (excl. closures)
Stock-based compensation
Depreciation & amortization
Store closures
Total costs
58.2%
25.5%
6.9%
0.2%
2.4%
0.0%
93.2%
61.9%
25.2%
12.0%
0.2%
2.6%
0.0%
101.8%
67.0%
25.1%
6.7%
0.3%
2.7%
1.8%
103.6%
67.0%
25.2%
7.0%
0.3%
2.5%
0.0%
102.0%
67.0%
25.1%
6.0%
0.3%
2.1%
2.3%
102.7%
64.5%
24.5%
5.0%
0.3%
1.8%
0.0%
96.1%
63.5%
24.5%
5.0%
0.3%
1.8%
0.0%
95.1%
63.0%
24.5%
5.0%
0.3%
1.8%
0.0%
94.6%
EBIT
% margin
$27.1
6.8%
($9.8)
-1.8%
($20.4)
-3.6%
($10.4)
-2.0%
($14.6)
-2.7%
$18.4
3.9%
$24.5
4.9%
$28.6
5.4%
2005
2006
2007
2008
2009
2010
2011
2012
Capital Expenditures / D&A
Capex ($)
Domestic (excl. Opening / Relocation spend) [2]
Superstore Opening / Relocation Capex [2]
International
Total Capex
Capex (% sales)
Domestic (excl. Opening / Relocation spend) [2]
Superstore Opening / Relocation Capex [2]
International Segment
Total Capex %
Depreciation & Amortization ($)
Domestic Segment
International
Total Depreciation & Amortization
Depreciation & Amortization (% sales)
Domestic Segment
International
Total Depreciation & Amortization %
Sale of property and equipment (proceeds) [3]
% of sales
$89.4
162.9
9.2
$261.5
0.9%
1.6%
2.3%
2.5%
$143.9
9.5
$153.4
$146.7
85.2
22.6
$254.5
1.3%
0.8%
4.2%
2.2%
$149.3
13.9
$163.2
$167.1
107.7
10.9
$285.7
1.4%
0.9%
1.9%
2.3%
$165.9
15.6
$181.5
$107.8
204.0
9.5
$321.3
0.9%
1.7%
1.8%
2.6%
$179.7
13.2
$192.8
$149.8
7.5
9.6
$166.8
1.3%
0.1%
1.8%
1.3%
$179.7
11.2
$190.9
$151.9
22.8
8.4
$183.1
1.3%
0.2%
1.8%
1.5%
$182.3
8.4
$190.7
$160.0
47.7
8.9
$216.7
1.3%
0.4%
1.8%
1.6%
$192.1
8.9
$201.0
$169.2
61.8
9.5
$240.4
1.3%
0.5%
1.8%
1.7%
$203.0
9.5
$212.5
1.4%
2.4%
1.5%
1.4%
2.6%
1.4%
1.4%
2.7%
1.5%
1.5%
2.5%
1.5%
1.5%
2.1%
1.5%
1.5%
1.8%
1.5%
1.5%
1.8%
1.5%
1.5%
1.8%
1.5%
$106.4
1.0%
$55.4
0.5%
$38.6
0.3%
$4.0
0.0%
$150.0
1.2%
$0.0
0.0%
$0.0
0.0%
$0.0
0.0%
Appendix
59
REVENUE / COST / INVESTMENT BUILDUP: TURNAROUND PLAN
Amounts in $MMs
Working Capital / Other Assets & Liabilities
Assets ($)
A/R, net
Merchandise Inventory
Prepaid expenses and other current assets
Deferred taxes (current + long-term)
Other assets (incl. tax receivables, other)
$230.6
1,455.2
23.2
111.1
40.8
$220.9
1,698.0
41.3
127.5
49.7
$382.6
1,636.5
47.4
66.8
72.5
$375.1
1,651.1
50.0
93.8
62.5
$337.9
1,618.7
50.1
93.8
62.6
$315.5
1,573.9
50.5
94.7
63.1
$266.0
1,607.4
53.2
99.8
66.5
$281.2
1,645.5
56.2
105.4
70.3
Liabilities ($)
Merchandise payable
Expenses payable
Accrued expenses and other current liabilities
Other liaibilities (incl. straight-line rent, lease term.)
$635.7
170.6
508.3
424.7
$850.4
202.3
540.4
440.1
$922.2
281.7
503.0
451.5
$931.2
278.4
500.2
437.7
$933.1
285.7
500.5
438.0
$944.3
286.2
504.9
441.8
$1,004.6
301.4
532.0
465.5
$1,072.2
318.5
562.4
492.1
Assets (%)
A/R, net (% sales)
Merchandise Inventory (% COGS)
Prepaid expenses & other assets (% sales)
Deferred taxes (% sales)
Other assets (% sales)
Liabilities (%)
Merchandise payable (% COGS)
Expenses payable (% COGS)
Accrued expenses and other (% sales)
Other liabilities (% sales)
Net Operating Assets - Liabilities
% of sales
A/R Days
Inventory Days (COGS)
A/P Days (COGS): includes Merch. & Expenses Pay.
Cash Conversion Cycle
Net Working Capital
% sales
2005
2006
2007
2008
2009
2010
2011
2012
2.2%
18.5%
0.2%
1.1%
0.4%
1.9%
19.5%
0.4%
1.1%
0.4%
3.1%
17.2%
0.4%
0.5%
0.6%
3.0%
17.2%
0.4%
0.8%
0.5%
2.7%
17.0%
0.4%
0.8%
0.5%
2.5%
16.5%
0.4%
0.8%
0.5%
2.0%
16.0%
0.4%
0.8%
0.5%
2.0%
15.5%
0.4%
0.8%
0.5%
8.1%
2.2%
4.9%
4.1%
9.8%
2.3%
4.7%
3.8%
9.7%
3.0%
4.0%
3.6%
9.7%
2.9%
4.0%
3.5%
9.8%
3.0%
4.0%
3.5%
9.9%
3.0%
4.0%
3.5%
10.0%
3.0%
4.0%
3.5%
10.1%
3.0%
4.0%
3.5%
121.6
1.2%
104.2
0.9%
47.3
0.4%
85.2
0.7%
5.8
0.0%
(79.4)
-0.6%
(210.7)
-1.6%
(286.5)
-2.0%
8.1
67.6
37.4
38.2
$879.5
8.4%
7.0
71.2
44.1
34.1
$866.2
7.5%
11.2
62.9
46.2
27.9
$815.1
6.6%
11.0
62.8
46.0
27.7
$816.7
6.5%
9.9
62.1
46.7
25.2
$737.8
5.9%
9.1
60.2
47.1
22.3
$658.9
5.2%
7.3
58.4
47.5
18.3
$567.4
4.3%
7.3
56.6
47.8
16.1
$536.0
3.8%
[1] Stated by executive management in Q1 2008 Earnings call
[2] Capex required to open Superstore estimated at approximately $3.9. Capex required to relocate Superstore estimated at approximately $1.5M
[3] Proceeds estimated at $2.0M in furniture and fixtures sales per store closure
Appendix
60
PER STORE EXPENSE BREAKDOWN OF ACTIVITIES
Source: FY 2005 - 2007 10-Ks
Fiscal
Superstore
Year
Openings
2007
23
2006
18
2005
31
2004
8
2003
8
Domestic Stores
Superstore
Superstore
Relocations Remodels
Closures
12
2
8
10
4
28
1
19
18
4
20
11
3
1
Stores
EOY
642
626
612
599
611
Fiscal
Year
2007
2006
2005
2004
2003
Pre-Open
Expenses
$14.8
9.0
15.8
8.6
7.2
Domestic Store-Related Expenses
Relocation
Remodel
Closures
Expenses
Expenses
Expenses
$17.4
$0.7
$38.4
7.1
NA
40.8
0.3
47.4
30.5
2.2
38.4
19.1
28.8
NA
Total
$71.3
16.1
104.3
79.7
55.1
Fiscal
Year
2007
2006
2005
2004
2003
Average
Pre-Open
Expenses
$0.6
0.5
0.5
1.1
0.9
$0.7
Per Store (Domestic) Expenses
Relocation
Remodel
Closure
Expenses
Expenses
Expenses
$1.5
$0.4
$4.8
0.7
NM
NA
1.5
0.3
2.5
1.7
0.6
1.9
1.7
9.6
NA
$1.4
$2.7
$3.1
Total
$7.2
1.2
4.8
5.2
12.2
$6.1
$0.7
$1.4
$0.4
International
Closures
51
Expenses
$10.3
Closure
Expenses
$0.2
$3.1 Assumed Avg. Cost ($M) [4]
Domestic:
[1] FY 2007 Relocation expenses adds back $12.9M benefit for reversal of lease charges for previously vacant stores
re-opened
[2] FY 2004 Remodel expenses exclude $21.7M of refixturing which overstates expenses
[3] FY 2003 Remodel expenses include costs associated with remodeling of the video departments in 299 Superstores,
full-store lighting upgrades in 311 Superstores and relocation of 11 Superstores
[4] Assumed Average Remodel costs exclude FY 2006 expenses; See note [3] for explanation
International:
[5] Assumed closing of both company-owned stores and Battery Plus stores per FY 2006/7 10-Ks
Appendix
61
INCOME STATEMENT & CASH FLOW: TURNAROUND PLAN
Amounts in $MMs
Circuit City Price (12/12)
Annl. Price per share increase (for Diluted shares calculation)
Assumed proceeds from option exercies (% of share buybacks)
Annual Dividends per share
Proceeds from sale of furniture/fixtures per Superstore closure ($M) [1]
Tax rate
Min. cash required for Operations (% sales)
INCOME STATEMENT [2]
FY = February
Net Sales
Domestic segment
International segment
Total Sales
% growth
$7.44
$1.50
20.0%
$0.16
$2.0
38.0%
1.0%
HISTORICAL
2005
2006
2007
2008
PROJECTIONS
2009
2010
2011
2012
$10,014.6
398.9
10,413.5
$10,974.0
540.2
11,514.2
10.6%
$11,859.6
570.2
12,429.8
8.0%
$11,977.0
527.4
12,504.5
0.6%
$11,980.4
532.7
12,513.1
0.1%
$12,152.9
468.8
12,621.7
0.9%
$12,803.8
496.9
13,300.7
5.4%
$13,532.1
526.7
14,058.8
5.7%
Gross Profit
Domestic segment
International segment
Total Gross Profit
% gross margin
2,385.6
166.6
2,552.2
24.5%
2,604.5
206.0
2,810.5
24.4%
2,740.0
188.4
2,928.4
23.6%
2,730.8
174.1
2,904.8
23.2%
2,815.4
175.8
2,991.2
23.9%
2,916.7
166.4
3,083.1
24.4%
3,072.9
181.4
3,254.3
24.5%
3,247.7
194.9
3,442.6
24.5%
SG&A
Domestic segment
International segment
Total SG&A
2,331.2
139.5
2,470.7
2,379.9
215.8
2,595.7
2,632.8
300.8
2,933.6
2,737.3
184.4
2,921.7
2,911.8
190.4
3,102.3
2,436.8
148.0
2,584.8
2,559.3
156.9
2,716.1
2,637.3
166.3
2,803.6
Operating income (loss)
Domestic segment
International segment
Finance income
Total Operating income (EBIT)
% margin
54.4
27.1
5.6
$87.1
0.8%
224.6
(9.8)
$214.8
1.9%
107.2
(112.4)
($5.2)
0.0%
(6.5)
(10.4)
($16.9)
-0.1%
(96.5)
(14.6)
($111.1)
-0.9%
479.9
18.4
$498.3
3.9%
513.6
24.5
$538.1
4.0%
610.4
28.6
$639.0
4.5%
Interest expense
Interest income
Earnings from Operations
Income Tax Expense
Net earnings (loss) from Cont. Operations [3]
Earnings (loss) from Disc. Operations
Cumulative Change in Accounting
Net earnings (loss)
Diluted Shares Outstanding
Diluted EPS
4.5
14.4
$97.0
36.4
$60.6
1.1
$61.7
196.2
$0.31
3.1
21.8
$233.5
86.0
$147.5
(5.4)
(2.4)
$139.8
180.7
$0.77
1.5
27.2
$20.4
30.5
($10.1)
0.1
1.8
($8.2)
170.4
($0.05)
4.6
25.9
$4.4
1.7
$2.7
$2.7
165.3
$0.02
4.0
19.1
($96.0)
($96.0)
($96.0)
151.9
($0.63)
3.5
20.6
$515.5
195.9
$319.6
$319.6
140.4
$2.28
3.3
31.3
$566.2
215.2
$351.0
$351.0
130.4
$2.69
3.1
44.0
$680.0
258.4
$421.6
$421.6
121.4
$3.47
$87.1
153.4
$240.5
2.3%
$214.8
163.2
$378.0
3.3%
($5.2)
181.5
$176.3
1.4%
($16.9)
192.8
$176.0
1.4%
($111.1)
190.9
$79.8
0.6%
$498.3
190.7
$689.1
5.5%
$538.1
201.0
$739.1
5.6%
$639.0
212.5
$851.5
6.1%
2007
(3.4)
116.0
(72.1)
0.5
0.3
6.3
3.1%
-0.3%
2008
(3.7)
38.1
(31.5)
(2.5)
0.3
4.6
2.8%
-0.9%
2011
164.5
225.9
159.7
13.2
0.1
15.4
2.0%
28.1%
2012
208.0
277.2
198.9
14.3
0.0
18.9
1.6%
29.1%
Operating profit (EBIT)
Plus: Depreciation & amortization
EBITDA
% margin
CREDIT RATIOS
EBIT / Interest
EBITDA / Interest
(EBITDA - Capex) / Interest
Free Cash Flow / Debt
Debt / EBITDA
FFO / Debt
Total Debt / Capital
Pre-tax ROC
Total debt
Equity
Total capital
HISTORICAL
2005
2006
19.6
68.3
54.0
120.3
(4.7)
39.3
6.1
1.4
0.1
0.2
5.6
4.0
1.0%
4.0%
4.1%
10.6%
$20.8
2,079.9
$2,100.8
$81.2
1,954.6
$2,035.9
$57.7
1,791.2
$1,848.9
$50.5
1,730.1
$1,780.6
PROJECTIONS
2009
2010
(27.5)
142.9
19.8
197.6
(21.5)
145.0
1.0
11.0
0.5
0.1
3.0
13.4
2.8%
2.4%
-7.2%
29.2%
$43.6
1,489.8
$1,533.4
$40.9
1,666.9
$1,707.8
$38.4
1,877.1
$1,915.5
$35.7
2,159.3
$2,195.0
Appendix
CASH FLOW STATEMENT [2]
Operating activities:
Net earnings (loss)
Net (earnings) loss from Disc. Ops.
Depreciation & amortization expense
Impairment of goodwill
Stock-based compensation expense
(Gain) loss on dispositions of PPE
Provisions for deferred taxes
Cumulative Change in Accounting
Other
Changes in operating assets/liabilities:
A/R, net
Retained interests in sec. receivables
Merchandise inventory
Prepaid expenses & other current
Other assets
Merchandise payable
Expenses payable
Accrued expenses & other current liab.
Other long-term liabilities
Net change in operating assets/liabilities
Net Cash from Operations
62
HISTORICAL
2005
2006
2007
2008
PROJECTIONS
2009
2010
2011
2012
$61.7
(1.1)
153.4
18.3
(0.2)
(116.3)
-
$139.8
5.4
163.2
24.4
2.4
(14.3)
2.4
(1.7)
($8.2)
(0.1)
181.5
92.0
26.7
(1.4)
72.7
(1.8)
1.7
$2.7
192.8
37.4
-
($96.0)
190.9
37.4
-
$319.6
190.7
37.7
-
$351.0
201.0
39.8
-
$421.6
212.5
42.0
-
(58.7)
32.9
160.0
7.2
3.8
28.2
(17.2)
54.0
63.5
273.7
$389.5
16.6
(231.1)
(17.3)
(3.1)
211.4
40.9
43.2
(17.0)
43.5
$365.0
(133.2)
49.4
(9.6)
0.5
73.3
55.7
(81.4)
(1.5)
(46.6)
$316.4
7.4
(14.6)
(2.6)
(17.0)
9.0
(3.3)
(2.8)
(13.9)
(37.9)
$195.0
37.3
32.4
(0.0)
(0.1)
2.0
7.3
0.3
0.3
79.4
$211.7
22.3
44.9
(0.4)
(1.4)
11.2
0.5
4.3
3.8
85.2
$633.3
49.5
(33.6)
(2.7)
(8.5)
60.3
15.2
27.2
23.8
131.2
$723.0
(15.2)
(38.1)
(3.0)
(9.5)
67.6
17.1
30.3
26.5
75.8
$751.8
Investing activities:
Purchases of PP&E
Proceeds from sale of PP&E
Sales (Purchases) of investment sec.
Other investing activities
Proceeds from sale of finance ops.
Acquisitions, net of cash acquired
Net Cash from Investing
($261.5)
106.4
(125.3)
475.9
(262.3)
($66.9)
($254.5)
55.4
(394.9)
($593.9)
($285.7)
38.6
(76.0)
(11.6)
($334.7)
($321.3)
4.0
309.4
($7.9)
($166.8)
150.0
(43.8)
($60.6)
($183.1)
(307.0)
($490.1)
($216.7)
(349.6)
($566.3)
($240.4)
(353.9)
($594.4)
Financing Activities:
Net Proceeds (Payments) on Revolver
Net Proceeds (Payments) on long-term debt
Changes in overdraft balances
Repurchases of common stock
Issuance of common stock
Dividends paid
Excess tax benefits from stock payments
Redemption of preferred share purchase
Other financing
Net Cash from Financing
($1.1)
(28.0)
36.3
(259.8)
27.2
(13.8)
($239.3)
$20.1
(0.8)
(22.5)
(338.5)
38.0
(12.8)
(1.9)
($318.4)
($21.3)
(5.5)
19.3
(237.2)
89.7
(20.1)
15.7
(1.4)
($160.8)
$0.0
(7.2)
(46.8)
9.4
(26.5)
($71.1)
$0.0
(6.9)
(150.0)
30.0
(24.3)
($151.2)
$0.0
(2.7)
(150.0)
30.0
(22.5)
($145.2)
$0.0
(2.5)
(150.0)
30.0
(20.9)
($143.4)
$0.0
(2.7)
(150.0)
30.0
(19.4)
($142.1)
$83.3
(14.5)
2.0
70.8
809.0
$879.7
($547.3)
(18.0)
1.7
(563.7)
879.7
$316.0
($179.0)
5.7
(1.4)
(174.7)
316.0
$141.2
$116.0
116.0
141.2
$257.3
$4.9
($0.1)
(0.1)
257.3
$257.2
$9.0
($2.0)
(2.0)
257.2
$255.1
$9.0
$13.4
13.4
255.1
$268.5
$8.9
$15.4
15.4
268.5
$283.9
$9.4
Net Cash Flow from Cont. Operations
Net Cash Flow from Disc. Operations
Exchange Rate Effect on Cash
Increase (decrease) in cash & equivalents
Cash & equivalents at beginning of year
Cash & equivalents at end of year
Interest income on cash & equivalents
Appendix
63
Rate
DEBT / INVESTMENTS SCHEDULE
Available cash flow
Plus: Surplus cash (excess of 1.0% sales)
Less: Minimum cash required @ 1.0% sales
Net cash flow available for debt retirement
2008
($193.3)
$16.2
125.0
($302.2)
Long-term debt
Beginning balance
(Req. amortization of long-term debt) [4]
Ending balance
Interest expense on long-term debt
8.00%
Short-term investments
Beginning balance
Sales (Purchases) of investment sec.
Ending Balance
Interest income on short-term investments
3.50%
Revolver
Beginning balance
Available cash flow after req. amortization
Borrowings / (Paydown)
Ending balance
Interest expense on Revolver
7.00%
$57.7
(7.2)
$50.5
$4.6
$598.3
309.4
$289.0
$20.9
$0.0
(20.4)
$0.0
$0.0
PROJECTIONS
2009
2010
2011
$43.7
$304.9
$363.0
$132.2
$130.9
$122.1
125.1
126.2
133.0
$50.7
$309.7
$352.1
2012
$369.3
$127.9
140.6
$356.6
$50.5
(6.9)
$43.6
$4.0
$43.6
(2.7)
$40.9
$3.5
$40.9
(2.5)
$38.4
$3.3
$38.4
(2.7)
$35.7
$3.1
$289.0
(43.8)
$332.8
$10.1
$332.8
(307.0)
$639.8
$11.6
$639.8
(349.6)
$989.4
$22.4
$989.4
(353.9)
$1,343.3
$34.6
$0.0
376.6
$0.0
$0.0
$0.0
946.7
$0.0
$0.0
$0.0
1,339.0
$0.0
$0.0
[1] See Capex on Revenue / Cost / Investment Buildup Assumptions
[2] Projected income statement and cash flows exclude effect of Discontinued Operations
[3] Assumed no projected NOL benefit from losses given nominal dollar amount of projected losses. Company reported $1.5M NOL carryforward in 10-K
[4] Schedule obtained from debt maturity schedule in FY 2007 10-K
$0.0
1,697.2
$0.0
$0.0
87.1
$7.44
201.7%
Current share price (12/12)
% Value Increase
(5.2)
$22.45
11.0%
11.5%
12.0%
12.5%
13.0%
13.5%
14.0%
$179.8
$142.1
($141.9)
($126.1)
2.75%
$26.13
24.60
23.23
22.00
20.90
19.90
18.99
190.9
37.4
150.0
(166.8)
79.4
192.8
37.4
4.0
(321.3)
(37.9)
2.50%
$25.52
24.06
22.76
21.58
20.52
19.56
18.68
(111.1)
($111.1)
2009
$12,513.1
0.1%
(16.9)
($16.9)
2008
$12,504.5
0.6%
3.50%
$28.21
26.40
24.81
23.40
22.14
21.01
19.98
VALUATION SENSITIVITY
Terminal Growth
3.00%
3.25%
$26.78
$27.47
25.16
25.76
23.73
24.26
22.45
22.91
21.29
21.71
20.25
20.62
19.30
19.63
$486.0
212.5
42.0
(240.4)
75.8
639.0
242.8
$396.2
$269.7
$489.0
201.0
39.8
(216.7)
131.2
538.1
204.5
$333.6
2012
$14,058.8
5.7%
$305.3
$308.7
$439.5
190.7
37.7
(183.1)
85.2
498.3
189.4
$309.0
PROJECTIONS
2010
2011
$12,621.7
$13,300.7
0.9%
5.4%
[1] The choice of using a higher discount rate than WACC is explained in the valuation write-up
[2] Conservatively did not incorporate a tax benefit despite losses at the operating level
[3] Non-cash compensation expense related to stock options and is non-cash. Adding line item back also simplifies share count analysis to derive price per share.
[4] Assumes Proceeds from sale of furniture/fixtures per Superstore closure is $2.0M
168.6
$22.45
$899.6
2,518.4
$3,418.0
424.4
59.0
$3,783.4
Actual Share Outstanding (9/30)
Price / share
Sum of PV of Cash Flows
Plus: PV of Terminal Value
Enterprise Value
Plus: Cash, short-term investments (8/31)
Less: Debt (8/31)
Equity Value
PV of Free Cash Flows
Free Cash Flow
Undiscounted Terminal Value
Implied Multiple of LTM Revenue
Implied Multiple of LTM EBITDA
214.8
HISTORICAL
2005
2006
2007
$10,413.5
$11,514.2
$12,429.8
10.6%
8.0%
Plus: Depreciation
Plus: Stock-based compensation expense [3]
Plus: Proceeds from sale of PP&E [4]
Puchase of PP&E
Changes in Operating assets/liabilities (see Cash Flow Statement)
Total Operating income (EBIT)
Less: Taxes [2]
Net operating profit after-tax
FY = February
Total Sales
% growth
Assumptions
Marginal tax rate
Discount rate (different from WACC) [1]
Terminal growth rate
38.0%
12.5%
3.00%
DISCOUNTED CASH FLOW: TURNAROUND PLAN
Discount rate
Amounts in $MMs
3.75%
$28.99
27.08
25.41
23.92
22.60
21.41
20.34
$431.1
$4,538.2
0.3 x
5.3 x
218.8
43.3
(247.6)
8.6
658.2
250.1
$408.1
Terminal
$14,480.6
3.0%
Appendix
64
4.7%
7.0%
0.0%
CC D/E
CC Cost of Debt (Rd)
CC Cost of Preferred (Rp)
0.0%
0.0%
Multiplied by: CC P/(D+P+E)
Cost of Preferred Portion
(6) Levered Beta = Unlevered Beta * ( 1 + ((D/E))*
* Unlevered and Levered Beta formulas exclude tax adjustment per Miles and Ezzell (1985),
confirmed by Arzac
(5) Unlevered Beta = Levered Beta / ( 1 + ((D/E))*
(4) Market values based on prices as of 12/12/2007
(3) hhgregg, Inc. was excluded since data indicated Beta was zero
(1) Interest on 30-Year Treasury Bond as of 12/12/2007. Source: Bloomberg
(2) Long run compound average equity risk premium: Ibbotson & Chen, Long Run Stock
Returns: Participating in the Real Economy, Financial Analysts Journal Feb. 2003
11.4%
0.0%
CC Cost of Preferred (Rp)
WACC
4.5%
0.2%
Multiplied by: CC D/(D+P+E)
4.3%
After-Tax Cost of Debt
Cost of Debt Portion
7.0%
38.0%
CC Marginal Tax Rate
11.2%
CC Cost of Debt (Rd)
95.5%
Cost of Equity Portion
0.0%
Add: Size Premium
Multiplied by: CC E/(D+P+E)
7.2%
4.5%
Adjusted Market Risk Premium
(1)
Add: Risk-Free Rate of Return (Rf)
11.7%
1.15
Multiplied by: CC Levered Beta
Cost of Equity
6.2%
Market Risk Premium (Rm - Rf)
WACC CALCULATION
38.0%
4.5%
CC Marginal Tax Rate
0.0%
6.24%
CC D/(D+P+E)
(2)
4.51%
38.0%
Size Premium
Market Risk Premium (Rm - Rf)
Marginal Tax Rate
(1)
Risk-Free Rate of Return (Rf)
WACC INPUTS
(in millions)
Circuit City Stores Inc. (NYSE:CC)
7.00%
7.50%
21.9%
24.6%
32.0%
2.0%
15.9%
99.9%
15.4%
45.0%
7.5%
7.3%
0.0%
9.3%
3.4%
1.10
0.19
0.77
0.90
1.05
0.64
1.35
1.25
0.67
0.76
2.06
1.34
2.20
Beta(5)
Unlevered
(6)
9.5% ##
9.1% ##
##
30.00%
10.1% ##
9.5% ##
9.0% ##
8.4% ##
7.9% ##
##
##
##
##
##
90.00%
80.00%
75.00%
70.00%
10.6% ##
##
95.00%
85.00%
11.2% ##
##
11.00%
100.00%
E/(D+P+E) ##
CC
WACC SENSITIVITY ANALYSIS
10.0% ##
##
##
20.00%
25.00%
10.4% ##
##
10.8% ##
11.3% ##
##
##
11.7% ##
##
5.00%
15.00%
10.00%
5.00%
0.00%
D/(D+P+E) ##
CC
WACC SENSITIVITY ANALYSIS
CC Levered Beta
CC Marginal Tax Rate
8.8% ##
8.2% ##
9.4% ##
10.0% ##
10.5% ##
11.1% ##
11.7% ##
11.50%
9.2% ##
9.6% ##
10.0% ##
10.4% ##
10.9% ##
11.3% ##
11.7% ##
9.4% ##
9.8% ##
10.2% ##
10.5% ##
10.9% ##
11.3% ##
11.7% ##
6.50%
9.2% ##
8.6% ##
9.8% ##
10.4% ##
11.0% ##
11.6% ##
9.6% ##
8.9% ##
10.2% ##
10.8% ##
11.4% ##
12.1% ##
12.7% ##
12.50%
Cost of Equity
12.2% ##
12.00%
9.3% ##
9.7% ##
10.1% ##
10.5% ##
10.9% ##
11.3% ##
11.7% ##
9.9% ##
9.3% ##
10.6% ##
11.2% ##
11.9% ##
12.5% ##
13.2% ##
13.00%
9.5% ##
9.9% ##
10.2% ##
10.6% ##
11.0% ##
11.3% ##
11.7% ##
10.3% ##
9.6% ##
11.0% ##
11.7% ##
12.3% ##
13.0% ##
13.7% ##
13.50%
9.6% ##
9.9% ##
10.3% ##
10.6% ##
11.0% ##
11.3% ##
11.7% ##
10.7%
10.0%
11.4%
12.1%
12.8%
13.5%
14.2%
14.00%
9.7%
10.0%
10.3%
10.7%
11.0%
11.4%
11.7%
8.00%
1.15
38.0%
1.10
Pre-Tax Cost of Debt
Debt/
Equity
4.7%
6.00%
193,152
44,184
16,652
2,399
1,856
4,105
143
9,435
30,468
473
21,240
$37,897
Equity(4)
Mkt. Val.
CC D/E
5.50%
1.28
47,437
14,138
330
383
1,854
631
65
706
2,222
0
1,977
$1,273
Debt
Total
Average Unlevered Beta for Comps
Average
0.24
1.01
Target Corp.
TGT
Wal-Mart Stores Inc.
0.92
Staples Inc.
WMT
1.22
RadioShack Corp.
RSH
SPLS
1.28
1.56
1.81
0.72
0.82
2.06
1.47
2.27
Beta
Levered
OfficeMax Inc.
Office Depot, Inc.
PC Mall Inc.
GameStop Corp.
Costco Wholesale Corp.
Conns Inc.
Best Buy Co. Inc.
Amazon.com Inc.
Company Name
Source: Capital IQ WACC Template customized by Turnaround Team
OMX
ODP
MALL
GME
COST
CONN
BBY
AMZN
Ticker(3)
BETA CALCULATION
WEIGHTED AVERAGE COST OF CAPITAL ANALYSIS
Appendix
65
Appendix
6.2
66
Appendix B – Industry Detailed Analysis, Financial Measures
The following Appendix details specific financial data for the key retailers in the electronics retail
industry: Best Buy, Circuit City, GameStop, and RadioShack. The charts for Revenue, Net Income, and
Return on Assets and Equity can be found in Section 2. The data was obtained from the company filings
and demonstrates that Best Buy is the industry leader, while Circuit City is well below the industry
average on several metrics, most notably, revenue, net income, ROI, and ROE.
Note: The comparable companies have various year ends and quarter ends.
Retailer
BEST BUY CO
INC
CIRCUIT CITY
STORES INC
GAMESTOP
CORP
RADIOSHACK
CORP
Last Yearend
13 weeks Ending
2007-09-01
March 3, 2007
3 months Ending
February 28, 2007 2007-08-31
13 weeks Ending
2007-11-03
February 3, 2007
3 months Ending
December 31, 2007 2007-09-30
Quarter Ends - Last 5
13 weeks Ending 14 weeks Ending 13 weeks Ending
2007-06-02
2007-03-03
2006-11-25
3 months Ending 3 months Ending 3 months Ending
2007-05-31
2007-02-28
2006-11-30
26 weeks Ending 13 weeks Ending 14 weeks Ending
2007-08-04
2007-05-05
2007-02-03
3 months Ending 3 months Ending 3 months Ending
2007-06-30
2007-03-31
2006-12-31
13 weeks Ending
2006-08-26
3 months Ending
2006-08-31
13 weeks Ending
2006-10-28
3 months Ending
2006-09-30
Company
BEST BUY CO INC
CIRCUIT CITY STORES
GAMESTOP CORP
RADIOSHACK CORP
$
$
$
$
Operating Revenues ($ Millions)
Q1'08
Q4'07
Q3'07
7,927.0 $
12,899.0 $
8,473.0
2,485.0 $
3,933.0 $
3,080.0
2,617.0 $
1,278.0 $
2,303.0
934.0 $
992.0 $
1,458.0
$
$
$
$
Q2'07
7,603.0
2,818.0
1,011.0
1,059.0
Company
BEST BUY CO INC
CIRCUIT CITY STORES
GAMESTOP CORP
RADIOSHACK CORP
Net Income ($ Millions)
Q2'08
Q1'08
Q4'07
Q3'07
$
250.0 $
192.0 $
763.0 $
150.0
$
(62.8) $
(54.5) $
(12.2) $
(15.9)
$
51.9 $
46.5 $
24.7 $
129.8
$
46.3 $
47.0 $
42.5 $
84.5
$
$
$
$
Q2'07
230.0
10.0
13.5
(16.3)
Company
BEST BUY CO INC
CIRCUIT CITY STORES
GAMESTOP CORP
RADIOSHACK CORP
Q2'08
8,750.0
2,643.0
1,611.0
960.0
$
$
$
$
Compound Growth Rate (%)
10-Yr.
5-Yr.
1-Yr.
16.5
5.7
NA
-2.7
12.9
5.3
36.5
0
16.5
7.2
72
-6
Appendix
67
Company
Return on Assets (%)
2005
2004
2003
2006
BEST BUY CO INC
CIRCUIT CITY STORES INC
GAMESTOP CORP
RADIOSHACK CORP
10.8
NM
5
3.4
Company
10.3
3.8
5.1
11.4
9.8
NM
7.5
13.4
3.8
NM
3
1.5
3.7
1.3
3.3
5.3
8.3
1
7.4
11.6
3.4
0.6
3.3
7
Return on Equity (%)
2005
2004
2003
2006
Return on Revenues (%)
2005
2004
2003
2006
BEST BUY CO INC
CIRCUIT CITY STORES INC
GAMESTOP CORP
RADIOSHACK CORP
9.9
1.6
6.7
14.2
2002
24
NM
12.7
11.8
23.5
7.5
12.2
35.7
23.7
2.8
10.7
39.9
2002
3.3
NM
4
6.4
3
0.4
3.9
5.8
Return on Revenues (%) - Computer & Electronic Retail
8
BEST BUY CO INC
7
CIRCUIT CITY STORES INC
6
GAMESTOP CORP
RADIOSHACK CORP
4
3
2
Percent (%)
5
1
0
2002
2003
2004
2005
2006
Year
Note: Charts begin with oldest year, while tables begin with most recent year.
Current Ratio - Computer & Electronic Retail
3
2.5
BEST BUY CO INC
CIRCUIT CITY STORES INC
GAMESTOP CORP
2
1.5
1
0.5
0
2002
2003
2004
Ye a r
2005
2006
RADIOSHACK CORP
26
NM
11.1
39.9
2002
23.7
1.7
19.2
35.8
Appendix
68
Debt to Capital Ratio (%) - Computer & Electronic Retail
50
45
BEST BUY CO INC
40
CIRCUIT CITY STORES INC
GAMESTOP CORP
35
RADIOSHACK CORP
30
25
20
15
10
5
0
2002
2003
2004
2005
2006
Ye a r
BEST BUY CO INC
CIRCUIT CITY
GAMESTOP CORP
RADIOSHACK CORP
2006
2005
1.4
1.7
1.3
1.6
1.3
1.7
1.3
1.6
Current Ratio
2004
2003
1.4
2.1
1.4
1.9
1.3
2.5
1.7
1.9
2002
2006
Debt / Capital Ratio (%)
2005
2004
2003
2002
Debt as a % of Net Working Capital
2006
2005
2004
2003
2002
1.3
2.4
1.7
2.1
8.6
2.7
38
34.6
3.3
2.6
46.1
45.7
23.3
0.5
0
44.8
21.2
4.3
238.8
56.2
10.6
0.5
4.1
35.1
12.3
1
0
41.3
9.2
4.3
412.5
77.2
Dividend Payout Ratio (%) Computer & Electronic Retail
50
45
BEST BUY CO INC
CIRCUIT CITY STORES INC
40
GAMESTOP CORP
35
RADIOSHACK CORP
30
25
20
15
10
5
0
2002
2003
2004
Year
2005
2006
Percent %
Company
27.2
0.8
22.1
62
39.4
1.3
0
67
77.1
0.6
0
67.3
Appendix
6.3
69
Appendix C – Board of Director Composition
Board Composition
Individual Name
Board Role
Other Board Involvement
Alan Kane
Independent
Director
AMERICAN EAGLE OUTFITTERS Independent Chairman
INC
(1) President/CEO (1)
Allen King
Independent
Director
Independent
Director
Independent
Director
UNIVERSAL CORP
Barbara Feigin
Carolyn Byrd
Carolyn Woo
J Spainhour
James Hardymon
Mikael Salovaara
Philip J.
Schoonover
Ronald Brill
Ronald Turner
Ursula Fairbairn
Independent
Director
Independent
Director
Lead
Independent
Director
Functional Experience Company Experience
VF CORP
AFC ENTERPRISES INC
AON CORP; NISOURCE INC
TUPPERWARE BRANDS CORP Executive VP/CFO (1)
(Tupperware prior to 12/2005)
LEXMARK INTERNATIONAL INC; Chairman (1)
WABCO HOLDINGS INC
Chairman/CEO (1)
President/CEO (1) Vice
Chairman/COO (1)
Independent
Director
Chairman
Independent
Director
Independent
Director
Independent
Director
Source: Deloitte, Company Website
Fashion Institute of Technology; Columbia
Graduate School of Business; Federated
Department Stores, The May Company,
Grossman's Inc.
Universal Corporation and Universal Leaf Tobacco
Co.
VF Corporation, Grey Global Group
GlobalTech Financial, LLC, Coca-Cola Financial
Corporation, Rare Hospitality International, Inc. and
AFC Enterprises, Inc.
Mendoza College of Business, University of Notre
Dame
ServiceMaster Company, Ann Taylor Stores
Corporation
Textron, Inc., American Standard Companies, Inc.
and Lexmark International, Inc
Goldman, Sachs & Co.; Greycliff Partners
BestBuy, TOPS Appliance City, Sony
Executive VP/CFO (1)
BRINKS CO
AIR PRODUCTS & CHEMICALS
INC; CENTEX CORP; SUNOCO
INC; VF CORP
Home Depot, Inc., Pharmaca Integrative
Pharmacy, Inc.
Chairman/President/CE Ceridian Corporation
O (2) President/CEO (2)
President/CEO (1)
Fairbairn Group, LLC, American Express Comany,
Union Pacific Corporation, IBM Corporation
Appendix
70
End Notes / References
1
Website located at http://www.ce.org/Research/Sales_Stats/1891.asp as of December 3, 2007
Ibid
3
“Wal-Mart Looks to Grab Gains in Gadgets”, WSJ, by Kris Hudson, August 2, 2007
4
Based on Best Buy and Circuit City Annual Reports and CE Industry Figures
5
“Best Buy, Wal-Mart Grew CE Share In 3rd Quarter”, by Alan Wolf , TWICE, 11/5/2007
6
Based on data gathered from www.walmart.com, www.circuitcity.com, www.bestbuy.com on December 6, 2007
2
7
“RadioShack to close 400 to 700 stores”, Associated Press, Feb 17, 2006
Factiva, Circuit City report as of November 18, 2007
9
http://connection.ebscohost.com/content/article/1039062643.html;jsessionid=2ECCA132F8DEC1A7530EEA266DDA4A79
.ehctc1 as of November 28, 2007
10
Factiva, Circuit City report as of November 18, 2007
11
http://www.firedog.com/fdandyou.html?cm_re=firedog-_-content-_-firedog%20and%20you as of December 6, 2007
12
Sources: Dow Jones, Factiva, Google Financials, Nov. 2007
13
http://www.fundinguniverse.com
14
Circuit City Conf Call, September 20, 2007
15
Standard and Poor’s Corporate Ratings Criteria 2006
16
Amended and Restated Credit Agreement dated as of July 8, 2004, First Amendment to Amended and Restated Credit
Agreement dated as of November 17, 2004, Second Amendment to Amended and Restated Credit Agreement dated as of July
15, 2005, Third Amendment to Amended and Restated Credit Agreement dated as of October 18, 2005
17
Ibid
18
Circuit City Stores, SC TOC, Intertan Inc, 4/1/04 SEC File 5-42871
19
February 2007 Circuit City 10-K Executive Compensation, page 34
20
February 2007 Circuit City 10-K, page 30
21
February 2007 Circuit City 10-K Executive Compensation, page 27
22
March 2007 Best Buy 10-K, page 7
23
CIA World Fact Book
24
McKinsey Global Institute, p12
25
“Chinese consumer electronics market ranks second worldwide”, English Peoples Daily Online, March 2006
8