City
An Circuit LBO Candidate
Turnaround Management
December 9, 2008
Advisor: Professor Laura Resnikoff
Aaron Baker
Lauren Cassidy
Josh Goodman
Josh Siegel
Erik Ulin
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TABLE OF CONTENTS
Executive Summary ...................................................................................................................................... 3
Circuit City SWOT Analysis ........................................................................................................................ 5
Strengths ................................................................................................................................................... 5
Weaknesses............................................................................................................................................... 5
Opportunities ............................................................................................................................................ 5
Threats ...................................................................................................................................................... 6
Position Statement ........................................................................................................................................ 6
Consumer Electronics ................................................................................................................................... 7
Specialty Retailers .................................................................................................................................... 7
Consumer Electronics Specialty Retailers ........................................................................................... 7
Specialty retailers on the web............................................................................................................... 8
Growth.................................................................................................................................................. 8
Price Competition................................................................................................................................. 8
Private label growth ............................................................................................................................. 9
Private equity firms buying up specialty retailers .................................................................................... 9
The Consumer ............................................................................................................................................. 11
Negative macro-economic trends affecting all consumers ..................................................................... 11
Circuit City History..................................................................................................................................... 12
The early days......................................................................................................................................... 12
The first restructuring ............................................................................................................................. 12
Growth Period......................................................................................................................................... 12
Competition Intensifies........................................................................................................................... 13
The Second Restructuring ...................................................................................................................... 14
The Third Restructuring ......................................................................................................................... 15
Services .............................................................................................................................................. 15
Current State of Affairs .......................................................................................................................... 16
Previous Diversification Efforts.................................................................................................................. 17
CarMax ................................................................................................................................................... 17
Divx Digital Video Express:................................................................................................................ 17
Credit Services........................................................................................................................................ 18
Management................................................................................................................................................ 19
Overview ................................................................................................................................................ 19
Incentive compensation plan .................................................................................................................. 20
Annual bonus program ....................................................................................................................... 21
Long-term incentive Awards .............................................................................................................. 22
Managerial challenges ................................................................................................................................ 23
The right fit? ........................................................................................................................................... 23
Recent management changes .................................................................................................................. 24
Investing in the company ........................................................................................................................ 24
The Competitive Landscape ....................................................................................................................... 26
Best Buy ................................................................................................................................................. 26
Discount Retailers................................................................................................................................... 27
CompUSA .............................................................................................................................................. 28
Niche Players .......................................................................................................................................... 28
The Internet............................................................................................................................................. 28
Financial Analysis....................................................................................................................................... 30
Profitability ............................................................................................................................................. 30
Operations............................................................................................................................................... 30
Leverage ................................................................................................................................................. 30
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Liquidity ................................................................................................................................................. 31
Returns .................................................................................................................................................... 31
Ownership............................................................................................................................................... 31
Industry Analysis ........................................................................................................................................ 32
A Mature Industry .................................................................................................................................. 32
Target Market ......................................................................................................................................... 33
Wal-Mart Effect...................................................................................................................................... 34
Critical Issues at Circuit City ...................................................................................................................... 36
IT-systems .............................................................................................................................................. 36
Lack of Standard Operating Procedures ................................................................................................. 36
Employee Morale ................................................................................................................................... 37
Incentive programs and career development .......................................................................................... 37
Morale among senior managers .............................................................................................................. 38
Location & Store Antiquitation .............................................................................................................. 38
Vendor relations ..................................................................................................................................... 39
Recent developments .............................................................................................................................. 39
Underperforming Stores ..................................................................................................................... 40
Relocation .......................................................................................................................................... 40
Turnaround Plan.......................................................................................................................................... 42
The Turnaround Plan Structure .............................................................................................................. 42
Focus on relocation of existing store base .............................................................................................. 42
Standard Operating Processes, IT System Upgrade, and Employee Training ........................................ 43
Increase private label offering ................................................................................................................ 44
Expand additional services ..................................................................................................................... 44
Improving Customer Experience ............................................................................................................ 44
Divestments ............................................................................................................................................ 45
Problem: Being in the scrutiny of the public markets ............................................................................ 45
Going Private .............................................................................................................................................. 47
Assumptions ........................................................................................................................................... 47
Overview ............................................................................................................................................ 47
Store metrics....................................................................................................................................... 48
Balance sheet items ............................................................................................................................ 52
Capital Expenditure ............................................................................................................................ 53
Purchase price .................................................................................................................................... 53
Debt ratings and interest rates ............................................................................................................ 54
The structure of the LBO ........................................................................................................................ 55
Exit scenario ........................................................................................................................................... 57
Conclusion .............................................................................................................................................. 58
Sources ........................................................................................................................................................ 59
Appendix ..................................................................................................................................................... 62
Management profiles .............................................................................................................................. 62
Retail Industry Takeover Table .............................................................................................................. 65
Historical ratio analysis .......................................................................................................................... 66
Ownership structure................................................................................................................................ 67
Quarterly Schedule By Store Type ......................................................................................................... 68
Quarterly P&L Forecast 2008E - 2015E ................................................................................................ 69
Annual Income Statements 2008-2015 ................................................................................................... 71
Ratio Analysis 2008-2015 ...................................................................................................................... 71
Annual Cash Flows 2008-2015 .............................................................................................................. 72
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EXECUTIVE SUMMARY
Circuit City (CC, the company) grew up during a time of rapid growth in the specialty
retailer; the company found a niche, selling a broad line of consumer electronics at a lower cost,
and expanded within it. Doing so required a strategy well utilized by the specialty retailers of the
time: open enormous superstores in B locations (non-mall locations with lower rent) with a
deeper and wider selection of specialty products (electronics) than the large discounters and
expand geographically as fast as possible to pass along economies of scale to their customers.
However, perhaps because the strategy was so successful and attracted new entrants to the
segment, or perhaps because rapid modernization and maturity of any segment requires massive
change for the existing players, Circuit City has struggled over the past decade. First, the
geographical areas once owned and won by Circuit City are now also occupied by Best Buy
(with better locations) and Wal-Mart (with better prices). Second, the product selection
advantage that once attracted customers and drew them away from the large discounters such as
Wal-Mart and the club stores such as Costco has evaporated as these retailers have moved deeper
into these attractive markets and are able to match Circuit Citys selection and beat them on cost.
Finally, any customer service advantage or enhanced expertise in these areas waned as Best Buy
invested heavily in its shopping experience and customers grew more sophisticated and
increasingly researched online before entering stores. Due to all of these trends, Circuit City has
seen its gross margins erode due to pricing pressures and operating margins fall as its
comparative store sales stagnated over fixed operating costs. A change is needed.
The turnaround plan proposed in this document will help Circuit City compete based on all of
these contextual changes. Major change and restructuring in necessary, and the first step will be
to take CC out of the public eye by attracting private funds through an MBO. Specialty retailers
across the board have struggled lately, making them attractive buyout opportunities. Once free
from Wall Street scrutinizing, Circuit City should work on driving sales and inventory turns
through literally moving its underperforming stores to better locations and improve its customer
service and customer experience to increase loyalty and market share. To drive increased gross
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margins, CC should expand its private label offerings and introduce new high-margin service
offerings in addition to firedog. Finally, not only to improve its cost structure and operating
efficiency but also to improve the experience of both its customer and its employees, CC must
upgrade its IT system, modernize its SOPs, and improve its employee training and compensation
structure.
Circuit City has a strong brand, a national footprint, and relationships with all of the top
consumer electronics vendors. The brand remains as strong as ever but contextual factors have
eaten away at its competitive positioning and change is needed. CC is an attractive target for
buyout firms and has in fact already been rumored to be on the market. At the right price, a
buyout and turnaround as outlined in the following paper will reap excellent returns for the
current shareholders, the buyout firm, CC employees, and customers everywhere.
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CIRCUIT CITY SWOT ANALYSIS
Strengths
Well-known Brand: The company brand name is synonymous with consumer electronic
retailing in the mind of the consumer.
Large Store Footprint: The company has already invested in a store base and the associated
infrastructure (i.e. distribution centers, national advertising relationships, etc.) making it
difficult for a competitor to replicate the concept. Additionally, Circuit Citys store base has
the potential to leverage the right product and solid in-store execution to deliver strong sales.
Established Relationships with Key Suppliers: Manufacturers prefer Circuit City as an ongoing business in order to limit the potential buying power of Best Buy. This is evidenced by
the trade credit extended to Circuit City despite the hardships the company is facing.
Weaknesses
Tarnished Brand: Poor in-store execution has destroyed some of the brands equity over the
past several years.
Not the #1 Retailer for Key Suppliers: Best Buys run-rate sales outpaces Circuit City in
many product categories, thus the manufacturers prefer to provide new and/or unique
product, and higher levels of trade promotions to Best Buy in order to preserve & build the
relationship.
Employee Morale: Employee morale, across all levels of senior management as well as instore employees, has suffered in conjunction with the recent financial difficulties. Seemingly
never ending senior executive turnover, rumors of buy-out, employee firings only to be hired
back at lower base pay levels and inability to compete with Best Buy have lead to a
deteriorated state of employee morale.
Opportunities
Improve store location: The store footprint is now located in retail locations that are not
considered prime locations. This resulted from two issues: 1) past management teams
believed that the brands strength was enough to drive traffic 2) prime retail locations shifted.
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Improving the store locations to more desirable retail locations will help improve traffic.
There is no structural reason why a Circuit City store in the proper location cannot generate
similar financial results as a Best Buy store. Both stores hire approximately the same type of
store employee, carry similar product, work with the same suppliers, sell to similar
customers, and provide similar services.
Differentiate from Best Buy: Circuit City could carve out a section of the store and target
different segments of the market than Best Buys focus. For example, Circuit City could
dedicate a section to female professionals who prefer to view the products in a more lifestyle setting, or could focus on interior designers, similar to Home Depots strategy with
Home Depot Supply.
Threats
Big-box Retailers Focus on Improving In-Store Customer Service: If Wal-Mart and the
other big-box discount retailers focus on improving their employees product knowledge
and selling abilities for consumer electronic products, then Circuit City may lose its
advantages in customer service.
Online Competition: Consumers are becoming increasingly comfortable shopping for
consumer electronic products online. A major push by a new entrant with an online-only
presence may significantly impact Circuit Citys ability to compete.
Best Buy Continues to Widen the Profitability Gap: Best Buy is currently expanding
successfully both in the US and internationally. Its dominance in the consumer electronic
industry may allow it to create a competitive advantage that Circuit City cannot overcome.
POSITION STATEMENT
This report was prepared under the assumed scenario of being consultants to a major private
equity firm analyzing Circuit City as a potential buyout candidate and reporting to the investment
board. The reported financial information is current through Circuit Citys Q2 FY2008.
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CONSUMER ELECTRONICS
Recent new waves of technology and products are flowing into the US market and successfully
attracting consumers; domestic spending on consumer electronics has risen. US consumer
spending on such electronics jumped 13% in 2006 to $145 billion and 2007 has thus far been
strong [1]. However, as is the case with fast-growing and profitable industries, much larger
discounters such as Wal-Mart and warehouse club stores such as Costco have entered the space
and created a price competitive market that have driven down margins for the traditional
specialty retailers, such as Circuit City.
Specialty Retailers
Specialty retailers are defined as those that sell either a single line of inventory (shoes) or a
multitude of closely related items (electronics). Once the dominant form of retailing, specialty
stores faced challenges first by the rise of local general stores and then by department stores and
big-box discounters such as K-Mart and Wal-Mart in the 1950s and especially the 1960s. The
explosion of the shopping mall in the next two decades created space for specialty retailers to
join forces and share customers. As specialty stores grew to national scales, these industries
recognized the ability to take advantages of scale and by the 1980s specialty retailers saw the
growth of specialty superstores specialty stores with huge footprints. The large superstores
tend to have lower cost structures than the smaller retailers and generally are located away from
prime real estate as to keep those costs down and pass the savings onto customers. However,
this characteristic makes it harder to reach and the optimal size can add tremendously to
complexity in both store management and consumer choice during times of product change [2].
Consumer Electronics Specialty Retailers
The consumer electronics space within specialty retailers has evolved in a similar manner. Small
neighborhood general stores exist such as RadioShack. Further, specialty stores that target
subcategories of consumer electronics have grown such as GameStop. Finally, larger superstores
have proliferated such as Best Buy, Circuit City, and CompUSA. However, the big discount
stores and warehouse concepts, as well as specialty stores within stores, have made times very
tough on these more specialized players: Tweeter Home Entertainment Group filed for
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bankruptcy protection June 2007, CompUSA announced in February 2007 that it would close
more than half its stores, RadioShack has closed more than 500 stores since 2006, and clearly
Circuit City has faced problems as price competition increases (more on this later). Best Buy has
insolated itself from these problems through its better store locations and additional revenue
from other services such as its Geek Squad, but still saw its first-quarter profit fall 18% in
2007. Other specialty store segments have faced similar issues.
Specialty retailers on the web
Clearly sales over the internet are of increasing importance to retailers of all sizes; in the first
quarter of 2007 an estimated 3.2% of all retail sales were conducted over the web and that
number is expected to ultimately quadruple in the coming years. Retailers use the web in several
ways: to inform and provide research advice to customers, to purchase products that can then be
shipped or picked up in local stores, or offer new, more niche, product lines with economics that
do not make sense within each store of a national chain. In the coming years, a specialty
retailers ability to win both offline and online, versus what ultimately is a different set of
competitors, will be a big determinant of its success. [3]
Growth
Growth in consumer electronics is historically driven by product cycles. Despite the struggles of
individual retailers, demand for consumer electronics in 2007 remains strong as growth is led by
technical innovation and products such as flat panel TVs, digital music devices and digital
cameras. This growth is offset in part by a slowdown in satellite radio. According to the
Consumer Electronics Association, growth in the segment is expected to be 7% in 2007 and 6%
in 2008, compared to estimated growth of approximately 14% in 2006.[4]
Price Competition
The success of superstore consumer electronics retailers has drawn the attention of the big
discounters and warehouse stores. Wal-Mart has greatly expanded its presence in the product
segment in the last few years and has remodeled its electronics section to match Best Buy and
Circuit City in terms of the range of sophisticated televisions and products offered, but often at
lower prices. As an example, in June 2007 Best Buys price on a 40-inch Samsung LCD
television ($1,800) was almost 20% higher than Wal-Marts price on the same item ($1,476).[5]
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In 2006, Wal-Mart controlled 15% of the consumer electronic retail market and was 2nd only to
Best Buy (25%). Historically, specialty retailers have been successful as they offered a broader
product range and expertise (aka customer service) that was missing from the larger stores and
therefore were able to have pricing power and demand higher product margins that the larger
discounters. However, as Wal-Mart and Costco bulk up their product lines and expertise in these
areas, consumer electronics specialty retailers such as Best Buy and Circuit City will need to
either ramp up their consumer services or create new revenue channels in order to distinguish
themselves and attract consumers. Best Buy has been more successful than its competition in
these areas through its acquisition and subsequent growing of Geek Squad. This trend is retail
industry-wide: PetSmart offers pet services such as grooming and training for revenue and
increased customer loyalty, PetsHotels, Doggy Day Campus, and full-service veterinary hospital
in the majority of its retail stores through a partnership with operator Banfield, The Pet Hospital.
[6]
Private label growth
As original design manufacturers (ODM) and original equipment manufacturers (OEM) take on
more of the design and manufacturing capabilities for the name-brand manufacturers (Sony,
Panasonic, etc), production expertise is expanding and increasing the opportunity for national
retailers to move into high-quality private label products. Consumer electronics retailers are
sourcing television, MP3 players, and other products from low-cost Chinese manufacturers.
Most notably, Best Buy sells products under the Insignia label. In June 2007, Best Buy
offered an Insignia 32-inch LCD flat panel television for $600 versus an LG model of the same
size for $900. Circuit City sells private label under its Nexxtech brand but on a much smaller
scale and does not offer televisions, MP3 players, or any products above a $200 price point. [7]
Private equity firms buying up specialty retailers
Specialty retailers have been seen as particularly attractive to private equity firms over the past
two years, but it is yet to be seen if this situation will continue as credit markets crunch and the
number of attractive targets is reduced. As larger rivals and discount chains drove many retailers
to become troubled, private equity firms have seen opportunity to buy under-priced assets, turn
them around, and reissue stock to the public markets. Also, going private reduces pressure to
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meet public market expectations by reporting comparative same-store sales and quarterly
earnings during periods of restructuring or major turnaround efforts. The list of specialty
retailers acquired by private equity in the last 24 months ranges from the biggest deal, Toys R
Us for $6.6 billion in 2005, to teen accessories provider Claires Stores for $3.1 billion, to
Limited Brands, Petco, Davids Bridal, Michaels Stores, The Sports Authority, Burlington Coat
Factory, and finally Guitar Center. Rumored targets in the consumer electronics retail segment
include troubled companies RadioShack and Circuit City. [8]
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THE CONSUMER
Retail sales are approximately 41% of national GDP [9], and therefore as the consumer goes so
goes the economy and retailers in particular those selling primarily non-essential goods such as
specialty retailers and consumer electronics retailers. Unfortunately for these businesses in 2007,
the news and trends related to consumer spending are almost uniformly negative as the macroeconomy dips, with possibly the only positive being the recent interest rate cuts by the Federal
Reserve.
Negative macro-economic trends affecting all consumers
Almost all forward indicators of consumer spending are trending in a negative direction: labor
and wage growth, housing turnover and home pricing, weakening consumer confidence, tighter
credit, and shrinking consumer debt capacity. Falling housing prices and the broader tightening
of credit has pushed many consumers towards using credit cards (rising usage) to find capacity to
make purchases of all sizes and level of essentiality. Unfortunately for retailers, credit card
lending standards are now tightening which could hurt consumer spending. Savings rates are
near all-time lows and leverage is near all-time highs. Debt cycles are closely related to retail
sales; when consumers are in the process of paying down debt they spend less in general and in
particular on non-essential purchases. One measure for this cycle is the consumer debt-to-GDP
ratio which currently sits at 97%, up from 83% in Q203 and 60% in the early 1990s. Declining
rates on credit outside of home loans should help consumer spending, but this remains one of the
few true pieces of good news. [10]
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CIRCUIT CITY HISTORY
The early days
Circuit City traces its history back to 1949 when it was founded by Samuel S. Wurtzel in
Richmond, VA to capitalize on the expected growth in television adoption following the
broadcasting of the first southern television station. Wurtzels intuition was accurate; the
business quickly grew into a 4 store chain and further accelerated its growth through product
category expansion and acquisition.
The first restructuring
The rapid growth increasingly pressured the business model and in 1972, under new
management led by Alan Wurtzel, the company initiated its first restructuring. The company
divested underperforming stores, exited unprofitable product lines, trimmed headcount, and
redefined its go-to-market strategy. The superstore concept emerged from the new strategy and
in 1975 Circuit City opened its first superstore. This was more of a Las Vegas gamble than a
business investment as the company risked half its net worth to open the $2 million electronics
superstore with over 32,000 square feet. This large store format revolutionized consumer
electronic retailing and, arguably, the retail industry as a whole. The stores high volume allowed
the company to offer more competitive price points and significantly grow market share. Circuit
City established a competitive advantage through economies of scale.
Growth Period
The superstore strategy allowed Circuit City to dominate the marketplace. Smaller stores could
not compete with Circuit Citys prices, level of service or advertising spend. As volumes
continued to swell Circuit Citys economies of scale accelerated, further separating Circuit City
from its competitors. In 1984, the company listed its stock on the American Stock Exchange and
announced a change in leadership to Richard Sharp. At this time the company operated 113
stores, making it the leading consumer electronics retailer. The proceeds from the IPO were
earmarked for geographic expansion and conversion of existing stores to superstores. By 1987
the company achieved $1 billion in annual sales and doubled this to $2 billion by 1990 driven by
growth in cordless phones, microwave ovens, and VCRs. These results were particularly
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impressive because the consumer electronics industry suffered a recession during this period.
Strong results were attributed to a solid management team and a well-designed merchandising
formula.
Competition Intensifies
The 1990s proved a more difficult decade for Circuit City. While the first half of the decade was
marked by strong growth, the second half was marked by notable competition. Best Buy had
expanded into almost 50% of Circuit Citys markets, and analysts classified 70% of the markets
as highly competitive. While the business models differed, Circuit City focused on the hard-sale
approach with commissioned salespeople, whereas Best Buy offered a help-yourself model.
Finally, prices proved a key lever for gaining market share. Amidst the increased competitive
marketplace that earmarked this era, Circuit City became distracted and management diverted
attention away from the core electronics business (discussed later in CarMax and Divx), further
exasperating the situation. Moreover, not only did Circuit City face competition from Best Buy
in consumer electronics, but in the late 1990s and early 2000s, Home Depot and Lowes entered
the appliance business. As a result, Circuit City made the decision to exit the consumer appliance
space and focus solely on consumer electronics, increasing its exposure to such product offerings
as televisions, digital cameras, DVD players, digital camcorders, MP3 players, home theatre
systems, and car stereo equipment. Appliances represented 14% of Circuit Citys overall sales at
the time. However, this allowed for cost savings through closure of distribution centers as well as
reduction in workforce. [11]
Instead of directing its efforts on fixing the core business, Circuit Citys management continued
to focus on multiple retail concepts. This is apparent when you view the FY2000 Annual Report.
[12] The report is titled Making It Easier. Managements believes the key to success centers
around exporting its self-proclaimed competitive advantage in customer service to multiple retail
platforms. In stark contrast, the Best Buy FY2000 annual report is titled Wow. Another
Exciting Year, and highlights market share gains, new store opportunities, etc. [13] It is clear
that Circuit City management had become distracted from the competitive environment while its
main competitor was intensely focused on growing its business.
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The Second Restructuring
In 2000, the CEO was replaced by Alan McCollough, who was promoted from president and
COO. He began a 3 year, $1.2 billion overhaul of the 570 stores. He boosted the DVD, video
game, and digital camera product offerings, remodeled the store format reducing the square
footage dedicated to in-store warehouse, and overhauled the customer experience by replacing
the commissioned sales-force with hourly employees. In connection with these moves, the
company closed 6 distribution centers and laid-off more than 1,000 employees. Given the
competitive environment, these initiatives helped to relieve the problems in the core business.
In the FY2001 annual report, it becomes clear that the new management teams thought process
was in the correct direction, but their plan of action was severely limited in details. For example,
in the letter management focus is on, further tightening inventory managementapply six
sigmaleverage longstanding information systems advances. While these are all valid
initiatives, they are meaningless without a concrete, tactical plan to implement them, especially
considering that management acknowledges that, 2002 will be a challenging year with an
unpredictable sales and earnings climate. To counter this challenging environment,
managements intended to, make decisions that undergird our longer-term financial
performance. We must remain focused on our customers and continue taking steps to stay
competitive and up-to date with consumer preferences. We must analyze all our processes to
ensure all activity is productive. While verbose, these statements lacked specific initiatives to
turnaround the core business at Circuit City. Additionally, FY2001 saw significant turnover
within the leadership team at Circuit City. There was a new EVP Merchandising, SVP Store
Innovation and Development, VP Strategic Planning, and SVP Marketing. [14]
The pace of decline in profitability decelerated and then profit turned positive for the next
several years. Managements focus on profitable segments and disposition of less profitable
segments clearly yielded positive results. This served as a positive feedback loop and
management maintained its focus on the remaining operations and on delivering a superior
customer shopping experience. Unfortunately, Circuit City had not acted soon enough. Despite
the growth in profitability, Circuit City was continuing to lose share to Best Buy on premium
products and Wal-Mart and other big-box retailers on standard products. In hindsight, it is clear
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that Circuit Citys improved performance can be attributed to a strong product cycle (notebook
computers, flat screen TVs), which sold at higher price points than the current product mix, not
from superior strategic execution. As flat panel TV prices eroded, Circuit City imploded. This
sparked the call for a change of management.
The Third Restructuring
In FY2007, Phil Schoonover replaced Alan McCollough as CEO of Circuit City. In the FY2007
annual report, it is clear that Circuit City is under new leadership. Instead of pages and pages of
colorful pictures highlighting the shopping experience at Circuit City (as has been shown in the
FY2004-2006 annual reports), Schoonover highlights the newest growth initiative, firedog, a
service offering that competes with the rapidly growing Geek Squad offering at Best Buy. Then,
Schoonover details the challenges facing Circuit City in each of its major product categories and
lays out an explanation of how to resolve those issues. [15]
Services
This is one area of diversification that has been profitable for the company as it complements the
core business. Ranging from personal computer fixes, to theater entertainment installations, to
media integrations, to warranties, services, including point of sale associated services, are key
due to the inflated profit margin that Circuit City garners as compared with the electronic
hardware themselves. At home, in a Circuit Store, and online, firedog associates are available
for help 24 hours a day, 365 days a year. Further, services retain different price points based on
the service delivery medium. In order to reduce labor costs and encourage consumers to allow
firedog technicians to repair computers by taking remote control, the online service repair option
is the most cost effective for consumers, followed by the in-store drop off model with the athome fix being the most expensive. In addition, Firedog has gained the advantage of being
eligible for reimbursement from electronic manufacturers for repair services rendered covered by
manufacturer warranties. As a result, a consumer that purchases a Hewlett Packard personal
computer, for example, can bring the computer for free repair to firedog; HP then compensates
firedog for the repair service. An additional advantage is the combination of services that
Firedog can offer, such as flat panel TV wall installation and a warranty. In this situation, when
a consumer makes the significant purchase of a flat panel display and chooses to install it on the
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wall, he wants to make sure it will hold. The nuts and bolts of the fitting installation can be a
technical procedure and if not performed properly, the fragile TV can fall and break. However, a
Firedog installation comes with a warranty. So not only are consumers paying for the
installation itself, but for the guarantee that it will hold. An educated sales staff is required to
push point of sale services. In Circuit Citys glory days, the commissioned sales staff selling
associated warranties was a key to profitability. The migration away from a commission based
compensation structure for sales along with reduced investment in employee training has
depleted Circuit City margins and facilitated the bottom line decline.
Current State of Affairs
Circuit City is a serial restructurer. The first restructuring resulted from strong growth pressuring
the business model, the second restructuring resulted from managerial distraction, and the third
restructuring resulted from competitive threats. It is clear that the employees of Circuit City
across all levels of the organization need a solid plan of reorganization that they can believe in
and a management team that is clearly committed to seeing the plan through. Many employees
within all ranks of the Circuit City organization have heard numerous attempts and/or rumors of
a private equity buyout (Highfields actual offer in 2005 and rumors started again in 2007). The
media around Circuit City continues to be negative and speak only of the market share losses to
Best Buy and the big box retailers. This has created an unstable employee base that has been
laid-off at high wages, only to be offered their job back at a lower wage. With the high level of
uncertainty facing the future business prospects at Circuit City, we are convinced morale is low
even in the corporate suite and would not be surprised to hear about top management
resignations in the near future.
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PREVIOUS DIVERSIFICATION EFFORTS
The previous diversification efforts Circuit City pursued, although profitable in some cases,
distracted managements attention away from the core consumer electronics business. During
the growth years of the industry when investment in core competencies was critical to future
success, Circuit City instead focused on alternative businesses. Comparatively, Best Buy
invested in prime locations, store design, and customer experience and ultimately surpassed
Circuit City to become the leading consumer electronics retailer.
CarMax
In the mid 90s, Circuit City searched for business ventures where it could expound on its retail
history of success and superior reputation. The used auto business presented a fragmented
market with unsatisfied consumers, similar to the consumer electronics market years prior.
Circuit City believed its managerial skills could be carried over as a recipe for success. The
leaders eventually chose used car retailing services and launched CarMax. CarMax was
promoted as a no hassle way of both selling and buying used vehicles, including providing credit
to qualified buyers. CarMax grew to sales of $304 Million in 1995. In 1997, Circuit City
established it as its own legal entity and made an initial public offering, raising in excess of $400
million and relinquishing a small portion (less than 25%) of the company. The entity used this
capital to aggressively expand, turning its first, albeit small, profit in the year 2000. CarMax
continued to grow its bottom line and eventually spun off from its parent in 2002 for $140
million and became its own corporate entity distinct from its Circuit City parent. [16]
Divx Digital Video Express:
First there was VHS vs. Beta, then DVD vs. Divx, now it is Blu-Ray vs. HD DVD. In 1975
Sony came out with the Betamax video standard. A year later, JVC introduced VHS sparking
the first movie standard format war. Through superior marketing techniques, including licensing
agreements with movie studios, reduced player manufacturing costs, and consumer perception of
tape-time length, VHS emerged as the winner [17]. In the mid 90s a similar format war was
played out as analog video cassettes transition to a digital standard. Specifically, this war was
between Divx (Digital Video Express) and DVD (Digital Video Disc). Unfortunately, Circuit
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City strongly backed Divx and came out on the wrong side of digital format national expansion.
By 1999, Circuit City had invested approximately $207 million in Divx operations and owned
75% of the partnership. However problems persisted including consumer rejection of the format
due to the manner in which a viewing time window was imposed on the movie disc and
difficulties finding a phone jack near the television, opposition of many retailers to the Divx
format, licensing problems, and increased prices on Divx players and the Divx format was
abandoned by Circuit City in late 1999 [18]. Today, another format war is erupting as the
transition to high definition ensues. This time, it is between Blu-Ray and HD DVD. Current
projections for the end of 2007 put the number of U.S. households with Blu-Ray players at
400,000 and HD DVD players at 600,000. However, the movie sales in the Blu-Ray format are
higher. Increased pricing pressures from these stores in local markets currently project sales of
Blu-Ray to double that of HD DVD at $186 million for the former as opposed to $90 million for
the latter. Again retailers and movie studios are caught in the middle. Recently Wal-Mart
lowered the price of an HD DVD player below the $100 mark and sales exploded. [19] This
move forced Circuit City to lower its price. Blu-Ray players are more expensive to manufacture
and if history repeats itself, the bet should be placed on the format whose player is cheaper to
make.
Credit Services
Through the 1990 fiscal year Barclays provided consumers with store credit. Specifically,
Barclays provided credit for 20% of store sales in 1990. 1990 proved to be a difficult year for
Circuit City because rising interest rates indicative of a general economic tightening reduced
consumer demand. Further, Barclays tightened credit policies dampening customers access to
credit. As a result, Circuit City began looking for another credit supplier and decided to launch
its own private label credit card services to replace Barclays as part of a wholly owned
subsidiary, First North American National Bank. In 2003, Circuit Citys move to rid itself of all
non-core operations forced the sale of its financial services group to Fleet Boston Financial
Corporation and Banc One Corporation [20].
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MANAGEMENT
Overview
Circuit City is led by Mr. Phil Schoonover, who joined the company as executive vice president
and chief merchandising officer in 2004 from Best Buy. He was named president in February
2005, elected to the board of directors in December 2005 and named chief executive officer in
March 2006. Before joining the company, Schoonover was executive vice president customer
segments at Best Buy Co. Mr. Schoonover brought with him several people with experience
from Best Buy as this was clearly the business model Circuit City had to adopt to gain strength in
the market place. Apart from Mr. Schoonover, other key executives with experience from Best
Buy include (for a complete overview of senior management, please see appendix):
SVP Multi-Channel Sales, Ronald G. Cuthbertson
Mr. Cuthbertson joined the company in March 2005 as senior vice president, supply
chain and inventory management. Before joining the company, he was president and
chief executive officer of Southport Consulting, Inc., a management consulting company.
Prior to his role at Southport Consulting, he was employed at Best Buy Co., Inc. from
1999 to 2004 and served in numerous roles including enterprise vice president, with
concurrent roles of vice president Best Buy International and vice president global
sourcing, as well as executive vice president, merchandising, marketing and supply chain
at Best Buy Canada Ltd.
SVP Merchandise Manager for Entertainment, Irynne Mackay
Ms. MacKay joined the company in December 2006. Before joining the company, she
served as managing director of Infinitive, Inc., a management consulting firm based in
the Washington, D.C. area, for two years. During that time, Ms. MacKay led the team
assisting Circuit City with its merchandising transformation. Prior to joining Infinitive in
2004, she was a senior director at Best Buy Co., Inc. At Best Buy, she worked on new
business development and customer centricity. Before joining Best Buy, Ms. MacKay
worked for nine years at Accenture, a global management consulting, technology services
and outsourcing company, on large scale retail transformation projects.
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SVP Retail Operations, Marshall Whaling
Mr. Whaling joined the company in May 2006 as senior vice president, retail operations.
Prior to joining the company, Mr. Whaling was senior vice president of sales and
operations for the business-to-business division at Best Buy Co., Inc. He joined Best Buy
in 1997 and served as vice president of retail operations and as regional vice president
and district manager. Before joining Best Buy, he worked for American of Madison, Inc.
for more than twenty years, last serving as senior vice president of stores.
Head of TV Merchandise, Randy Wick
Before joining the Circuit City, Mr Wick served as executive vice president of Petters
Group Worldwide, an independent operating company that specializes in brand
marketing. Prior to joining Petters Group Worldwide in 2004, he was vice president of
retail strategies at Best Buy Co., Inc. from 2002 to 2004. He joined Best Buy in 1996 and
served as merchandising manager from 1996 to 2001 and as vice president of
merchandise from 2001 to 2002.
Mr. Schoonover and the team from Best Buy were brought on board to try to turn around Circuit
City, which by 2004 had hit hard times by the entrance of the low cost retailers and the
formidable performance by Best Buy.
Incentive compensation plan
An important part of attracting and retaining talent such as Mr. Schoonover and his team is the
executive compensation plan. At Circuit City, the incentive compensation plan for senior
executives is built on a philosophy of trying to align compensation with the interests of the
company shareholders, attract and retain talent as well as drive performance. To this end, the
compensation committee of the board has devised a compensation structure which consists of
three main components:
Base salary
Annual performance-based bonus
Long-term incentive Awards.
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The compensation plan was developed together with a consulting firm that took into account the
compensation practices at other retail companies, including Best Buy, Home Depot, etc. The
goal for the compensation package is targeted at the 50th percentile range in terms of its
competitors [21]. The components of the compensation program itself are not very surprising,
since these are quite standard for any top level executive compensation. What is of interest to
analyze and understand is the basis for the various bonus and incentive plans as well as any
perquisites that may come off as overly lavish.
Annual bonus program
The target percentage of base salary for payment of the annual performance based bonus
increases from 60% for senior vice presidents to 80% for executive vice presidents and 100% for
the chief executive officer. As is clear, there is quite substantial variability in the pay level
depending on the achieved earnings per share. What is interesting in this respect is not the
variability itself, but the basis for the performance goals each year. As is stated in the 2006
Proxy Statement to the 10K:
Each year the Committee considers the Companys prior years performance, as well as
operational plans and budgets for the coming year. Based on these considerations, the
Committee sets an earnings per share performance goal. Actual payout may range from 0
percent to 200 percent of the annual incentive opportunity, depending on achievement of
specified earnings per share targets, with payments increasing as Company performance
improves. [22]
The annual bonus program is therefore dependent on the historical achievement of the company
as well as some forward-looking analysis as to potential for the company in the given industry
environment. A classic criticism to a bonus which is based on earnings per share measures is
that it is possible to tweak earnings in a given year by various accounting measures. With a
sinister outlook on managerial integrity, this could mean that the EPS number for a certain time
period may not necessarily be indicative of the operating performance of the firm but rather of
the financial savvy of its management. In any case, one can question the validity of employing a
measure which uses history as a benchmark for future performance. In the case of Circuit City,
it puts fairly low threshold levels, as the company has been performing poorly over the past few
years.
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Cynicism aside, the board decided to not award an annual bonus to any of the top executives in
the company for fiscal year 2007, as the targets for EPS were not met. This must be seen as a
positive as the company at least follows through with its commitment to its principles.
Long-term incentive Awards
The long-term incentive program includes awards of stock options and time-restricted vesting
programs. The vesting program is a four-year program based on achieving certain operating
margins (see table below).
Operating Profit Margin
Acceleration of shares
2.3%
25% of shares vest
3.25%
4.0%
4.5%
50% of shares vest
75% of shares vest
100% of shares vest
Analyzing the trends for the companys operating margin over the past ten years, it is clear that
these are levels at which the company has not been for a long period of time. The company has
been close to reaching the lowest vesting level and should be able to reach this level again,
making it a realistic performance target. One can always question how low the lowest threshold
should be and how much should be allowed to be vested at that time, but at least the performance
levels seem reasonable. Additionally, much of the earnings potential of each of the senior
officers is tied up in the vesting program, which should account for a good incentive program.
Vesting schedule vs Operating Margins
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1998
1999
2000
Operating margin
2001
2002
25% vesting
2003
2004
50% vesting
2005
2006
2007
75% vesting
Figure 1. Vesting Schedule versus historical operating margins FY1998-2007.
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MANAGERIAL CHALLENGES
Given the radical changes that have hit the consumer electronics markets the past few years,
(falling prices, online competitors, etc.) being in charge of turning around Circuit City is no easy
task. Additionally, given the troubling past of the company, the new management was faced
with what can best be described as a mess. As the company is facing challenges to catch up with
Best Buy and adopt a similar model of operations, it is fitting that many of its key senior
managers have an extensive background from that company, beginning with CEO Phil
Schoonover. Having an inside perspective of the practices and philosophy within the formidable
competitor, will help as Circuit City struggles to reinvigorate its business.
The right fit?
However, as Circuit City is in a situation where it must turn around its business, it is important to
analyze whether senior management has the requisite skills and experience to actually be able to
turn the ship. Mr. Schoonover himself was at Best Buy when it carried its turnaround efforts, but
not as the CEO. To be the CEO in a turnaround situation may require a different skill set. In this
situation, analysts do seem to have confidence in Mr. Schoonovers abilities to run the company
and turn it into a more profitable venture. We do feel that, although the management team does
have some strong individual competencies, it would be valuable to bring on someone with first
hand experience of turning around a retail business. It does not seem to be meaningful to just
focus on Best Buy experience (which seems to have been the key recruitment factor so far), but
rather bring in a different perspective and experience which might help management further
develop its action plan going forward.
Regardless of whether additional management power is added, Mr. Schoonovers main
challenges in terms of management seem to be the following:
Stemming the loss of senior management in the past nine months, several key senior
managers have left the company for outside opportunities
Reinstating morale at all levels of the company sources indicate that morale is at an alltime low at all levels in the company, including HQ.
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Recent management changes
In the past quarters, the company has gone through some significant changes in senior
management. Key persons have left the company, including:
CFO, Mike Foss
Mr. Foss left Circuit City for the position of CFO at PetCo in Phoenix, Arizona. Sources
indicate that he was offered a very generous package at PetCo, which together with the
situation at CC must have made the decision easy. Mr. Foss held high regard with
analysts, so the leave is a considerable setback for the company. Mr. Foss announced his
departure during the spring of 2007, giving the company time to find his replacement,
Mr. Bruce Besanko (see profile below).
SVP, CC Direct and Head of merchandising, Dave Matthews
Mr. Mathews joined Circuit City in 2005 after stints at Crutchfield Corp. and L.L. Bean
Inc. He was recently named president of Orchard Brands, a $1.1 billion in annual
revenue, Beverly, Mass., direct-marketing company controlled by private-equity firm
Golden Gate Capital. The company has yet to recruit a replacement for Mr. Mathews,
and until such time his duties are filled by CEO Paul Schoonover.
SVP Consumer Electronics Merchandise, Randy Wick
Mr Wick left Circuit City in November 2007 for a position at Office Depot.
It is worrying to see these leaves at the senior management levels as many of these were brought
on with the specific goal to turn around the company. All management leaves seem to have been
for appealing opportunities, but the tendency brings to question the realism of Phil Schoonover
pulling through this turnaround. In order to succeed, he needs to be able to rally the whole
company around the cause and senior management is crucial. At the same time, this might be an
opportunity to bring on a senior manager with experience of bad times management from
another retailer.
Investing in the company
In the case of Circuit City, the combined ownership (including stock options) of the executive
officers and the board of directors amounts to 1.8% of total shares outstanding. The same figure
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for Best Buy is 17%, but the main difference lies in the fact that the founder is the Chairman and
holds 15% of total shares outstanding [23]. Taking this into account, the differences between the
two is not formidable. However, in a turnaround situation, one important signal to the market
and employees as to the commitment of senior management and the board of directors in the
company and its performance is stock ownership. One example of a public statement of
commitment was when the current CEO of LM Ericsson, Mr Carl-Henrik Svanberg, upon
accepting the position, made a personal investment of roughly $20MM. [24] At the time (early
2003), Ericsson stock was severely depressed and the new CEO was seen as a savior of the
company. He had the good fortunes of already having become wealthy through a similar type of
public investment in his previous employer, Assa Abloy. Mr. Svanberg did get significant public
recognition for putting his money where his mouth is and committing to reshaping the
company. This has been a good investment for Mr. Svanberg personally and for the company, as
the stock has appreciated significantly from this point in time.1 Naturally, not all CEOs have
$20MM to spend on purchasing stock, but it would be desirable to see top executives take on
some personal financial risk in the company, thus signaling to the market and not the least to its
employees that this is a company they believe in and will turn around.
1
Lately (the past quarter), Ericsson has missed some earnings estimates, which has sent stock prices down and
raised criticism of Mr Svanberg, but the issue of public commitment to company performance is still valid.
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THE COMPETITIVE LANDSCAPE
The competition in the consumer electronics industry has been dominated by the long and rich
saga of Circuit City vs. best Buy. Beginning in the early 90s, competition Best Buy forced
Circuit City to find new ways to drive sales growth and maintain market share as price wars in
selected product categories erupted. During this time-frame, Circuit City differentiated itself on
a basis of outstanding customer service, with an educated sales staff securing hard-sell sales as
well as sales of attachment services such as warranties [25]. Key to the superior customer service
strategy was the commission based pay structure for the sales staff. Associates were incentivized
to actively land sales with customers both on the products themselves and on the associated
services. In contrast, Best Buy operated under the help yourself model with an open store
approach where a high percentage of the merchandise was available for the shopper to pick off of
the shelves and where there was very little customer service [26]. Competition on price was
never far from the battleground as Circuit City continued to match competitor low prices, offer
promotions, and advertise to maintain customers. Through the late 90s and early 00s, however,
Circuit City consistently lost market share to Best Buy [27]. Circuit City eventually sold its soul
to the Devil, abandoned its policy of superior customer service, and adopted the Best Buy
model of a more open store with merchandise on the shelves and reserved a lesser percentage of
floor space for inventory storage. The reorganization of each individual stores footprint took
time and money and hurt same store sales figures. To finally expel the superior customer service
previously associated with Circuit City, 3,900 commissioned sales associates were relieved of
their duties and replaced by new, hourly wage employees. This drastically hurt sales of
attachment services, something Circuit City is still attempting to rebound from [28]. Today, Best
Buy is the most preferred consumer electronics store overall with a market share of 51% while
Circuit City commands a 17% market share, although both shares are declining due to the rise of
the discount retailers in the electronic space. Inclusive of discount retailers, Best Buy maintains
a 25% share in the Unites States, Wal-Mart a 15% share with Circuit City coming in third at 9%
[29].
Best Buy
Best Buy is the leading consumer electronics specialty retailer as measured by gross revenue in
the market today. The large chain operates 870 stores, with 822 in the United States, 47 in
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Canada, and 1 in China totaling over 1.2 million square feet. In addition, Best Buy operates
Magnolia Audio Video, Pacific Sales, Geek Squad, Future Stop and Five-Star stores worldwide.
Best Buy comprises the high-end of the consumer electronics market with product offerings such
as televisions, digital cameras, DVD players, digital camcorders, MP3 players, home theatre
systems, car stereo equipment, personal computers, telephones, home-networking equipment
DVD movies, video game hardware and software, CDs and computer software, and vacuum
cleaners and other household appliances. For FY07 a total of 45% of Best Buy revenue came
from consumer electronics, 30% from home-office products, 18% percent from entertainment
media and the remaining 7% from appliances [30].
Discount Retailers
In the beginning when flat panel televisions were brought to the consumer, electronics retailers
experienced very strong margins. However, as the barriers to entry to this market are nonexistent, discount retailers decided to compete to obtain their share of the profits from TV sales.
The combination of discount retailers market power with suppliers and the overcapacity of flat
panel TVs in the market driven by steep declines in manufacturing costs significantly deflated
prices. The flat panel TV story is not unique as discount retailers have entered the consumer
electronics market in full force, further complicating Circuit Citys problems. Moreover, even
high-income shoppers are increasingly heading to discount retailers such as Wal-Mart, Costco
and BJs as opposed to big-box consumer electronic stores such as Circuit City and Best Buy
[31]. The aforementioned market power of discount retailers such as Wal-Mart is a significant
threat to Circuit Citys future profitability. The cost structure of these retailers is superior as
compared with that of Circuit City as they can remain profitable despite significantly reduced
prices. In fact, discount retailers utilize consumer electronics in some instances as loss-leaders
through large promotional campaigns to bring customers to the store and cross-sell them on the
other merchandising genres that are more profitable. Although discount retailers can effectively
compete on operation efficiencies, they cannot compete on a platform of superior customer
service.
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CompUSA
CompUSA is another competitor in the consumer electronics space and is also struggling to
outline a differentiated strategy to position itself to compete in the increasingly competitive
market. The Dallas-based CompUSA is closing 126 stores in light of the price erosion in the
consumer electronics market. CompUSA is focusing more on technology enthusiasts and
educated professional that it designates as its core customer, leaving the price sensitive consumer
for the competition. CompUSA is also focusing on the small and medium-size business
customer segments embarking on a campaign to educate business owners about product offerings
through in-store seminars. Finally, CompUSA is improving customer service as it invests in
employee training and certification programs [32].
Niche Players
Other smaller, niche players such as Radio Shack also exist as competitors in the consumer
electronics market. However, Radio Shack adopted a different strategy as it is primarily focused
on private label merchandise. Radio Shack and others in the private label electronics business
often operated in mall-type settings where the store size is much smaller than big box retailers.
These smaller niche players did not sell branded merchandise and therefore sold substitution
products as opposed to competitive ones.
The Internet
Circuit City maintains an e-commerce website where consumers can buy products online.
Further, these products can be returned at any Circuit City location, offering a competitive
advantage over other internet-only retailers. However the electronic commerce industry has
significantly hurt Circuit City sales. E-commerce only retailers, such as Amazon.com, have no
store locations to contribute to fixed costs and can effectively compete with superior operational
efficiency. Further, the internet allows supremely price sensitive consumers to access large
amount of information in a relatively short amount of time. Customers are using Circuit City instore displays to get a physical look at electronic products, and are then going home to the
internet to purchase the product for the lowest price achievable. This practice, called free
riding is increasingly negative effect on circuit city through sales and market share erosion.
However, help for Circuit City in combating the free riding practice of low-cost competitors may
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be on the way via the courts. A recent Supreme Court ruling in the Leegin vs. PSKS case now
allows manufacturers to set a minimum price for goods, removing the effects of excess
discounting and brand erosion [33]. In doing this, the courts acknowledged that retail services
create demand for products that free riders then capture through pricing policies. Although the
consumer electronics manufacturers have not yet begun to move in this direction, because the
vertical minimum price fixing decision lies in the hands of the manufacturer and not the retailer,
the option is there and some may move in the near future to protect margins for retail partners
and prevent brand erosion [34].
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FINANCIAL ANALYSIS
We examined Circuit Citys financial statements over the last five years through five lenses:
profitability, activities, leverage, liquidity, and other measures.
Profitability
For profitability, we examined cost of goods sold, gross profit, operating expenses, and operating
income (EBIT) as a percentage of sales as well as the interest burden and effective tax rate. As a
percentage of sales, COGS rose 70 basis points in 2004 to a peak of 76.6%, declined in 2005 to
75.5%, was nearly flat in 2006, and rose again in 2007 to 76.4%. Gross profit margins did the
opposite, bottoming out in 2004 at 23.4% and dipping again in 2007 to 23.6%. Operating
expenses as a percent of sales have remained in the range of 20.5% to 21.9% over the last five
years and were 21.0% in 2007. Operating profit margins improved between 2003 and 2006 from
0.4% to 2.1%, respectively, but fell again to 1.2% in 2007. The interest burden peaked in 2004
at 8.3% of EBIT, but was wiped out in 2007 when debt was taken off the books. The tax rate has
ranged from 4% to 42% over the last five years. Overall, profitability results have been mixed
and more volatile due to leverage.
Operations
To measure operations, we examined Circuit Citys cash to sales ratio, accounts receivable and
inventory days on hand, and net fixed asset turnover. We found that Circuit City held relatively
less cash on its books in 2007, just 1.5% of sales, than in 2003, when cash on the balance sheet
measured 8.8% of sales. Accounts receivable and inventory days-on-hand both peaked in 2004,
at 22 and 73 days, and declined to 13 and 63 days in 2007, respectively.
Leverage
To measure leverage, we looked at liabilities to assets, debt to capital, interest times earned, and
accrued expenses to sales. Liabilities to assets increased every year from 2003 to 2007 from
38% to 62%. Debt to capital rose from 10.8% in 2003 to 40.4% in 2006 before being paid off in
2007. Times interest earned fell to a low of 12x in 2004 before recovering. Accrued expenses as
a percent of sales rose from 1.1% in 2003 to 6.1% in 2007.
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Liquidity
For liquidity, we looked at the current and quick ratios. The current ratio fell from 2.4x to 1.4x
between 2003 and 2007 as current liabilities rose faster than current assets. The quick ratio,
which does not take inventories into account, fell every year between 2003 and 2007 from 1.3x
to 0.4x. We also looked at alternative performance measures.
Returns
Bringing all of the metrics together, we calculated return as a function of profitability (net profit
margins), activity (asset turnover), and leverage. Profitability results have been mixed, turnover
has improved, leverage has increased, and overall return has increased from -0.2% in 2003 to
7.5% in 2006 and 5.0% in 2007 (see ratio analysis in appendix for more details).
Ownership
Insider and Institutional ownership is 0.3% and 100.5% of shares outstanding, respectively. Of
the 169 million shares outstanding, 30.9 million shares are short or 18.3%, which is a high
percentage. This compares to Best Buys (BBY) insider and institutional ownership of 38.6%
and 58.8% of shares outstanding, respectively. Of the 418 million shares outstanding, 65 million
are short or 15.5%. The low level of insider ownership at Circuit City greatly concerns us, and
we recommend an employee profit sharing plan as part of our proposal (see appendix for detailed
ownership structure)
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INDUSTRY ANALYSIS
A Mature Industry
Examination of the US consumer electronics retailing industry shows that the industry has likely
peaked and is in the maturity phase.
Competition has significantly intensified
Small number of large companies dominate
Industry store opening plans have decelerated from peak levels
Growth opportunities are mostly seen outside the US marketplace [35]
This interpretation of the market environment leads to the conclusion that Circuit City must
either significantly invest in its business to become the industry leader, accept a position as the
industry follower, or exit the industry. Best Buy established competitive advantages within the
premium segment through years of investment in aligning store design, location, merchandise,
and customer experience to the needs of the customer. In addition, vendors have partnered with
Best Buy to deliver unique products that further differentiate Best Buys offering. Wal-Mart has
a clear competitive advantage on costs within the price-sensitive segment.
Strategic Direction Must Aign with Industry Life-Cycle
G
r
o
w
t
h
Industry
beginning to
develop; Mostly
Mom & Pop
Retailers; CC
growing
organically as a
regional player
Introduction
Phase
Industry
growing
rapidly; CC
consolidating
industry with
superstore
concept and
becoming
national
chain;
Competition
from BBY
growing
Early
Growth
Phase
Competition
significantly
intensifies; BBY
growing, HD
growing
appliance bus;
W MT taking
share at lowend
CC Faces 3 Strategic Choices:
Become Leader
Accept 2nd Place
Exit Industry
Current
Industry Phase
Late
Growth
Phase
Maturity
Phase
Time
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Target Market
Within a mature industry market segmentation is critical. One of the reasons underlying Circuit
Citys deteriorating performance has been that its value proposition was not clearly defined and
did not resonate within the marketplace. Circuit Citys offering was, to borrow a term from
tennis, in the no mans land. Price points and the product offering were neither premium nor
low cost. Circuit City needs to define a target market and hone its customer offering to provide a
value proposition to that segment to drive customers into the store and retain them long-term.
The improvement in customer lifetime value increases significantly with improvements in
retention rate, as shown in the table below. We have shown the effect across multiple discount
rates to emphasize that the effect remains significant across any assumed discount rate.
Improving Retention Rate Significantly Increases CLV
Retention Rate
50%
60%
70%
80%
90%
Discount Rate
8%
10%
12%
14%
-----46%
45%
44%
43%
42%
118% 114% 110% 107%
104%
245% 231% 220% 210%
201%
530% 480% 440% 407%
380%
Improvement over 50% Retention Rate
6%
The market for consumer electronic retailing can be segmented numerous ways. The first is by
willingness to pay. Here we find that there are essentially three segments: premium, value, and
price-sensitive. The premium segment is dominated by Best Buy and the price-sensitive segment
is dominated by Wal-Mart. The value segment has gravitated toward Wal-Mart because Circuit
City and other retailers (CompUSA, Tweeter, etc.) did not clearly define a value proposition to
the marketplace. The value segment is price conscious, but is willing to pay a premium for a
more personalized shopping experience than the big-box discount retailers can provide.
Another way to dissect the market is by gender. Historically, consumer electronic purchases
were predominately male. This is changing as the products manufacturers become more designed
focus and offer stylish products. Flat panel televisions and the accompanying products (home
stereo, DVD player, video game console, etc) are becoming more like furniture, than electronic
products. This is shifting the target market from male to female as females typically exert more
influence on decisions regarding home design and furnishing. Best Buy has recognized this facet
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of the industry. One of its target segments is Jills, busy moms who want a kid-friendly store
environment and often purchase based on staff recommendations [36]. However, Best Buys
marketing campaigns remain targeted to the male customer. For example, Best Buys holiday
circular is busy, product focused, with an emphasis on price. Contrasting that to Anthropology (a
womans clothing retailer) it is clear that they position the product more within a lifestyle
context, with no focus on price. Similar examples can be seen across many retailers (Tiffany,
Coach, etc). The example below demonstrates the difference between marketing primarily to
males (Best Buy) and marketing primarily to the female population (Anthropology):
Best Buy Holiday
Flyer
Anthropology Holiday
Catalogue
Wal-Mart Effect
The consumer electronics industrys experience
following Wal-Marts entrance closely resembled
other industrys experience. Wal-Mart aggressively
priced key products, won significant market share,
and forced weak competitors either into major
restructuring programs or completely out of the
market. The table shows the market share of the top
2006 Top 10 Consumer Electronic Retailers
1
Best Buy
17.0%
2
Wal-Mart
9.4%
3
Circuit City
7.6%
4
Dell
4.6%
5
Target
3.5%
6
Radioshack
3.0%
7
GameStop
2.7%
8
CompUSA
2.7%
9
Costco
2.6%
10
Apple Store
2.0%
Source: TWICE magazine and JPMorgan estimates
10 consumer electronic retailers.
This story has played out across numerous industries to the point where a Business Week article
termed it the, Wal-Mart Effect. [37]. Many of the competitors that restructured their business
have returned to profitability and the best-practices to the restructuring provide a reasonable
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guideline. We analyzed the approach of Winn Dixie and JC Penny, two retailers in different
segments of the retail industry, in search of best practices. The key lessons can be summarized
as:
1) Focus initial efforts on what matters the most to customers: It is critical to make a
strong impression on the consumer quickly during the restructuring and give them a
reason to believe that change is occurring. For Winn Dixie it was perishable products, for
JC Penny it was merchandising. Both companies focused intently on these issues and,
coupled with the marketing message, were able to convince their consumers to return.
2) Focus on core operations: JC Penny entered the restructuring program managing the
Eckerds Drugstore chain. This was one of the first divestments that helped to focus
managements attention on improving operations in the core brand. Winn Dixie shortly
after filing Chapter 11, closed its manufacturing facilities, stores in 14 non-core markets,
and 3 distribution facilities.
3) Store Modernization: The shopping experience must be geared to the needs of the
consumer not to the needs of the company. Both companies acknowledged that
consumers demand an updated shopping experience and they set out to redesign store
layouts and product positioning within the stores.
4) Private label products dramatically improve performance: Private label serves to
improve margins and differentiate the product offering. Winn Dixie used private label to
segment customers on willingness to pay and was able steal to market share back from
both premium and low-end competitors. JC Penny used private label to enhance the
product line and improve margins.
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CRITICAL ISSUES AT CIRCUIT CITY
IT-systems
The company has traditionally had many problems with managing the IT-infrastructure
throughout the company. In 1999, the company launched the internal development of a new
point of sale system, called Magellan. This system was deployed in a fraction of all stores, and
was later scrapped in favor of an off the shelf system in 2004. However, the problem with ITsystems has continued, especially with the point of sales system. In April 2007, after years of
trouble, the company decided to outsource IT-management in its entirety to IBM. The contract
is valued to $775MM over seven years; under the contract IBM is to manage Circuit Citys IT
systems, security, web site and help desk operations. Circuit City announced estimated cost
savings at about 15% over the life of the contract [38].
There is no structural reason why Circuit City should significantly lag Best Buy sales per square
foot, yet, in FY2006, Circuit City posted sales per square foot of roughly $560 vs. Best Buy at
$920 [39]. The stores are essentially similar in size, stocked with almost identical product,
employed by similar people. The large discrepancy in the sales per square foot is likely attributed
to underinvestment in IT systems and a lack of standard operating procedures. Improvements in
these areas should drive top line results.
Lack of Standard Operating Procedures
The company has already engaged Deloitte & Touche to design retail standard operating
procedures, covering everything from unloading a truck to adjusting the pricing and labor
models. The company acknowledged that its in-store practices were lacking and needed to be
addressed as customer service was falling. Deloitte has developed new SOPs which are being
rolled out in a phased approach, starting with one large store and then rolling out to 50 stores to
test the scalability of the processes. After successful rollout, the company will form eight central
and 60 regional learning centers to roll out the concept to all 650 stores. At this point, senior
management is putting its emphasis on execution throughout the company. One indication of
this is the implementation of six day weeks for district managers instead of five as in the
previous practice [40].
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Employee Morale
The companys perspective is that one problem lay in its historical salary structure, which was
well beyond industry averages according to analysts. The financial pressures which arose after
the disappointing holiday results of 2006 forced the company to address this issue. CC replaced
about 3,400 store associates with lesser-paid staff, which obviously caused massive turmoil
among the store personnel, and is something the company has had to address in its actions going
forward. The value and motivation behind this move has been questioned by many analysts and
experts. The company explained that the wage structure for these employees was well beyond
industry averages and, in order to adjust employee costs, this was a way forward. However, the
actual savings the company could garnish through this action are questionable. A Wharton
professor estimated the overpayment to $0.51 per hour per employee, making the total annual
savings after wage adjustments to roughly $3.5MM [41]. The value of generating a $3.5MM
savings for a company with a turnover of $11Bn by cutting its best performing staff is
questionable. Naturally, this estimate does not come from inside sources, so the savings may
very well have been higher. The layoffs affected two to three employees per store, so on paper it
doesnt look too harsh. However, it is important to think of the precedent this move gives to
other store-front employees. What incentives do they actually have to perform well, since the
result for previous high-performers was only to be laid off (albeit offered to come back at lower
wages)? Whether the cost savings is a correct estimate or not is of lesser importance. The
extent of the public discussion around the motivation of the layoffs was a detriment to employee
morale. This move, or at least the official motivation behind the move, seems to us to have been
detrimental to the company as a whole, since morale is now a critical factor [42].
Incentive programs and career development
One change that has been made to target morale issues is the institution of a clearer career path
for in-store associates, with more layers between store manager and associates. This creates
possibilities for associates to pursue a gradual ladder towards management and function as
rewards for high performers [43].
Instituted career paths for store-personnel
o Store manager
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o Assistant Store manager
o Department head
o Key carriers This is a new position and a middle-step up towards a potential
managerial position. It is one that is not unattainable at first glance (as a position
as department head may be for a new employee).
o Associates
In order to address issues of motivation at the store-front level, the company has instituted a
point-based incentive system where employees gather points by selling certain items. The points
are redeemable for gift-cards and there is also a car give-away program for highest points
gathered.
Morale among senior managers
As for addressing the morale issues indicated within senior management, it seems to be a case
where there is a need for a new plan of action that people can buy into. At present, the
management leaves seem to indicate a lack of faith in the possibility to turn the company around.
This is a serious issue for Schoonover and something that needs to be addressed. As we stated in
the discussion around management, it may be a question of whether Schoonover is the right
person to succeed with this turnaround or if he needs to be reinforced with senior managers with
hands-on turnaround experience.
Location & Store Antiquitation
Circuit City has several problems with its real estate:
Location
Store model.
Location
Historically CC had an if we build it, they will come attitude regarding their status in the
market place. The company was the clear market leader, with BBY on the brink of bankruptcy.
In this situation, the company did not feel that it needed A-locations, because the Circuit City
brand would attract customers to go out of their way to shop at the its stores. The resulting
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situation is that BBY occupied the A-locations and has much higher traffic and a better standing
among vendors.
Store model
The traditional layout of the Circuit City stores followed the so-called 35K-model, with 35,000
square feet in total. Of this area, almost 40% was non-usable for sales (warehouse, offices,
lavatories and other facilities) and only 60% was effective sales area. This layout is the premise
for the low sales per square foot the company is experiencing relative to its competition.
Vendor relations
An area where the company must work to improve is in its relations to its vendors. As earlier
discussed, the company is in an industry that is characterized by very powerful vendors (e.g.,
Sony, Samsung, Philips, LG, etc.) who make pricing and production decisions autonomously
from the retail channels. The independent pricing decision was a major reason for the negative
results in FY2007. Vendors slashed prices on flatpanel-TVs, a move which left retailers
scrambling to salvage any value. This was a situation where one could observe the advantages
of a company with strategic relationships with their vendors. Best Buy is the best example of
such a player, since they managed to mitigate the effect of the price wars by approaching its
vendors ahead of time and negotiating the terms of the supply contracts. Consequently, the
financial effect on Best Buy was not at all as significant as for other players in the market place.
In order to improve its profile towards its vendors, a key activity going forward is a targeted
recruitment of an executive with inside experience from one or several of the vendors. Having
an inside perspective in the senior management team will significantly strengthen the strategic
capabilities of Circuit City vis--vis its vendors and will help uphold stronger margins.
Recent developments
Recent developments with Circuit City include:
Underperforming stores
Relocation.
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Underperforming Stores
In analyst discussions, management initially indicated that about 250 stores of the 650 total
stores in the domestic segment were classified as bad stores bad location and being of the old
model of stores. Recently, management indicated that problem stores amounted to as many as
350-400 out of the established store base, which makes it a much bigger problem. One highlight
of the store base is that there are very few stores that are actually cash flow negative. Estimates
indicate that as few as five (5) stores out the entire base are cash flow negative [44]. As positive
as this is for the company as a whole, it makes it a difficult decision to relocate or close a
seemingly unattractive position when it is generating positive returns. One reason for this
pattern is also that the leases have had been structured for a term of 20 years, making the tail end
of the lease period fairly profitable, since the lease costs must be fairly low by that time
compared to when the stores opened. The company has also developed a new store model, which
most new and relocated stores follow. The new store model is one with a total of 20,000 square
feet of space, of which a much larger portion is used for sales compared to the old layout. This
format improves new store productivity, 4 wall contribution margin, and sales per square foot.
Relocation
Management is focused on relocating its existing store base to more attractive locations, using
the new store layout. The pace has been fairly slow so far, as the company has also had to open
new stores in new locations throughout the country. Current company plans indicate a relocation
pace of 15-20 stores per year, while new stores account for about 40-45 stores.
Each relocation is associated with significant costs [45]
Early lease termination cost: $0.9MM
Accelerated depreciation: $0.2MM
CapEx in new store: $1.5MM
However, the results show a positive development (source: 2007 10-K):
Average of 26% increase in sales in the first 12 months after new store opening compared
to old location
11% ROIC (including lease termination)
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26% ROIC (excluding lease termination)
Although the short term benefit from the relocation program might not exceed the cost of capital
for the firm, the long-term benefits are clear: better store locations, better store layouts and more
efficient use of capital.
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TURNAROUND PLAN
The Circuit City turnaround plan will position it as the consumer electronics specialist offering
both goods and services in a convenient, enjoyable, friendly manner for customers. The plan
proposes activities focused on improving both gross margins and also sales volume to drive an
increase in overall margin dollars. Specifically, this plan will grow sales from $12.4B to $21.5B
in 2015 while at the same time improving operating margins to about 3.4% in 2015 through
reduction of COGS and SG&A.
The Turnaround Plan Structure
The structure of the turnaround is based on best practices pulled from successful retail
turnaround efforts cited in the previous section:
General Principle
Focus initial efforts on what
matters the most to customers
Circuit City Application
Improve store locations
Employee morale
Additional services
Divestments
Standard Operating Procedures
IT Systems
Improve store locations
Implementation of new store model
Private label products
dramatically improve
performance
Store Modernization
Redefine target market
Focus on core operations
Innovation on retail experience
Product Differentiation
Margin Improvement
Focus on relocation of existing store base
Store relocations to A locations, while costly, drive margin and volume improvement, and
therefore are critical to the success of the turnaround plan. The relocation will also help
implement new operating procedures and new systems requirements throughout the store base.
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We recommend increasing the pace to 75 relocations per year in 2008-2010 and then reducing
the pace somewhat, resulting in roughly 300 stores being relocated in the first five years, thus
making the majority of stores being good stores rather than the current situation of the 2/3 of
the store base being bad stores. New store investments should be held at a minimum in order
to avoid diverting management attention; the company should reduce its plan of opening 75 new
stores. The initial years of relocation will incur a substantial strain on cash flows, as relocation
expenses amount to $2.6MM per store. The initial year of operations for newly relocated stores
will have a net negative impact on the overall performance of the company, but the following
years make it a more attractive investment. Given that the new stores are developed around a
new concept with improved processes, this will have a positive effect on margins and volume.
Standard Operating Processes, IT-system Upgrade, and Employee Training
Coherent processes in the store front have been lacking. Best-in-industry standard operating
procedures will increase operational efficiencies and sales volume through an improved
experience with customer service and at checkout. With the roll-out of the current Deloitte &
Touche plan throughout the store infrastructure, we believe overall store performance can
improve, especially on improving their efficiency in using their capital base via inventory
management. Aligning the entire employee base in improving store performance and
profitability will infuse the company with a sense of purpose.
Through upgrading its aging IT system, Circuit City will be able to price more efficiently,
service customer inquiries and checkout experience more smoothly, and ensure seamless
transactions. Moreover, the system will provide more valuable information regarding inventory
replenishment, communication both across stores and also store-to-internet, vendor
improvement, and performance management. Simply stated, up-to-date IT systems are critical to
modern retailing.
One important part of the rollout of the program is to invest in training of its employees. This is
something we think is worthwhile and even critical, given the issues the company is facing in
terms of employee morale. Showing employees commitment through investment is crucial.
This investment also is critical to the customer shopping experience and differentiates Circuit
City from low-cost retailers such as Wal-Mart.
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Increase private label offering
Circuit City should increase their private label offerings to differentiate and drive gross margin
improvement. The rise in ODM and OEM use by consumer electronic manufacturers has led to
improvements in third party production of electronics. This trend has allowed small electronics
manufacturers and retailers to introduce or dramatically improve the breadth of selection and
quality of their private label offerings through working with these smaller manufacturers,
primarily located in China. Best Buy has been successful in introducing their Insignia line
across their entire product line; this move allows them to earn a profit margin on their lower
priced products in cases where brand name goods would provide almost no profit. Circuit City
has a private label line Nexxtech but the selection is very limited with no price points over
$200. With the increased marketplace price competition, Circuit City should explore greatly
expanding this line to both expand its value offerings but also to earn margin in this area. This
offering would also reinforce the companys reputation as an expert at all price points.
Expand additional services
As price competition has squeezed margins, specialty retailers have expanded their additional
services as a way to differentiate, win consumer loyalty, and earn margin dollars. Warranty
sales have served this role in the past and should continue to be offered with all purchases at the
point of sale. Also, firedog is a perfect example of margin enhancement. The company should
continue investing in add-on services such as a menu-based warranty program for online
purchases.
We note that we agree with Circuit Citys decision to exit the private label credit card business
since it is a scale business with a steep learning curve, and Circuit City lacks both the customer
base and expertise necessary to succeed in this business in the long run. Also, net loss ratios for
store cards tend to be higher than those of general purpose (e.g. Visa, Mastercard) cards, because
a distressed cardholder is more likely to default on the Circuit City card and no longer shop at
Circuit City than default on a general purpose card and no longer shop anywhere.
Improving Customer Experience
We recommend that Circuit City explore the benefit-cost tradeoffs of a wide selection of
customer service initiatives to improve the customer lifetime value. For example, Circuit City
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should consider implementing customer relationship management software. Any customer
making a large ticket purchase should be recorded into a centralized database. When the
expected useful life of the product is reached, the company could proactively reach out to the
consumer to inform him or her about possible replacement purchases. Also, there is a strong
correlation between product cycles and sales growth; so before a new product will be introduced
to the marketplace, Circuit City could inform its priority customers in advance, answer any
questions, and explain the products value proposition in order to better serve the consumer and
increase early adoption. This would positively impact the P&L as well as the companys brand
image. Circuit City could also design a specific area of the store for the female customer. As
mentioned previously, this is a valuable customer segment not currently served by the
marketplace. Instead of product displays, Circuit City could design a section of the store to
highlight products in a natural home setting. Employing female personnel for this area would
reinforce the message. Finally, we recommend that Circuit City host customer appreciation
events for its top customers at its stores.
Divestments
Divesting non-core assets is essential to focusing managerial attention to improving core
operations. InterTAN, the Canadian chain, has been performing poorly and management is
currently seeking a buyer for the division. Having purchased the division for approximately
$280MM, management seems to be looking to show positive returns on the investment, as the
process of finding a suitable buyer has been an ongoing process for quite some time. We believe
it would be beneficial for the company as a whole to take the steel bath and if necessary accept
negative returns on this transaction in order to ensure full management attention to the core
domestic segment of Circuit City. A purchase price of $100MM would be acceptable, just to get
the transaction completed.
Problem: Being in the scrutiny of the public markets
One serious issue for this turnaround plan is that it is probably not possible for the company to
carry it out as a public company. We believe that the turnaround plan and its results make
Circuit City suitable for a leveraged buyout by an investor. The aggressive pace of relocations is
something the market would not view as positive in current market conditions, as it would put in
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question the companys ability to generate sufficient cash to cover the added investment. An
LBO structured with part equity and part debt will generate enough of a cash cushion to be able
to carry out the turnaround plan in its entirety and also generate attractive returns on a five year
investment horizon.
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GOING PRIVATE
The basic premise of the proposed buyout is to structure it as a leveraged buyout with a
significant equity portion. As the company has very slim margins, it is not possible to carry out a
highly leveraged buyout, but rather with something like a 60/40 split of debt to equity. The
company has a fairly healthy balance sheet as it is, with negligible interest bearing debt as it is
($50MM year-end Q2 FY2008 and a $500MM revolving debt facility). The issue is to balance
the needed investments in store relocations and the added interest and principal payments with
the overall cash flow profile of the firm.
The exit goal for the leveraged buyout is to sell the company back to the market through an IPO
after a five-year investment horizon. At this point, most of the real estate will have been
relocated and the company can then focus on expanding its store base with new locations and
layouts. The positive effects of taking the company private in this manner are that the company
can go through the necessary structural changes at the pace of its choosing, rather than catering
to the whims and demands of the market; additionally, taking the company private offers
possibilities for incentive plans where management and employees can experience significant
upside if the company delivers on the management case. Employee morale is one of the key
levers (both in the store front and at HQ) to turn the company around, and going private in this
manner offers excellent opportunities to structure more attractive incentive programs. An
investment of this type will also serve to reaffirm management and investor confidence in the
company and thereby also instill a sense of commitment throughout the company.
Key to be able to carry out this transaction is that it can generate attractive returns for the
investment horizon. With our turnaround plan, we feel confident that Circuit City is an excellent
candidate for going private in a leveraged transaction as we feel confident to be able to generate
a rate of return in excess of 20% on an annual basis.
Assumptions
Overview
The investment horizon is five years, i.e., taking the company private in early 2008 and then
carrying out an IPO in early 2013. The vast majority of relocations will be carried out during the
investment horizon, with a total of 305 out of the total estimated 400 stores being relocated
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during this time. The remaining relocations will be carried out during 2013 and 2014, at which
time the company will begin opening new stores as well.
Store metrics
In order to arrive at a detailed forecast for Circuit City and a reasonable estimate of the impact of
our plan, we had to analyze the performance down to the store level of the company, making
some assumptions down the road.
First, we assumed the quarterly P&L results for the last five years to determine the seasonal sales
trend and found that the average Circuit City store lost or barely made money in each of the first
three quarters but that these losses were more than offset by fourth quarter earnings. We then
calculated quarterly margins, adjusting for two assumptions: a 35.8% tax rate each quarter and
net discontinued and other charges of zero (see Table 1 below).
Table 1: Seasonal Factors
Sum - Last 5 Years
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Continuing Ops
Discontinued & Other Charges
Net Income
Q1
10,228
7,756
2,473
2,590
(87)
(6)
(92)
(36)
(56)
27
(30)
Q2
11,312
8,607
2,705
2,791
(110)
(6)
(113)
(41)
(72)
(48)
(120)
Q3
12,525
9,550
2,975
3,016
(59)
(5)
(53)
(19)
(34)
40
6
Q4
17,204
13,027
4,177
3,292
900
(9)
865
322
543
28
571
Average Revenue/Quarter - L5Y
20%
22%
24%
34%
100.0%
75.8%
24.2%
25.3%
-1.1%
-0.1%
-1.0%
-0.4%
-0.7%
0.1%
-0.8%
100.0%
76.1%
23.9%
24.7%
-0.8%
-0.1%
-0.8%
-0.3%
-0.5%
-0.2%
-0.3%
100.0%
76.2%
23.8%
24.1%
-0.3%
0.0%
-0.3%
-0.1%
-0.2%
0.1%
-0.3%
100.0%
75.7%
24.3%
19.1%
5.2%
-0.1%
5.3%
1.9%
3.4%
0.1%
3.3%
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Continuing Ops
Discontinued & Other Charges
Net Income
Source: Company Reports, Team Analysis
Total
51,269
38,939
12,330
11,690
644
(27)
606
226
380
47
428
100.0%
76.0%
24.1%
23.3%
0.7%
-0.1%
0.8%
0.3%
0.5%
0.0%
0.5%
Next, we created a P&L for the last twelve months and divided by the 644 average store count to
reach a single store P&L. From the Circuit City conference call transcripts, we learned that
approximately 400 stores were in bad locations and needed to be relocated. These stores were
barely profitable, and the remaining stores were in good locations. Only five Circuit City stores
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lost money in the last twelve months. Using this information, we created a bad location store
P&L and used a weighted average calculation on the remaining 244 stores so that the good
location store P&L dropped out (see Table 2 below).
Table 2: Estimated Single Store P&L
($mm)
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Continuing Ops
Discontinued & Other Charges
Net Income
LTM
18.4
14.0
4.4
4.1
0.3
0.0
0.4
0.1
0.2
(0.0)
0.2
Average Store Count (#)
644
Bad
14.0
10.9
3.1
3.0
0.1
0.1
0.0
0.1
0.04
Good
27.7
20.5
7.2
5.9
1.3
1.3
0.4
0.8
0.8
400
244
Source: Company Reports, Team Assumptions
Then, we created a six year transition schedule for bad stores based on the disclosure that a
relocated Circuit City stores revenue increased 26% on average in the first year and that level
declines to 4% over time. We assumed that bad location stores would grow revenue at 3% and
the margins would remain flat. We also excluded the $2.6 million one-time relocation expense
from SG&A in year one so that we could include it in our quarterly model depending on the
quarter that we relocated the store (see Table 3 below).
Table 3: Estimated Bad Location & Transition Store P&L Schedule
Single Store P&L
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Continuing Ops
Discontinued & Other Charges
Net Income
Bad
Annual
14.03
10.94
3.08
3.01
0.07
0.07
0.02
0.04
0.04
Sales Growth (%)
Memo: One-Time Charge
2.6
Bad store growth
3.0%
Source: Company Reports, Team Assumptions
Yr 1
17.67
13.66
4.02
3.84
0.18
0.18
0.06
0.11
0.11
26%
Yr 2
20.50
15.69
4.81
4.51
0.31
0.31
0.11
0.20
0.20
16%
Transition
Yr 3
Yr 4
22.55
24.13
17.09
18.27
5.46
5.86
5.01
5.30
0.45
0.55
0.45
0.55
0.16
0.20
0.29
0.36
0.29
0.36
10%
7%
Yr 5
25.34
19.06
6.28
5.51
0.77
0.77
0.28
0.50
0.50
5%
Yr 6
26.35
19.69
6.66
5.66
1.00
1.00
0.36
0.64
0.64
4%
For good location stores, we assumed 4% annual revenue growth and flat margins. We then
created a profile for new stores that Circuit City plans to open in the future (see Tables 4 & 5).
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Table 4: Good Location Store P&L Schedule
Single Store P&L
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Continuing Ops
Discontinued & Other Charges
Net Income
Yr 1
27.60
20.42
7.18
5.93
1.25
Good
Yr 2
Yr 3
28.71
29.86
21.24
22.09
7.47
7.77
6.17
6.42
1.30
1.35
Yr 4+
31.05
22.97
8.08
6.68
1.41
1.25
0.45
0.80
1.30
0.47
0.83
1.35
0.48
0.87
1.41
0.50
0.90
0.80
0.83
0.87
0.90
Sales Growth (%)
4%
4%
4% terminal
Source: Company Reports, Team Assumptions
Table 5: New Store P&L Schedule
Single Store P&L
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Continuing Ops
Discontinued & Other Charges
Net Income
Yr 1
19.19
14.63
4.56
4.22
0.34
0.03
0.31
0.11
0.20
0.20
Memo:
Sales Growth (%)
Year 1: Additional SG&A Charge
New
Yr 2
Yr 3
24.13
26.54
18.27
19.97
5.86
6.58
5.25
5.71
0.61
0.87
0.61
0.87
0.22
0.31
0.39
0.56
0.39
0.56
2.6
26%
10%
Yr 4+
27.60
20.63
6.98
5.87
1.11
1.11
0.40
0.71
0.71
4% terminal
Source: Company Reports, Team Assumptions
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Margin Forecast (%)
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Continuing Ops
Discontinued & Other Charges
Net Income
Bad
Annual
100.0%
78.0%
22.0%
21.5%
0.5%
0.0%
0.5%
0.2%
0.3%
0.0%
0.3%
Single Store P&L
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Continuing Ops
Discontinued & Other Charges
Net Income
Yr 1
100.0%
76.2%
23.8%
22.0%
1.8%
0.2%
1.6%
0.6%
1.0%
0.0%
1.0%
Tax Rate
CIRCUIT CITY STORES
Yr 1
100.0%
77.3%
22.7%
21.7%
1.0%
0.0%
1.0%
0.4%
0.6%
0.0%
0.6%
Yr 2
100.0%
76.5%
23.5%
22.0%
1.5%
0.0%
1.5%
0.5%
1.0%
0.0%
1.0%
Transition
Yr 3
Yr 4
100.0%
100.0%
75.8%
75.7%
24.2%
24.3%
22.2%
22.0%
2.0%
2.3%
0.0%
0.0%
2.0%
2.3%
0.7%
0.8%
1.3%
1.5%
0.0%
0.0%
1.3%
1.5%
New
Yr 2
100.0%
75.7%
24.3%
21.8%
2.5%
0.0%
2.5%
0.9%
1.6%
0.0%
1.6%
Yr 3
100.0%
75.2%
24.8%
21.5%
3.3%
0.0%
3.3%
1.2%
2.1%
0.0%
2.1%
Yr 4
100.0%
74.7%
25.3%
21.3%
4.0%
0.0%
4.0%
1.4%
2.6%
0.0%
2.6%
Yr 5
100.0%
75.2%
24.8%
21.7%
3.0%
0.0%
3.0%
1.1%
2.0%
0.0%
2.0%
Yr 6
100.0%
74.7%
25.3%
21.5%
3.8%
0.0%
3.8%
1.4%
2.4%
0.0%
2.4%
Good
Annual
100.0%
74.0%
26.0%
21.5%
4.5%
0.0%
4.5%
1.6%
2.9%
0.0%
2.9%
35.8%
Next, we applied the average seasonal variation over the last five years to our annual forecasts to
reach a quarterly schedule for bad location, transition, good location, and new stores. Finally, we
forecast store relocations and new store openings on a quarterly basis and adjusted our forecast
to maintain a $155 million margin of safety in our cash position or ~1% of sales (see appendix
for detailed quarterly forecasts). We note that at this stage, we included the $2.6 million of
additional SG&A expenses in the twelve months following a store relocation or opening.
Specifically, we forecasted one-time charges in the first, second, third, and fourth quarter after a
store relocation or opening of $2.0 million, $0.3 million, $0.2 million, and $0.1 million,
respectively. This spending in the first year covers $0.9 million for the early lease termination
for relocated stores as well as $1.5 million of capex and $0.2 of accelerated depreciation cost
spread over the year.
Though we plan to sell the company at the end of fiscal year 2012, we note that net margins
improve every year between 2008 and 2015 except for in 2013 when they drop just 30 basis
points due to a final push to relocate 50 bad location stores and increase new store openings to
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25. Between 2008 and 2014, we plan to relocate all 400 of our bad location stores. Beginning in
2012, once we have the majority of our bad location stores moved to better locations, we plan to
ramp up new store openings (see table 6 below).
Table 6: Store, P&L, and Margin Forecast 2008E to 2015E
Stores (#)
Beginning
Openings per year
Relocations per year
Non-Relocated
Relocated
Good
New
Ending
Aggregated P&L ($mm)
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest
Pre-Tax Income
Tax
Net Income from Continuing Ops.
Discontinued & Other Charges
Net Income
400
75.7%
24.3%
23.2%
1.1%
Margin Analysis (%)
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest
Pre-Tax Income
Tax
Net Income from Continuing Ops.
Discontinued & Other Charges
Net Income
12,430
9,502
2008E
60
672
0
75
325
75
272
0
672
2009E
80
672
0
75
250
150
272
0
672
2010E
112
672
0
75
175
225
272
0
672
2011E
175
672
0
60
115
210
347
0
672
2012E
302
672
0
20
95
155
422
0
672
2013E
295
672
0
50
45
130
497
0
672
2014E
371
672
0
45
0
115
557
0
672
2015E
449
672
30
0
0
95
577
30
702
13,336
10,093
3,243
3,097
146
52
93
33
60
60
13,617
10,280
3,337
3,161
176
51
125
45
80
80
15,236
11,489
3,747
3,517
230
55
175
63
112
112
16,286
12,254
4,032
3,700
331
59
272
97
175
175
17,256
12,960
4,297
3,772
524
54
470
169
302
302
18,186
13,622
4,564
4,060
505
45
460
165
295
295
18,727
13,983
4,744
4,132
612
35
577
207
371
371
20,162
15,015
5,148
4,426
721
22
699
251
449
449
100.0%
75.7%
24.3%
23.2%
1.1%
0.4%
0.7%
0.3%
0.4%
0.0%
0.4%
100.0%
75.5%
24.5%
23.2%
1.3%
0.4%
0.9%
0.3%
0.6%
0.0%
0.6%
100.0%
75.4%
24.6%
23.1%
1.5%
0.4%
1.1%
0.4%
0.7%
0.0%
0.7%
100.0%
75.2%
24.8%
22.7%
2.0%
0.4%
1.7%
0.6%
1.1%
0.0%
1.1%
100.0%
75.1%
24.9%
21.9%
3.0%
0.3%
2.7%
1.0%
1.7%
0.0%
1.7%
100.0%
74.9%
25.1%
22.3%
2.8%
0.2%
2.5%
0.9%
1.6%
0.0%
1.6%
100.0%
74.7%
25.3%
22.1%
3.3%
0.2%
3.1%
1.1%
2.0%
0.0%
2.0%
100.0%
74.5%
25.5%
22.0%
3.6%
0.1%
3.5%
1.2%
2.2%
0.0%
2.2%
Balance sheet items
We forecast certain balance sheet items in order to be able to forecast simplified cash flows for
the company going forward. For working capital items (accounts receivable, inventories,
accounts payable, accrued liabilities) we assume a similar distribution per quarter as over the
four quarters of FY 2007. There is significant seasonal variation in items such as inventories and
accounts payable, while others do not exhibit as dramatic seasonality. Inventories and accounts
payable show a clear spike in Q3 each year, which is the period ending on Nov 30th, just in time
for the Christmas season (see graph below). This tendency follows in our assumptions and is set
to be constant from the FY2007 quarterly levels (e.g., preserving the seasonal effect). One could
argue that the levels should be brought down, as this is an area where management is active to
reduce levels, but we chose to maintain these levels to assume a more conservative outlook.
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% of COGS Q1-4 2004-2007
160.0%
Inventories
Accounts payable
140.0%
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Capital Expenditure
In order to forecast capital expenditures, we assume it to consist of two main parts: maintenance
CapEx and CapEx for new and relocated stores. For the maintenance CapEx, we assume the
level to be 1.5% of sales and Depreciation at 90% of that. This ensures constant investment in
existing facilities (for necessary expansion, etc.) in order to be able to sustain future growth rates.
As for CapEx associated to relocated and new stores, we base our assumptions on the companys
own data. The associated expenditure for a relocation is $2.6MM, which consists of $0.9MM of
lease termination fee, $0.2MM for accelerated depreciation and $1.5MM for Capital Expenditure
for investment in the new store location.
Purchase price
For the purchase price of the company, there are several issues to consider.
Current stock price: @ $7.76 per share gives a market value of equity at 1,300MM.
In order to be able to offer attractive returns to current shareholders, we assume a 20%
premium on the current share price, making the offer price for equity holders a total of
$1,570MM (rounded).
Analyzing the financial implications of the turnaround plan, it is clear that the company
will be in need of an additional cash infusion. In our estimation, an additional $180MM
of equity will be sufficient.
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Debt ratings and interest rates
The rating agencies consider the adjusted debt to adjusted capitalization ratio, the fixed-charge
coverage ratio, management strength, and a consistent operating history when determining credit
ratings. We calculated the adjusted debt to adjusted capitalization ratio to gain a better
understanding of the true leverage of Circuit City and the fixed-charge coverage ratio to assess
the companys ability to service its debt. Comparing CC to other large, US retailers (Best Buy,
Target, Walmart, Bed Bath and Beyond, and the Gap), we found that the company had the
highest adjusted debt to adjusted capitalization ratio at 59.3% and the lowest fixed-charge
coverage ratio at 1.3x. As Circuit Citys rent expenses come due, the company does not have
much room to make its payments. The current management team is strong though they lack
turnaround expertise, and the company has not had a consistent operating history. Since Circuit
City does not have any publicly traded debt, it does not currently have a credit rating. We
believe if CC added any debt it would receive a CCC rating, since it is not in default and would
have a limited ability to service its debt.
($mm)
Adjusted Debt
Commercial Paper
Long-term Debt, Current Portion
Long-Term Debt
Capital Leases
Rent x 8.0
Less: Cash
CC
2,388
8
51
2,753
424
GPS
5,554
326
188
7,736
2,696
BBY
4,474
1,377
600
4,008
1,511
BBBY
1,728
2,312
584
TGT
13,677
2,160
10,152
1,920
555
WMT
50,360
3,812
11,482
27,966
3,594
9,600
6,094
Adjusted Capitalization
Equity
Adjusted Debt
4,025
1,637
2,388
10,805
5,251
5,554
7,855
3,381
4,474
4,149
2,421
1,728
29,631
15,954
13,677
112,646
62,286
50,360
8,876
5,325
137
2,913
501
4,023
2,379
1,356
289
20,657
11,240
2,281
6,896
240
83,008
48,846
7,318
25,644
1,200
Adjusted EBIT
Net Income
Interest Expense
Taxes
Rent
415
166
(23)
(73)
344
6,253
3,188
158
1,940
967
Adjusted Interest
322
1,125
638
289
2,521
8,518
Interest Expense
(23)
158
137
-
2,281
7,318
Rent
344
967
501
289
240
1,200
57.0%
41.7%
Adj. Debt to Adj. Capitalization
59.3%
Fixed-Charge Coverage
S&P Rating
1.3
na*
51.4%
5.6
BBB-
13.9
BBB
46.2%
13.9
BBB
44.7%
8.2
A+
9.7
AA
*At present, Circuit City has no publicly traded debt and therefore the credit rating
agencies have no ratings on the company.
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ANAGEMENT
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CIRCUIT CITY STORES
Since Circuit City does not have any publicly traded debt, we assumed a rate of 8% on senior
umed
debt
debt and 10% on subordinated debt. Our senior debt interest rate assumption comes from the
4.11% current 10 Year Treasury Bond rate and a ~4% premium on CCC rated debt. We assume
the subordinated debt earns an interest rate 2% higher than the senior debt.
The structure of the LBO
The LBO is financially structured as consisting of $750MM of equity infusion and $1,000MM of
0MM
debt
debt added to the company balance sheet. We assume that a potential buyer might consider a
debt structure of 75% senior term debt and the remainder in the form of subordinated debt.
75%
The assumed senior debt is a seven year paper with an interest rate of 8.0% (paid semi-annually)
(paid
and a subordinated debt at a 10% interest rate (see debt schedule below). In addition to the term
loans,
loans, the company will also maintain a revolving debt facility, as the business is characterized
by highly seasonal changes in profitability. The current facility is $500MM, however, in a
scenario with significant debt added to the balance sheet, we believe it is prudent to estimate a
sheet,
lower
lower cap on the revolver since lenders might be reluctant to supply additional financing at this
point. We assume the revolver to be capped at $350MM and it is to be paid down by the end of
year.
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Table 8. Debt Schedule
Debt Schedule
Revolver (6% interest, $350MM)
Average revolver balance
End of year balance
Interest payment
2008
2009
2010
2011
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
81.7
0.0
4.8
108.8
0.0
6.4
Senior debt (7-yr, 8% interest, $750MM)
Opening balance
Principal payment
Ending balance
Interest payment
750.0
107.1
642.9
58.8
642.9
107.1
535.7
50.4
535.7
107.1
428.6
42.0
428.6
107.1
321.4
33.6
Subordinate debt (10% interest, $250MM)
Opening balance
Principal payment
Ending balance
Interest payment
250.0
0.0
250.0
24.4
250.0
0.0
250.0
24.4
250.0
0.0
250.0
24.4
Total debt service
EBIT
83.3
145.6
74.8
175.9
66.4
230.1
Debt coverage
EBIT/Interest
EBITDA/Interest
(EBITDA-CapEx)/Interest
Net debt/EBITDA
1.7x
3.9x
1.5x
0.0x
Uses of cash
Current market value (Dec 7, 2007)
Per share
Share outstanding (#M)
Market value of equity ($M)
Purchase premium
Purchase price
Debt
Equity share
Cash from company (infusion)
Debt schedule
Senior debt interest (7yr)
Sub debt interest
Senior debt interest (7yr, semi-annual)
Sub debt interest (semi-annual)
Senior debt share
Subordinate debt share
Total debt
2.4x
4.8x
2.1x
0.5x
2014
2015
112.3
0.0
6.6
87.3
0.0
5.1
49.7
0.0
2.9
321.4
107.1
214.3
25.2
214.3
107.1
107.1
16.8
107.1
107.1
0.0
8.4
0.0
0.0
0.0
0.0
250.0
0.0
250.0
24.4
250.0
0.0
250.0
24.4
250.0
0.0
250.0
24.4
250.0
0.0
250.0
24.4
250.0
0.0
250.0
24.4
62.8
331.2
56.0
524.1
47.8
504.5
37.9
612.1
27.3
721.3
3.5x
6.6x
3.1x
0.8x
5.3x
8.8x
4.9x
0.8x
2012
9.4x
13.5x
8.9x
0.3x
2013
10.6x
15.7x
10.0x
0.2x
16.1x
22.8x
15.4x
-0.1x
26.4x
36.4x
25.3x
-0.4x
$7.76
168.6
1,308.0
20.0%
1,569.6
1,000.0
750.0
(180.4)
%
8.0%
10.0%
3.9%
4.9%
75.0%
25.0%
$mm
750
250
1,000
What is important to follow in this scenario is the cash position as well as the revolver balance of
the company throughout the investment period so that it does not go into default while pursuing
its turnaround program. As the graph below shows, the company will be able to sustain the
projected change program and still maintain a healthy level of cash on its balance sheet. This
leads us to believe that an LBO will be possible to carry out.
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Table 9. Cash Position & Store Relocation
Cash position
Revolver balance
30
Max revolver during period
800
25
600
20
400
15
200
10
Q1 15
Q1 14
Q1 13
Q1 12
Q1 11
Q1 10
(200)
Q1 09
0
Q1 08
Cash Position ($mm)
New
(400)
5
Store Relocations (per Quarter)
Relocations
1,000
0
Exit scenario
In order to be an attractive investment, it is necessary to be able to achieve healthy rates of return
upon exit. We assume that a private equity investor (which would be the most likely investor)
would require an internal rate of return of at minimum 20%.
In terms of the returns necessary, we choose to use a multiple of EBITDA for the enterprise
value at the time of an IPO. Current multiples in the market place show the following profiles
for the company and its competitors:2
Company
EV/EBITDA
Best Buy
8.8x
RadioShack
5.3x
Wal-Mart
8.6x
CostCo
13.6x
Circuit City should, with a better store location profile and service offering be valued closer to
Best Buy rather than RadioShack (as RadioShack has a very different business model from
Circuit City). Applying a discount for conservatism, we feel that an exit multiple of 6.0x
EBITDA should be reasonable for an investor to expect from an IPO after the five year initial
investment horizon. We feel that the chosen multiple is fairly conservative, meaning that there
could be considerable upside as well.
With this in mind, our case looks as follows in terms of return on investment:
2
Yahoo! Finance
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Table 10. LBO exit scenario
Exit value in 2012
EBITDA multiple
EBIT
Depreciation
EBITDA
Enterprise value
Minus net debt end of 2012
Exit equity
IRR requirement
PV @ IRR requirement
Return multiple
Net debt
Equity
Affordable bid (Equity)
6.0x
524.1
233.0
757.1
4,542.5
218.4
4,324.2
20.0%
1,737.8
2.5x
(689.5)
1,737.8
1,048.3
Actual investment scenario
Equity investment
Exit equity
Return
Return (%)
Annual return
750.0
4,324.2
3,574.2
476.6%
42.0%
As is clear from the calculations, at the assumed equity investment of $750MM (as described
under Actual investment scenario), an investor could make very handsome returns of over 40%
IRR over the investment period. Even at an equity portion of over $1,000MM an investor is able
to make a fairly decent return of 20% IRR over the assumed time period of five years. Using
EBITDA multiples in the range of 3.0x to 6.0x, we found that our potential return ranged from
22.3% to 42.0% (see table below).
Table 11. Breakeven Analysis
EBITDA multiple and IRR
Equity investment
$750MM
3.0x
22.3%
3.5x
26.5%
4.0x
30.2%
4.5x
33.6%
5.0x
36.6%
5.5x
39.4%
6.0x
42.0%
Conclusion
Our analysis shows that Circuit City is an attractive investment opportunity for a private equity
type investor. A suitable type of investor in this company would preferably a firm with
considerable experience in the consumer retail sector. There have been players making offers on
the company the latest was in the Spring of 2005 by the Boston hedge fund Highfields Capital
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at a stock price of $17 per share, which was rejected. At this point we feel that the company may
be more willing to entertain discussions regarding a potential buy-out in order to be able to
reposition the Circuit City in the market.
SOURCES
1. Standard & Poors Industry Surveys, Retailing: Specialty, pg 4
2. Ibid, pg 15
3. Ibid, pg 13
4. Ibid, pg 4
5. Ibid, pg 4
6. Ibid, pg 11
7. Ibid, pg 12
8. Ibid, pg 5
9. Consumer: A Top-Down Perspective: Not Out of the Woods Yet, But Lower Rates Could
Help; Jefferies & Company, October 25,2007
10. Ibid.
11. Heller, Laura, Circuit City enters era of explosive growth Discount Store News, Volume
39; Issue 13, July 10, 2000
12. Circuit City Annual Report FY 2000
13. Best Buy Annual Report FY2000
14. Circuit City Annual Report FY2001
15. Circuit City Annual Report FY2004-2006
16. http://www.fundinguniverse.com/company-histories/CarMax-Inc-Company-History.html,
December 9, 2007.
17. http://www.mediacollege.com/video/format/compare/betamax-vhs.html, December 9, 2007.
18. Dan Alamo, Circuit City Pulls Divx plug; it gets 2 years to fade out Supermarket News,
June 28, 1999.
19. 1 Yukari Iwatani Kane and Sarah McBride, Latest Cut in DVD-Player Duel: Prices, The
Wall Street Journal, November 23, 2007, Page B1.
20. 1 Circuit City Stores Inc.: Bank One is Purchasing Private-Label Card Accounts, The Wall
Street Journal, Retail Brief, January 21, 2004.
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21. Circuit City Form Def 14A FY 2006, June 27, 2006
22. Ibid. p.24
23. Best Buy Fiscal 2007 Annual Report
24. Carl-Henric Svanberg New CEO and President of Ericsson Effective April 8, 2003,
Business Wire, Feb. 6, 2003
25. Richard L. Sharp, Management Letter, Circuit City Stores, Inc. 1994 Annual Report, page 2.
26. http://www.fundinguniverse.com/company-histories/Circuit-City-Stores-Inc-CompanyHistory.html, December 9, 2007.
27. http://investor.circuitcity.com/history.cfm, December 9, 2007.
28. http://www.fundinguniverse.com/company-histories/Circuit-City-Stores-Inc-CompanyHistory.html, December 9, 2007.
29. Dennis Pacheco, Best Buy, Circuit City and Office Depot, Caribbean Business, September
6, 2007.
30. Ibid.
31. Colleen Bohen, Changewave: Discount Retailers Attracting Wealthy Shoppers, TWICE,
August 6, 2007.
32. Dennis Pacheco, Best Buy, Circuit City and Office Depot, Caribbean Business, September
6, 2007
33. Supreme Court of The United States Syllabus, LEEGIN CREATIVE LEATHER
PRODUCTS, INC. v. PSKS, INC., DBA KAYS KLOSET . . . KAYS SHOES, October
Term 2006.
34. Justice Kennedy, Supreme Court of The United States Opinion of the Court, LEEGIN
CREATIVE LEATHER PRODUCTS, INC. v. PSKS, INC., DBA KAYS KLOSET . . .
KAYS SHOES, June 28, 2007
35. Standard & Poors Industry Surveys, Retailing: Specialty
36. http://customerworld.typepad.com/swami_weblog/2005/08/best_buy_profil.html
37. How Wal-Mart's TV Prices Crushed Rivals BusinessWeek April 23, 2007
38. IBM Wins Circuit City IT Outsourcing Contract, PC World, April 3 2007
39. http://www.wikinvest.com/stock/Circuit_City_Stores_(CC), December 9, 2007
40. Discussion with Dan Binder, CFA, Jefferies & Company
41. Short-Circuited: Cutting Jobs as Corporate Strategy Knowledge@Wharton, April 04, 2007
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42. http://cc.bloggingstocks.com/; November 25, 2007
43. Discussion with Dan Binder, CFA, Jefferies & Company
44. Ibid.
45. Circuit City FY 2007 10K, p. 42
46. Yahoo! Finance, December 8, ,2007
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APPENDIX
Management profiles
Feb 28, 2007 Team
Name
Philip J. Schoonover
George D. Clark, Jr.
Age Office
47 Chairman, President and
Chief Executive Officer
Executive Vice President
Chief Financial Officer
Michael E. Foss
46 Senior Vice President
Chief Financial Officer
Executive Vice President
Merchandising, Services and Mktg.
Ronald E. Baime
42 Senior Vice President
General Merchandise Manager
Senior Vice President
Supply Chain and Inventory Mgmt.
Dennis J. Bowman
50 Senior Vice President
Strategic Sourcing and Inventory
Planning/Replenishment
52 Senior Vice President
General Counsel and Secretary
42 Senior Vice President
Eastern Division President
47 Senior Vice President
General Merchandise Manager
Fiona P. Dias
38 Senior Vice President
President Circuit City Direct
Philip J. Dunn
51 Senior Vice President,
Treasurer and Controller
Gary M. Mierenfeld
52 Senior Vice President
Store Development, Procurement,
Distribution and Service
Douglas T. Moore
47 Senior Vice President
Western Division President
Ernest V. Speranza
58 Senior Vice President
Chief Marketing Officer
Jeffrey S. Wells
50
50 Executive Vice President
Chief Operating Officer
William C. Denney
Ronald G. Cuthbertson
47
John W. Froman
George D. Clark, Jr.
David L. Mathews
49
Executive Vice President
Multi-Channel Sales
W.Stephen Cannon
Michael E. Foss
47
April 30, 2004 Team
Name
Age Office
W.Alan McCollough
54 Chairman, President and
Chief Executive Officer
Executive
58 Senior Vice President
Human Resources and Training
Philip J. Dunn
54
Senior Vice President
Treasurer and Controller
Reginald D. Hedgebeth
39
Senior Vice President
General Counsel and Secretary
Phil Schoonover, Chairman, president & CEO
Schoonover, 46, joined the company in 2004 as executive vice president and chief
merchandising officer. He was named president in February 2005, elected to the board of
directors in December 2005 and named chief executive officer in March 2006. Before joining
the company, Schoonover was executive vice president, customer segments at Best Buy Co.,
Inc., a retailer of consumer electronics, home-office products, entertainment software, appliances
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and related services, from April 2004 until September 2004. He joined Best Buy in 1995 and
previously served as executive vice president, new business development from February 2002
until April 2004; executive vice president, digital technology solutions from February 2001 until
February 2002; and senior vice president, merchandising for five years. Before joining Best Buy,
Mr. Schoonover was an executive vice president at TOPS Appliance City, a retailer of home
appliances and consumer electronics, and held senior sales and marketing positions with Sony
Corporation of America, a global entertainment company.
Bruce Besanko , CFO
Mr. Besanko, 48, joined CC in Q3 2007 as Executive Vice President and Chief Financial Officer
from The Yankee Candle Company, Inc., where he served as senior vice president, finance and
chief financial officer since April 2005. He also served as vice president, finance for Best Buy
Co., Inc., from 2002 to 2005. Besanko held several financial leadership positions from 1996 to
2002 in the hardlines business at Sears, Roebuck & Co.,
George D. Clark, EVP Multi-Channel Sales
Mr. Clark joined the company in 1983. He was promoted to store manager in 1987, district
manager in 1992 and regional vice president in 1993. He was named assistant vice president in
1995; vice president and Central Division president in 1997; Eastern Division president in 2002;
senior vice president in 2003; and general merchandise manager for technology in 2004. He was
named president - retail stores in March 2005; executive vice president - retail stores in March
2006 and executive vice president - multi-channel sales in February 2007.
Ronald G. Cuthbertson, SVP Multi-Channel Sales
Mr. Cuthbertson joined the company in March 2005 as senior vice president, supply chain and
inventory management. Before joining the company, he was president and chief executive officer
of Southport Consulting, Inc., a management consulting company. Prior to his role at Southport
Consulting, he was employed at Best Buy Co., Inc. from 1999 to 2004 and served in numerous
roles including enterprise vice president, with concurrent roles of vice president Best Buy
International and vice president global sourcing, and executive vice president, merchandising,
marketing and supply chain at Best Buy Canada Ltd.
Philip J. Dunn, SVP, Treasurer and Controller
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Mr. Dunn joined the company in 1984 as an assistant controller of inventory audit and control.
He was named treasurer in 1990, was promoted to vice president in 1992 and added the title of
controller in 1996. In 1999, he was elected senior vice president. Mr. Dunn was employed by
Arthur Young & Co., an accounting firm and a predecessor of Ernst and Young LLP, from 1980
to 1984.
Michael L. Jones, CIO
Mr. Jones joined the company in 1999 as vice president, chief information officer, First North
American National Bank. He was promoted to senior vice president, chief information officer in
February 2004. Prior to joining the company, Mr. Jones was employed by Markel Corporation,
an international property and casualty insurance holding company, for ten years, most recently as
president and chief operating officer of an operating subsidiary.
Irynne Mackay, SVP
Ms. MacKay joined the company in December 2006 as senior vice president, general
merchandise manager for entertainment. Before joining the company, she served as managing
director of Infinitive, Inc., a management consulting firm based in the Washington, D.C. area, for
two years. During that time, Ms. MacKay led the team assisting Circuit City with its
merchandising transformation. Prior to joining Infinitive in 2004, she was a senior director at
Best Buy Co., Inc. At Best Buy, she worked on new business development and customer
centricity. Before joining Best Buy, Ms. MacKay worked for nine years at Accenture, a global
management consulting, technology services and outsourcing company, on large scale retail
transformation projects.
Peter Weedfald, SVP, CMO
Mr. Weedfald joined the company in July 2006 as senior vice president, general merchandise
manager for entertainment/content. In September 2006, he was named chief marketing officer.
Before joining the company, he served as a senior vice president, sales and marketing, U.S.
consumer electronics and North American corporate marketing for Samsung Electronics
America, a marketer of consumer electronics, information systems and home appliance products,
from February 2005 to July 2006. He joined Samsung in October 2001 and served as vice
president strategic marketing North America from October 2001 to November 2003 and as
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senior vice president and chief marketing officer, Samsung North America from November 2003
to February 2005. Prior to joining Samsung in 2001, Mr. Weedfald held various senior positions
with ViewSonic Corporation, a worldwide provider of advanced display technology from 1998
to 2000. Prior to joining ViewSonic in 1998, he served in various senior publisher positions at
Ziff-Davis Publishing, a leading integrated media company serving the technology and
videogame markets.
Marshall Whaling, SVP
Mr. Whaling joined the company in May 2006 as senior vice president, retail operations. Prior to
joining the company, Mr. Whaling was senior vice president of sales and operations for the
business-to-business division at Best Buy Co., Inc. He joined Best Buy in 1997 and served as
vice president of retail operations and as regional vice president and district manager. Before
joining Best Buy, he worked for American of Madison, Inc. for more than twenty years, last
serving as senior vice president of stores.
Retail Industry Takeover Table
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Historical ratio analysis
Type
Components of Return
OPM
Ratio
i.e.
Calculation
2003
2004
2005
2006
2007R
Return on Equity
(return)
ROE =
NI
Average Equity
-0.2%
0.0%
2.9%
7.5%
5.0%
Net Profit Margin
(operations)
NPM =
NI
Sales
-0.1%
0.0%
0.6%
1.3%
0.7%
Turnover
(investment)
=
Sales
Assets
2.62
2.65
2.71
2.83
3.60
Leverage
(financing)
=
Assets
Equity
1.62
1.68
1.85
2.08
1.93
Cost of Goods Sold
to Sales
CGS Ratio =
CGS
Sales
75.9% 76.6% 75.5% 75.6%
76.4%
Profitability
Gross Profit
Margin
GPM =
Gross Profit
Sales
24.1% 23.4% 24.5% 24.4%
23.6%
Profitability
Operating Expenses
to Sales
Op Exp Ratio =
Op Exp
Sales
21.6% 20.5% 21.9% 20.9%
21.0%
Profitability
Operating Profit
Margin
OPM =
EBIT
Sales
0.4%
0.5%
1.2%
2.1%
1.2%
Profitability
Interest Burden
=
Interest
EBIT
2.5%
8.3%
3.5%
1.3%
0.0%
Profitability
Effective Tax Rate
t=
Tax
EBT
4%
42%
38%
37%
na
Cash to Sales
Cash Ratio =
Cash
Sales
8.8%
7.9%
9.6%
7.3%
1.5%
Activity
Accounts Receivable
Days-on-Hand
AR DOH =
AR
Sales/365
13.6
21.9
8.1
7.2
12.5
Activity
Inventory
Days-on-Hand
Inv DOH =
Inventory
CGS/365
67.3
73.1
67.6
71.2
62.9
Activity
Net Fixed Assets
Turnover (@Sales)
NFATO =
Sales
Net Fixed Assets
13.4
12.2
9.5
9.3
11.1
Total Liabilities
to Total Assets
Total Liab =
to TA
Liabilities
Assets
Leverage
(Interest-Bearing)
Debt to Capital
Debt to =
Capital
Debt
Debt + Equity
Leverage
Times Interest
Earned
Interest =
Coverage
EBIT
Interest
39.5
12.1
28.4
78.2
na
Leverage
Accrued Expense
to Sales
AE to Sales =
AE
Sales
1.1%
1.2%
5.8%
5.5%
6.1%
Current
Ratio
CR =
CA
CL
2.42
2.56
2.09
1.75
1.37
Quick (or Acid
Test) Ratio
QR =
CA - Inventory
CL
1.32
1.23
0.98
0.70
0.41
Return on
Invested Capital
ROIC =
NOP
Capital
1.8%
1.3%
3.8%
7.6%
5.0%
NOPAT=
EBIT*(1-Tax Rate)
42
30
80
153
89
Capital =
Debt + Equity
2,387
2,248
2,101
2,014
1,791
Profitability
Activity
Leverage
Profitability Measures
Profitability
Activity Measures
Activity
Leverage Measures
Leverage
Liquidity Measures
Liquidity
Liquidity
Other Performance Measure
OPM
OPM
Operating
Efficiency
NOPM =
NOPAT
Sales
OPM
Capital
Management
Capital =
Turnover
Sales
Capital
38%
40%
46%
52%
62%
10.8% 18.9% 18.1% 40.4%
0.0%
0.42% 0.30% 0.77% 1.33%
4.2
4.4
5.0
5.7
0.71%
6.9
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Ownership structure
Ownership 9/30/07
Wellington Management
TCW Group
HBK Investments
First Pacific Advisors
Putman Investments
Royal Capital Management
FMR
Vanguard Group
D.E. Shaw
Barclays Global Investors
State Street
Barclays Global Investors UK
BNPParibas
Deutsche
Morgan Stanley
UBS
TIAA Cref
Suntrust
Elm Ridge Capital
Bank of New York Mellon
Nationwide Fund Advisors
California Public Emp. Retirmt. Sys.
Merrill Lynch
Aviva
Northern Trust
Top 25 Owners
Other
Total
Shares
Held (K)
21,646
18,732
14,751
10,623
8,313
7,500
7,396
6,087
5,710
5,487
5,172
5,132
3,957
3,924
2,728
2,421
2,097
2,045
1,930
1,706
1,670
1,643
1,590
1,460
1,460
145,182
23,399
168,581
% of
TSO
12.8%
11.1%
8.8%
6.3%
4.9%
4.5%
4.4%
3.6%
3.4%
3.3%
3.1%
3.0%
2.4%
2.3%
1.6%
1.4%
1.2%
1.2%
1.1%
1.0%
1.0%
1.0%
0.9%
0.9%
0.9%
86.1%
13.9%
100.0%
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Quarterly Schedule By Store Type
Bad Store ($mm)
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Cont. Ops
Discont. & Other Charges
Net Income
Q1
2.80
2.18
0.61
0.60
0.01
0.01
0.00
0.01
0.01
Q3
3.43
2.67
0.75
0.74
0.02
0.02
0.01
0.01
0.01
Q4
4.71
3.67
1.03
1.01
0.02
0.02
0.01
0.01
0.01
Q1
3.53
2.72
0.81
0.83
(0.03)
(0.03)
(0.01)
(0.02)
(0.02)
Q2
3.09
2.41
0.68
0.66
0.02
0.02
0.01
0.01
0.01
Year 1
Q2
3.90
3.02
0.88
0.90
(0.02)
(0.02)
(0.01)
(0.01)
(0.01)
Transition Store ($mm)
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Cont. Ops
Discont. & Other Charges
Net Income
Q3
4.32
3.35
0.97
0.97
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
Q4
5.93
4.57
1.36
1.06
0.31
0.31
0.11
0.20
0.20
Q1
4.09
3.12
0.97
0.98
(0.01)
(0.01)
(0.00)
(0.01)
(0.01)
Year 2
Q2
Q3
4.52
5.01
3.47
3.85
1.05
1.16
1.05
1.14
0.00
0.02
0.00
0.02
0.00
0.01
0.00
0.02
0.00
0.02
Q4
6.88
5.25
1.63
1.24
0.39
0.39
0.14
0.25
0.25
Q1
4.50
3.40
1.10
1.07
0.02
0.02
0.01
0.01
0.01
Year 3
Q2
Q3
4.98
5.51
3.78
4.19
1.20
1.32
1.16
1.25
0.04
0.07
0.04
0.07
0.01
0.02
0.02
0.04
0.02
0.04
Q4
7.57
5.72
1.85
1.36
0.49
0.49
0.17
0.31
0.31
Q1
4.81
3.64
1.18
1.15
0.03
0.03
0.01
0.02
0.02
0.03
0.05
0.34
0.04
0.06
0.06
0.36
0.07
0.08
0.11
0.44
Good Store ($mm)
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Cont. Ops
Discont. & Other Charges
Net Income
Q1
5.51
4.07
1.43
1.18
0.25
0.25
0.09
0.16
0.16
Q2
6.09
4.51
1.59
1.31
0.28
0.28
0.10
0.18
0.18
Q3
6.74
4.99
1.76
1.45
0.31
0.31
0.11
0.20
0.20
Q4
9.26
6.85
2.41
1.99
0.42
0.42
0.15
0.27
0.27
Q1
5.73
4.24
1.49
1.23
0.26
0.26
0.09
0.17
0.17
Q2
6.33
4.69
1.65
1.36
0.29
0.29
0.10
0.18
0.18
Q3
7.01
5.19
1.83
1.51
0.32
0.32
0.11
0.20
0.20
Q4
9.63
7.13
2.51
2.07
0.44
0.44
0.16
0.28
0.28
Q1
5.96
4.41
1.55
1.28
0.27
0.27
0.10
0.17
0.17
Q2
6.59
4.87
1.71
1.42
0.30
0.30
0.11
0.19
0.19
Q3
7.29
5.40
1.90
1.57
0.33
0.33
0.12
0.21
0.21
Q4
10.02
7.41
2.61
2.15
0.45
0.45
0.16
0.29
0.29
Q1
6.19
4.58
1.61
1.33
0.28
0.28
0.10
0.18
0.18
Q2
6.85
5.07
1.78
1.47
0.31
0.31
0.11
0.20
0.20
Q3
7.59
5.61
1.97
1.63
0.34
0.34
0.12
0.22
0.22
Q4
10.42
7.71
2.71
2.24
0.47
0.47
0.17
0.30
0.30
Q1
6.44
4.77
1.68
1.39
0.29
0.29
0.10
0.19
0.19
Q2
7.13
5.27
1.85
1.53
0.32
0.32
0.12
0.21
0.21
Q3
7.89
5.84
2.05
1.70
0.36
0.36
0.13
0.23
0.23
Q4
10.84
8.02
2.82
2.33
0.49
0.49
0.18
0.32
0.32
Q1
6.70
4.96
1.74
1.44
0.30
0.30
0.11
0.19
0.19
Q2
7.41
5.48
1.93
1.59
0.34
0.34
0.12
0.22
0.22
Q3
8.20
6.07
2.14
1.76
0.37
0.37
0.13
0.24
0.24
Q4
11.27
8.34
2.93
2.42
0.51
0.51
0.18
0.33
0.33
New Store ($mm)
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Cont. Ops
Discont. & Other Charges
Net Income
Q1
3.83
2.91
0.92
0.91
(0.10)
0.01
(0.08)
(0.03)
(0.05)
(0.06)
Q2
4.24
3.23
1.00
0.99
(0.08)
0.01
(0.06)
(0.02)
(0.04)
(0.03)
Q3
4.69
3.59
1.10
1.07
(0.03)
0.01
(0.02)
(0.01)
(0.02)
(0.03)
Q4
6.44
4.89
1.55
1.16
0.79
0.01
0.67
0.24
0.43
0.44
Q1
4.81
3.64
1.18
1.14
(0.18)
(0.16)
(0.06)
(0.10)
(0.12)
Q2
5.32
4.04
1.28
1.23
(0.14)
(0.13)
(0.05)
(0.08)
(0.05)
Q3
5.89
4.48
1.42
1.33
(0.06)
(0.05)
(0.02)
(0.03)
(0.05)
Q4
8.10
6.11
1.99
1.44
1.42
1.34
0.48
0.86
0.88
Q1
5.30
3.98
1.32
1.24
(0.25)
(0.23)
(0.08)
(0.14)
(0.18)
Q2
5.86
4.41
1.44
1.33
(0.20)
(0.18)
(0.06)
(0.12)
(0.07)
Q3
6.48
4.89
1.59
1.44
(0.09)
(0.07)
(0.02)
(0.04)
(0.07)
Q4
8.91
6.68
2.23
1.57
2.02
1.92
0.69
1.23
1.25
Q1
5.51
4.11
1.40
1.27
(0.33)
(0.29)
(0.10)
(0.19)
(0.22)
Q2
6.09
4.56
1.53
1.37
(0.26)
(0.23)
(0.08)
(0.15)
(0.09)
Q3
6.74
5.06
1.69
1.48
(0.11)
(0.09)
(0.03)
(0.06)
(0.10)
Q4
9.26
6.90
2.37
1.61
2.59
2.45
0.88
1.57
1.60
2.0
2.0
0.3
0.3
0.2
0.2
+New Store SG&A
+Transition SG&A
Year 4
Q2
Q3
5.32
5.89
4.04
4.48
1.28
1.42
1.24
1.34
0.04
0.08
0.04
0.02
0.03
0.08
0.03
0.05
Q4
8.10
6.11
1.99
1.46
0.53
Q1
5.05
3.79
1.26
1.19
0.07
0.53
0.19
0.34
0.07
0.02
0.04
Year 5
Q2
Q3
5.59
6.19
4.21
4.71
1.38
1.48
1.29
1.39
0.09
0.09
0.09
0.03
0.06
0.09
0.03
0.06
Q4
8.50
6.42
2.08
1.51
0.57
Q1
5.26
3.92
1.34
1.23
0.11
0.57
0.20
0.36
0.11
0.04
0.07
Year 6
Q2
Q3
5.81
6.44
4.35
4.83
1.46
1.61
1.34
1.45
0.12
0.16
0.12
0.04
0.08
0.1
0.1
68
0.16
0.06
0.11
Q4
8.84
6.58
2.26
1.58
0.68
0.68
0.24
0.44
TURNAROUND MANAGEMENT
FINAL PAPER
CIRCUIT CITY STORES
Quarterly P&L Forecast 2008E - 2015E
Year
Stores
Beginning
Openings per year
Relocations per year
New
Relocated
Non-Relocated
Good
Ending
Non-relocated store P&L
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Continuing Ops.
Discontinued & Other Charges
Net Income
Transition store P&L
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Continuing Ops.
Discontinued & Other Charges
Net Income
Q1 08
Q2 08
Q3 08
Q4 08
672
0
25
0
25
375
272
672
672
0
25
0
50
350
272
672
1,049
819
231
225
5
5
2
3
3
1,083
845
238
233
5
5
2
3
3
88
68
20
21
(1)
195
151
44
45
(1)
(1)
(0)
(1)
(1)
324
251
73
73
(0)
(0)
(0)
(0)
(0)
(1)
(0)
(0)
(0)
672
0
25
0
75
325
272
672
1,114
869
245
239
5
5
2
4
4
Q1 09
672
0
0
0
75
325
272
672
Q2 09
Q3 09
Q4 09
Q1 10
672
0
25
0
125
275
272
672
672
0
25
0
150
250
272
672
672
0
0
0
150
250
272
672
672
0
25
0
175
225
272
672
865
675
190
186
4
4
2
3
3
877
684
193
188
4
4
2
3
3
882
688
194
190
4
4
2
3
3
1,212
946
266
260
6
6
2
4
4
668
521
147
143
3
3
1
2
2
445
343
102
79
23
23
8
15
15
395
302
93
94
(1)
(1)
(0)
(1)
(1)
242
185
57
57
1
1
0
0
0
376
288
87
85
2
2
1
1
1
961
736
225
172
52
52
19
34
34
1,530
1,194
336
329
8
8
3
5
5
672
0
25
0
100
300
272
672
Q2 10
672
0
25
0
200
200
272
672
Q3 10
Q4 10
Q1 11
672
0
25
0
250
150
272
672
Q2 11
672
0
25
0
275
125
272
672
Q3 11
672
0
10
0
285
115
272
672
Q4 11
672
0
0
0
285
115
272
672
Q1 12
Q2 12
672
0
0
0
285
115
272
672
672
0
10
0
295
105
272
672
Q3 12
672
0
10
0
305
95
272
672
Q4 12
672
0
0
0
305
95
272
672
Q1 13
672
0
20
0
325
75
272
672
Q2 13
672
0
25
0
225
175
272
672
672
0
0
0
225
175
272
672
672
0
15
0
340
60
272
672
657
512
144
141
3
3
1
2
2
636
496
140
137
3
3
1
2
2
874
682
192
188
4
4
2
3
3
459
358
101
99
2
2
1
1
1
423
330
93
91
2
2
1
1
1
431
336
95
92
2
2
1
1
1
591
461
130
127
3
3
1
2
2
362
283
80
78
2
2
1
1
1
366
285
80
79
2
2
1
1
1
366
286
81
79
2
2
1
1
1
503
393
111
108
2
2
1
2
2
243
190
53
52
1
1
0
1
1
215
168
47
46
1
1
0
1
1
732
557
175
175
0
0
0
0
0
907
694
213
211
2
2
1
1
1
1,113
854
259
252
7
7
2
4
4
1,528
1,165
363
274
89
89
32
57
57
1,093
830
263
261
2
2
1
2
2
1,307
997
309
304
5
5
2
3
3
1,490
1,139
351
338
13
13
5
8
8
2,046
1,555
492
368
124
124
44
80
80
1,323
1,000
323
315
8
8
3
5
5
1,502
1,141
362
349
13
13
5
8
8
1,706
1,301
406
387
19
19
7
12
12
2,344
1,775
569
421
148
148
53
95
95
1,557
1,172
384
368
16
16
6
10
10
Q3 13
672
0
15
0
355
45
272
672
Q4 13
Q1 14
Q2 14
Q3 14
Q4 14
672
0
0
0
325
0
347
672
672
10
0
10
300
0
372
682
682
10
0
20
275
0
397
692
692
10
0
30
250
0
422
702
702
0
0
30
250
0
422
702
179
139
39
38
1
1
0
1
1
246
192
54
53
1
1
0
1
1
97
76
21
21
0
0
55
43
12
12
0
0
0
0
0
-
-
-
-
-
-
1,780
1,347
433
412
21
21
7
13
13
2,036
1,546
489
460
30
30
11
19
19
2,796
2,110
686
501
186
186
66
119
119
1,410
1,062
348
333
15
15
5
9
9
1,617
1,224
393
374
19
19
7
12
12
1,856
1,410
445
419
26
26
9
17
17
2,549
1,924
624
456
168
168
60
108
108
1,203
905
298
284
14
14
5
9
9
1,330
1,005
325
308
17
17
6
11
11
1,473
1,116
357
333
24
24
9
15
15
2,023
1,523
500
362
138
138
49
88
88
38
29
9
9
(1)
0
(1)
(0)
(1)
85
65
20
20
(2)
0
(1)
(0)
(1)
0
0
0
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Good stores P&L
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Continuing Ops.
Discontinued & Other Charges
Net Income
1,498
1,108
390
322
68
68
24
44
44
1,657
1,226
431
356
75
75
27
48
48
1,834
1,357
477
394
83
83
30
53
53
2,519
1,864
656
542
114
114
41
73
73
1,558
1,152
405
335
71
71
25
45
45
1,723
1,275
448
370
78
78
28
50
50
1,908
1,411
497
410
86
86
31
55
55
2,620
1,938
682
563
119
119
42
76
76
1,620
1,198
422
348
73
73
26
47
47
1,792
1,326
466
385
81
81
29
52
52
1,984
1,468
516
427
90
90
32
58
58
2,725
2,016
709
586
123
123
44
79
79
1,685
1,246
439
362
76
76
27
49
49
1,864
1,379
485
401
84
84
30
54
54
2,063
1,526
537
444
93
93
33
60
60
2,834
2,096
738
609
128
128
46
82
82
1,752
1,296
456
377
79
79
28
51
51
1,938
1,434
504
417
88
88
31
56
56
2,146
1,587
559
461
97
97
35
62
62
2,947
2,180
767
634
133
133
48
86
86
1,823
1,348
474
392
83
83
30
53
53
2,016
1,491
525
433
91
91
33
59
59
2,232
1,651
581
480
101
101
36
65
65
3,065
2,267
798
659
139
139
50
89
89
2,033
1,504
493
408
86
86
31
55
55
2,401
1,776
625
516
109
109
39
70
70
2,827
2,091
736
608
128
128
46
82
82
3,883
2,872
1,011
835
176
176
63
113
113
0
50
0
75
0
80
2,635
1,995
641
618
22
(7)
30
11
19
19
2,935
2,222
713
709
4
34
(30)
(11)
(19)
(19)
3,272
2,477
795
787
8
(8)
15
6
10
10
Aggregated P&L
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest (Income) Expense
Pre-Tax Income
Tax
Net Income from Continuing Ops.
Discontinued & Other Charges
Net Income
13,336
4,494
3,400
1,094
983
111
33
78
28
50
50
0
78
0
80
0
33
0
58
0
78
0
80
0
33
0
58
0
78
2,817
2,129
688
673
15
(9)
24
9
15
15
2,841
2,143
698
693
5
33
(28)
(10)
(18)
(18)
3,166
2,388
778
766
12
(5)
17
6
11
11
13,617
4,793
3,620
1,173
1,029
144
32
112
40
72
72
3,020
2,277
743
724
19
(6)
25
9
16
16
3,356
2,532
824
815
8
32
(24)
(8)
(15)
(15)
3,733
2,818
915
896
19
(1)
21
7
13
13
15,236
5,127
3,862
1,265
1,081
184
31
153
55
98
98
3,237
2,435
802
780
23
(3)
26
9
17
17
3,593
2,706
887
874
14
31
(18)
(6)
(11)
(11)
0
50
3,984
3,001
982
925
58
2
55
20
35
35
0
18
16,286
5,472
4,112
1,360
1,122
237
29
208
75
134
134
0
5
0
21
3,438
2,579
859
774
84
(2)
86
31
55
55
3,806
2,860
946
866
81
29
52
19
33
33
0
30
4,219
3,174
1,045
957
88
2
85
31
55
55
0
12
17,256
5,794
4,348
1,447
1,175
272
24
248
89
159
159
Q4 15
672
0
15
0
325
0
347
672
-
0
58
Q3 15
672
0
15
0
335
15
322
672
-
0
33
Q2 15
672
0
15
0
345
30
297
672
New stores P&L
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest Income (Expense)
Pre-Tax Income
Tax
Net Income from Continuing Ops.
Discontinued & Other Charges
Net Income
New Store - SG&A
Transition Store - SG&A
Q1 15
672
0
0
0
355
45
272
672
0
43
0
51
3,622
2,710
912
856
56
(2)
59
21
38
38
4,011
3,006
1,005
943
62
24
37
13
24
24
0
49
4,446
3,337
1,110
1,028
82
3
79
28
51
51
0
20
18,186
6,107
4,569
1,538
1,233
305
20
285
102
183
183
0
35
0
47
3,540
2,642
898
797
102
(2)
104
37
67
67
4,074
3,044
1,030
949
81
19
61
22
39
39
0
48
4,682
3,501
1,181
1,075
106
2
104
37
67
67
-
(1)
0
20
18,727
6,431
4,796
1,635
1,311
324
15
309
110
198
198
(1)
2,538
1,878
661
546
115
115
41
74
74
2,960
2,189
770
636
134
134
48
86
86
20
5
3,780
2,812
968
864
103
(3)
106
38
68
68
30
2
4,375
3,259
1,116
996
119
15
105
38
67
67
69
141
108
33
32
(1)
0
(1)
(0)
(0)
(1)
3,446
2,549
897
741
156
156
56
100
100
32
0
5,059
3,773
1,286
1,138
148
1
148
53
95
95
193
147
46
35
24
0
20
7
13
13
4,733
3,501
1,232
1,018
214
214
77
138
138
13
0
20,162
6,949
5,171
1,778
1,428
350
10
340
122
218
218
TURNAROUND MANAGEMENT
FINAL PAPER
CIRCUIT CITY STORES
Quarterly Cash Flow Forecast 2008E - 2015E
Working capital
Accounts receivable
% of sales
Starting
382.6
Q3 08
387.0
11.8%
Q4 08
456.5
10.2%
Q1 09
234.6
8.3%
Q2 09
259.4
9.1%
Q3 09
374.5
11.8%
Q4 09
486.9
10.2%
Q1 10
251.5
8.3%
Q2 10
306.4
9.1%
Q3 10
441.6
11.8%
Q4 10
520.8
10.2%
Q1 11
269.6
8.3%
Q2 11
328.0
9.1%
Q3 11
471.3
11.8%
Q4 11
555.8
10.2%
1,964.8
98.5%
1,912.6
86.1%
2,629.8
106.2%
1,849.6
54.4%
2,097.3
98.5%
1,845.0
86.1%
2,535.5
106.2%
1,969.4
54.4%
2,242.9
98.5%
2,180.0
86.1%
2,991.6
106.2%
2,101.2
54.4%
2,398.0
98.5%
2,329.3
86.1%
3,186.9
106.2%
2,237.3 2,540.2 2,461.8 3,369.8
54.4% 98.5% 86.1% 106.2%
2,365.2 2,669.7 2,587.9 3,542.7
54.4% 98.5% 86.1% 106.2%
2,485.7 2,602.0 2,620.2 3,717.5
54.4% 98.5% 86.1% 106.2%
936.0
39.5
1.5%
35.6
90%
940.0
940.0
44.0
1.5%
39.6
90%
944.4
944.4
49.1
1.5%
44.2
90%
949.3
949.3
67.4
1.5%
60.7
90%
956.0
956.0
42.3
1.5%
38.0
90%
960.2
960.2
42.6
1.5%
38.4
90%
964.5
964.5
47.5
1.5%
42.7
90%
969.2
969.2
71.9
1.5%
64.7
90%
976.4
976.4
45.3
1.5%
40.8
90%
981.0
981.0
50.3
1.5%
45.3
90%
986.0
986.0
56.0
1.5%
50.4
90%
991.6
991.6
76.9
1.5%
69.2
90%
999.3
999.3
48.6
1.5%
43.7
90%
1,004.1
1,004.1
53.9
1.5%
48.5
90%
1,009.5
1,009.5
59.8
1.5%
53.8
90%
1,015.5
1,015.5 1,023.7 1,028.9
82.1
51.6
57.1
1.5%
1.5%
1.5%
73.9
46.4
51.4
90%
90%
90%
1,023.7 1,028.9 1,034.6
1,034.6
63.3
1.5%
57.0
90%
1,040.9
1,040.9 1,049.6 1,055.0
86.9
54.3
60.2
1.5%
1.5%
1.5%
78.2
48.9
54.1
90%
90%
90%
1,049.6 1,055.0 1,061.0
1,061.0
66.7
1.5%
60.0
90%
1,067.7
1,067.7 1,076.9 1,082.2
91.6
53.1
61.1
1.5%
1.5%
1.5%
82.4
47.8
55.0
90%
90%
90%
1,076.9 1,082.2 1,088.3
922
1,012.9
50.8%
46.2
1,016.5
45.8%
41.6
1,945.7
78.6%
72.3
1,042.3
30.7%
28.2
1,081.1
50.8%
45.7
980.6
45.8%
41.6
1,875.9
78.6%
72.3
1,109.8
30.7%
28.2
1,156.2
50.8%
45.7
1,158.7
45.8%
41.6
2,213.3
78.6%
72.3
1,184.1
30.7%
28.2
1,236.1
50.8%
45.7
1,238.0
45.8%
41.6
2,357.8
78.6%
72.3
1,260.8 1,309.4 1,308.4
30.7% 50.8% 45.8%
28.2
46.2
41.6
2,493.2
78.6%
72.3
1,332.9 1,376.2 1,375.5
30.7% 50.8% 45.8%
28.2
45.7
41.6
2,621.1
78.6%
72.3
785
641.2
32.1%
714.1
32.1%
796.1
32.1%
1,092.7
32.1%
684.4
32.1%
688.8
32.1%
767.5
32.1%
1,163.5
32.1%
731.9
32.1%
813.9
32.1%
905.6
32.1%
1,241.4
32.1%
782.5
32.1%
869.7
32.1%
964.7
32.1%
1,321.8
32.1%
828.9
32.1%
919.1
32.1%
1,020.1
32.1%
1,397.4
32.1%
871.2
32.1%
966.2
32.1%
312.2
530.3
218.1
450.0
(80.3)
275.1
(174.9)
171.1
(104.0)
566.4
395.3
435.0
(131.4)
266.5
(168.4)
183.0
(83.6)
606.3
423.4
513.9
(92.5)
314.2
(199.6)
196.6
(117.7)
648.9
452.3
549.7
(99.2)
335.6
(214.1)
210.6
(125.0)
688.1
477.5
581.8
(106.3)
355.6
(226.2)
223.6
(132.0)
724.0
500.4
19.0
(218.1)
(4.0)
(203.0)
(19.4)
80.3
(4.4)
56.6
9.9
174.9
(4.9)
179.9
50.3
104.0
(6.7)
147.6
15.4
(395.3)
(4.2)
(384.1)
(18.1)
131.4
(4.3)
109.0
10.8
168.4
(4.7)
174.5
72.1
83.6
(7.2)
148.5
15.9
(423.4)
(4.5)
(412.0)
(15.1)
92.5
(5.0)
72.3
13.2
199.6
(5.6)
207.2
98.2
117.7
(7.7)
208.2
16.7
(452.3)
(4.9)
(440.5)
(11.4)
99.2
(5.4)
82.4
35.5
214.1
(6.0)
243.6
133.8
125.0
(8.2)
250.6
55.1
(477.5)
(5.2)
(427.6)
33.3
106.3
(5.7)
133.9
54.7
226.2
(6.3)
274.6
159.0
132.0
(8.7)
282.3
(50.0)
100.0
7.3
57.3
(75.6)
(80.6)
(33.1)
(58.1)
(78.1)
(80.6)
(33.1)
(58.1)
(78.1)
(80.6)
(33.1)
(58.1)
(78.1)
(50.6)
(18.1)
(5.1)
(21.6)
(30.6)
7.6
(68.0)
7.5
(73.1)
8.6
(24.5)
8.7
(49.4)
4.5
(73.6)
4.8
(75.8)
5.8
(27.3)
5.9
(52.2)
1.3
(76.8)
1.3
(79.3)
2.6
(30.5)
3.2
(54.9)
(78.1)
(50.6)
0.3
(17.8)
1.6
(3.5)
(21.6)
(30.6)
-
Beginning Net PP&E
Capex
% of sales
Depreciation
% of capex
Ending net PP&E
Q2 08
268.0
9.1%
1,637
Inventories
% of COGS
Q1 08
219.5
8.3%
-
-
107.1
(107.1)
-
-
-
107.1
(107.1)
-
-
-
107.1
(107.1)
-
-
-
107.1
(107.1)
-
-
936.0
Liabilities
Accounts payable
% of COGS
Days payable
Other accrued liabilities
% of COGS
Net working capital (NWC)
Change
Cash flows
Net income
Less: increase in NWC
Less: increase in net pp&e
Cash from operations
Cash from Investing
Capex
Asset sales
Cash interest
Cash from investing
1.0%
Cash from financing
Principal repayment
Cash from financing
Q1 12
286.3
8.3%
Q2 12
347.5
9.1%
Q3 12
499.0
11.8%
Q4 12
588.6
10.2%
Q1 13
301.6
8.3%
Q2 13
366.2
9.1%
Q3 13
525.9
11.8%
Q4 13
620.3
10.2%
Q1 14
294.8
8.3%
Q2 14
371.9
9.1%
Q3 14
553.9
11.8%
Q4 14
653.3
10.2%
Q1 15
314.7
8.3%
Q2 15
399.4
9.1%
Q3 15
598.5
11.8%
Q4 15
705.9
10.2%
2,609.4 2,769.7
54.4% 98.5%
2,805.7 4,005.7
86.1% 106.2%
2,813.1
54.4%
1,088.3
70.2
1.5%
63.2
90%
1,095.3
1,095.3 1,105.0
96.5
56.7
1.5%
1.5%
86.8
51.0
90%
90%
1,105.0 1,110.6
1,110.6
65.6
1.5%
59.1
90%
1,117.2
1,117.2
75.9
1.5%
68.3
90%
1,124.8
1,124.8
104.2
1.5%
93.8
90%
1,135.2
1,400.7 1,341.3 1,392.6
30.7% 50.8% 45.8%
28.2
45.7
41.6
2,750.4
78.6%
72.3
1,470.4 1,427.8
30.7% 50.8%
28.2
45.7
1,491.2
45.8%
41.6
2,963.6
78.6%
72.3
1,585.2
30.7%
28.2
1,072.4
32.1%
1,468.5
32.1%
849.1
32.1%
978.2
32.1%
1,125.3
32.1%
1,541.6
32.1%
903.8
32.1%
1,047.5
32.1%
1,212.5
32.1%
1,661.9
32.1%
612.5
(111.5)
375.2
(237.3)
236.8
(138.4)
706.4
469.6
621.3
(85.1)
395.7
(225.6)
250.6
(145.0)
752.9
502.3
666.4
(86.5)
428.0
(238.5)
271.8
(156.2)
37.6
(500.4)
(5.4)
(468.2)
23.8
111.5
(6.0)
129.3
50.8
237.3
(6.7)
281.5
182.9
138.4
(9.2)
312.1
66.7
(469.6)
(5.3)
(408.3)
39.2
85.1
(6.1)
118.3
66.6
225.6
(7.0)
285.2
198.2
145.0
(9.6)
333.5
68.3
(502.3)
(5.7)
(439.6)
67.4
86.5
(6.6)
147.3
94.9
238.5
(7.6)
325.8
218.5
156.2
(10.4)
364.2
(12.6)
(43.6)
(51.6)
(49.6)
(20.6)
(35.1)
(47.1)
(48.6)
(20.1)
(25.1)
(32.1)
(32.6)
(13.6)
0.8
(11.8)
2.4
(41.2)
(51.6)
(49.6)
0.5
(20.1)
2.3
(32.8)
(47.1)
(48.6)
1.0
(19.1)
3.0
(22.1)
(32.1)
(32.6)
2.5
(11.1)
-
107.1
(107.1)
-
-
-
107.1
(107.1)
-
-
-
107.1
(107.1)
-
-
-
-
Change in cash
(145.7)
(11.4)
106.8
15.9
(433.5)
35.4
98.7
14.0
(464.2)
(4.5)
127.9
70.5
(495.3)
4.3
193.0
125.7
(431.1)
112.3
244.0
163.3
(509.4)
77.7
231.9
184.8
(441.1)
71.2
236.6
207.2
(461.7)
115.2
293.2
353.1
Beginning cash
Change in cash
Ending cash
919.9
(145.7)
774.1
774.1
(11.4)
762.7
762.7
106.8
869.5
869.5
15.9
885.4
885.4
(433.5)
452.0
452.0
35.4
487.3
487.3
98.7
586.0
586.0
14.0
600.0
600.0
(464.2)
135.8
135.8
(4.5)
131.4
131.4
127.9
259.3
259.3
70.5
329.8
329.8
(495.3)
(165.5)
(165.5)
4.3
(161.2)
(161.2)
193.0
31.8
31.8
125.7
157.4
157.4
(431.1)
(273.7)
(273.7)
112.3
(161.4)
(161.4)
244.0
82.6
82.6
163.3
245.9
245.9
(509.4)
(263.5)
(263.5)
77.7
(185.8)
(185.8)
231.9
46.1
46.1
184.8
230.9
230.9
(441.1)
(210.2)
(210.2)
71.2
(139.1)
(139.1)
236.6
97.5
97.5
207.2
304.8
304.8
(461.7)
(156.9)
(156.9)
115.2
(41.7)
(41.7)
293.2
251.5
251.5
353.1
604.6
4.8%
4.0%
3.9%
6.6%
3.3%
3.6%
4.4%
4.4%
1.0%
0.9%
1.7%
2.2%
-1.1%
-1.0%
0.2%
1.0%
-1.7%
-1.0%
0.5%
1.4%
-1.5%
-1.1%
0.3%
1.3%
-1.2%
-0.8%
0.5%
1.6%
-0.8%
-0.2%
1.3%
3.0%
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
165.5
165.5
(165.5)
165.5
(4.3)
161.2
(161.2)
161.2
(193.0)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
273.7
273.7
(273.7)
273.7
(112.3)
161.4
(161.4)
161.4
(244.0)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
263.5
263.5
(263.5)
263.5
(77.7)
185.8
(185.8)
185.8
(231.9)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
210.2
210.2
(210.2)
210.2
(71.2)
139.1
(139.1)
139.1
(236.6)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
156.9
156.9
(156.9)
156.9
(115.2)
41.7
(41.7)
41.7
(293.2)
0.0
0.0
0.0
0.0
0.0
350.0
0.0
350.0
0.0
350.0
0.0
350.0
0.0
350.0
0.0
350.0
0.0
350.0
0.0
350.0
0.0
350.0
0.0
350.0
0.0
350.0
0.0
350.0
0.0
350.0
2.4
350.0
2.4
350.0
0.0
350.0
0.0
350.0
4.0
350.0
2.4
350.0
0.0
350.0
0.0
350.0
3.9
350.0
2.7
350.0
0.0
350.0
0.0
350.0
3.1
350.0
2.0
350.0
0.0
350.0
0.0
350.0
2.3
350.0
0.6
350.0
0.0
350.0
739.5
Memo: Cash % LTM Sales
Revolver (Max $350MM)
Cash need
Beginning balance
Added use (repayment)
Revolver balance
Interest (annual)
Interest (quarterly)
Max revolver during period
6.0%
1.5%
273.7
70
TURNAROUND MANAGEMENT
FINAL PAPER
CIRCUIT CITY STORES
Annual Income Statements 2008-2015
Income statement
Revenue
COGS
Gross Profit
SG&A Expenses
Operating Profit
Interest (Income) Expense
Pre-Tax Income
Tax
Net Income
2008
13,336
10,093
3,243
3,097
146
52
93
33
60
2009
13,617
10,280
3,337
3,161
176
51
125
45
80
2010
15,236
11,489
3,747
3,517
230
55
175
63
112
2011
16,286
12,254
4,032
3,700
331
59
272
97
175
2012
17,256
12,960
4,297
3,772
524
54
470
168
302
2013
18,186
13,622
4,564
4,060
505
45
460
165
295
2014
18,727
13,983
4,744
4,132
612
35
577
207
371
2015
20,162
15,015
5,148
4,426
721
22
699
250
449
2008
2009
2.1%
24.5%
23.2%
1.3%
0.6%
2010
11.9%
24.6%
23.1%
1.5%
0.7%
2011
6.9%
24.8%
22.7%
2.0%
1.1%
2012
6.0%
24.9%
21.9%
3.0%
1.8%
2013
5.4%
25.1%
22.3%
2.8%
1.6%
2014
3.0%
25.3%
22.1%
3.3%
2.0%
2015
7.7%
25.5%
22.0%
3.6%
2.2%
Ratio Analysis 2008-2015
Ratio analysis
Revenue growth
Gross margin
SG&A
Operating margin
Net margin
24.3%
23.2%
1.1%
0.4%
71
TURNAROUND MANAGEMENT
FINAL PAPER
CIRCUIT CITY STORES
Annual Cash Flows 2008-2015
Annual Cash Flows
Cash flows
Net income
Less: increase in net working capital
Less: increase in net pp&e
Cash from operations
2008
59.9
141.1
(20.0)
181.0
2009
80.2
(11.9)
(20.4)
47.8
2010
112.2
(13.6)
(22.9)
75.7
2011
174.6
(14.0)
(24.4)
136.1
2012
302.1
(13.0)
(25.9)
263.2
2013
295.1
(13.2)
(27.3)
254.6
2014
370.7
(13.9)
(28.1)
328.7
2015
449.1
(21.1)
(30.2)
397.7
Cash from Investing
Capital expenditure
Asset sales
Cash interest
Cash from investing
(239.3)
100.0
31.0
(108.3)
(249.9)
23.8
(226.1)
(249.9)
11.1
(238.8)
(204.9)
3.6
(201.3)
(69.9)
2.4
(67.5)
(165.4)
2.9
(162.5)
(150.9)
3.2
(147.7)
(103.4)
5.5
(97.9)
Cash from financing
Principal repayment
Equity infusion
Cash from financing
(107.1)
180.4
73.2
(107.1)
(107.1)
(107.1)
(107.1)
(107.1)
(107.1)
-
(107.1)
(107.1)
(107.1)
(107.1)
(107.1)
(107.1)
-
Change in cash
146.0
(285.4)
(270.2)
(172.4)
88.5
(15.0)
73.9
299.8
Beginning cash
Change in cash
Ending cash
739.5
146.0
885.4
885.4
(285.4)
600.0
600.0
(270.2)
329.8
329.8
(172.4)
157.4
157.4
88.5
245.9
245.9
(15.0)
230.9
230.9
73.9
304.8
304.8
299.8
604.6
72