Circuit City Tumbles Anew as Losses Mount

Shares closed down 21% Monday following the Richmond, Va.-headquartered electronics retailer's first-quarter loss of $1 a share, reported after the market close Thursday. Circuit City also suspended its quarterly dividend payments.

The results for the quarter ended May 31 ushered in a strange trading day Friday after the company came in slightly ahead of the consensus Wall Street estimate of a loss of $1.06 a share. Circuit City lost 33 cents a share a year earlier. The stock was down about 7% most of the session before shooting up in the final moments of trading for a net gain of 7.5%.

"You had a 15% swing in a matter of 60 seconds," RBC Capital analyst Scot Ciccarelli says. "What you're seeing today is really taking it back to where it was for most of Friday."

The dominant factor in the volatile moves is the looming $1 billion bid for the company by Blockbuster (BBI), another troubled company beset by a radical shift in consumer behavior. Its stock fell almost 10% Friday after Circuit City released its results.

Shares of Blockbuster are down 41% for the past year; Circuit City lost 73% of its value over the same period.

Management also said it had filed a shelf registration with the Securities and Exchange Commission to sell additional shares and raise cash as needed.

The proposed deal has puzzled many Wall Streeters. Arvind Bhatia, an analyst with Sterne Agee, published a research note Friday that said there was only a 5% chance Blockbuster would pull off the takeover at $6 a share, and predicted it would drop its bid.

Circuit City on May 9 announced it had hired Goldman Sachs to help explore strategic alternatives, including a possible sale of the company. Chief Executive Phil Schoonover said in a Thursday conference call that process continues.

Circuit City's finance chief, Bruce Besanko, said the company expects a slightly higher loss in the second quarter, "based on the current macro environment and current business trends."

Same-store sales dropped 11.3% worldwide, and slipped 12.2% domestically.

Part of that decline reflects lower consumer spending. The company said its average ticket was flat from a year ago. But Circuit City, which last year fired 3,400 of its highest paid and most experienced salesmen and other employees, is also pinched between Best Buy (BBY) and discount retailers such as Wal-Mart Stores (WMT) and Costco Wholesale (COST), which are taking market share.

"Circuit's been ceding market share to Best Buy for years at this point," says RBC's Ciccarelli. "It's kind of caught between Best Buy, which has established itself at the higher end, and Wal-Mart and other discounters who've gotten in at the lower end."

It's not an encouraging picture, despite the better-than-expected bottom line, said Vivian Ma, an analyst at Oppenheimer & Co.

"Though better than plan, CC's 1Q09 operating loss was still substantial, and cash flow continues to weaken," she wrote Friday. "We see significant headwinds to CC's plan for a [second half] improvement to its business."

Stacey Widlitz, at Pali Capital, was more direct: "There's no reason to believe the back half of the year will see a recovery in consumer electronics."

At this point, it's no place for the little guy, or a lot of the bigger players.

"From an institutional perspective, once a stock goes below $5, some funds can't hold onto it any longer," Ciccarelli says. "Given the strain you've seen on the company's financials and the strain on its balance sheet, a lot of people are deciding to walk away from the transaction."

Widlitz says a few Circuit shareholders still back the transaction, but it remains a noggin-scratcher to most observers.

"There are a few shareholders out there that see some sense in this combination, but I think the majority of the sentiment is that this does not make sense," she says. "How do you combine two turnarounds in this environment and make it work? The probability: not so great."

Also See: