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Paper--CircuitCityLBO - Circuit City An LBO Candidate...

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Circuit City An 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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T URNAROUND M ANAGEMENT F INAL P APER C IRCUIT C ITY S TORES 1 T ABLE OF C ONTENTS 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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T URNAROUND M ANAGEMENT F INAL P APER C IRCUIT C ITY S TORES 2 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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T URNAROUND M ANAGEMENT F INAL P APER C IRCUIT C ITY S TORES 3 E XECUTIVE S UMMARY 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
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