Circuit City Profit Falls Amid Costly Promotions

Circuit City Stores Inc. (CC), the No. 2 U.S. electronics retailer, on Monday said quarterly profit from continuing operations fell, hurt by costly promotions for flat-panel TVs (search) and other digital items and higher expenses.

Circuit City, which has been losing market share to rival Best Buy Co. Inc. (BBY) for more than four years, earned $82.5 million, or 43 cents a share, from continuing operations in the fourth quarter ended Feb. 28, compared with $94.7 million, or 46 cents a share, a year earlier.

Excluding charges totaling about $38.6 million after-tax related to the closure of 19 money-losing stores and changes in its lease accounting, the company posted a profit of 60 cents a share profit, below a Wall Street average forecast for 62 cents a share, according to Reuters Estimates.

Alan Rifkin, an analyst at Lehman Brothers said in a research note gross margins came under pressure from increased promotions, but higher sales of the product warranties helped underpin profitability.

Circuit City also said it recorded an after-tax gain of $1.8 million on the sale of a corporate office buildings on the quarter. Looking ahead, it forecast total sales growth of 3 percent to 6 percent in fiscal 2006, with U.S. sales from stores open at least a year rising in the low single-digit range.

As previously reported on March 4, Circuit's fourth-quarter sales grew 5.3 percent to $3.47 billion from $3.30 billion in the prior year.

Sales at stores open at least a year, or same-store sales, fell 2.9 percent in the quarter, compared with analysts' forecast for a slide of 5 percent to 6 percent. The retailer cited progress in improving store operations for the smaller-than-expected sales decline.

Including service-related revenue, fourth-quarter same-store sales declined 1.8 percent, Circuit City said.

Alan McCollough, Circuit City chief executive, said the retailer was evaluating all marketing programs and processes, including a complete advertising agency review.

"Although we are pleased that, particularly in the fourth quarter, we made progress in our expense reduction efforts, we recognize that a key component of a sustained earnings turnaround will be strong sales growth," he said in a statement.

One of the biggest problems for Circuit City, according to analysts, have been its poor real estate, which has been tied to areas with declining customer traffic.

The company said it would open 60 to 70 superstores this fiscal year, with a relatively even split between new stores and relocations.

In the last 5 years, Circuit City has relocated 38 stores, of which 24 have been open for more than six months. At quarter's end, Circuit City operated 617 stores in 158 U.S. markets.