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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This note was uploaded on 04/06/2012 for the course ECON 202 taught by Professor Sanjeev during the Spring '12 term at Indian Institute Of Management, Ahmedabad.

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

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