Circuit City Earnings Above Expectations; New CEO Named

Circuit City Stores Inc. (CC) , the No. 2 U.S. consumer electronics chain, on Monday posted its first back-to-back quarterly profit in more than three years and said its president, a former Best Buy executive, would become chief executive.

The company, whose shares rose 7 percent, said the latest quarterly profit reversed a year-earlier loss, and was helped by strong demand for flat-panel televisions. It also raised its expectations for fiscal 2006 sales growth.

Circuit City said Chairman and Chief Executive Alan McCollough would retire and that President Philip Schoonover, a former Best Buy Co. Inc. (BBY) executive who has been helping lead Circuit City's turnaround, would become CEO.

The retailer, which is trying to stem a loss in market share to rival Best Buy, has been renovating its stores, improving its aging check-out systems, making more effective promotions, and hiring new management, like Schoonover.

"While we acknowledge there remains a lot of work yet to do, we are absolutely moving in the right direction," McCollough said on a conference call, adding that his decision to retire reflected his belief that management would be able to continue the transformation.

Sanford C. Bernstein & Co. analyst Colin McGranahan said Schoonover's promotion was widely anticipated and would be "positively received" although the timing may be sooner than expected.

In afternoon trading, shares of the retailer rose to $22.71 on the New York Stock Exchange.

Circuit City posted fiscal third-quarter net income from continuing operations of $10.1 million, or 6 cents per share, compared with a loss from continuing operations of $5.9 million, or 3 cents per share, a year earlier.

Analysts, on average, had been expecting a profit of 4 cents per share, according to Reuters Estimates.

Total sales rose 15 percent to $2.91 billion from $2.53 billion. Analysts' average forecast was $2.69 billion.

The retailer said sales were strong in flat panel televisions, portable digital audio products, notebook computers and digital imaging products, and its Web-originated sales jumped 74 percent.

Its consolidated comparable store sales -- or sales at stores open for at least a year -- rose 13.1 percent.

In its domestic business, total sales rose 14.4 percent to $2.74 billion. Its comparable store sales of televisions increased by double digits, with triple-digit comparable store sales growth in flat panel displays.

But Circuit City's margins were pressured from promotions as it tried grab customers' attention with deals on televisions and financing. Its gross margin declined to 24.2 percent from 25.2 percent.

It also said traffic in its stores was flat, but increases in the number of customers who made purchases -- called a "close rate" -- and higher average sale led to its sales growth.

While promotionals may be driving sales, analysts said they are looking to see how the retailer can improve its margins and earnings.

"What determines what moves the stock is whether they can carry the top line growth to the bottom line, whether the margins will hold up," said Zu Cowperthwaite, a senior analyst with Evergreen Investments, Wachovia's asset management unit.

"We're cautiously optimistic that the margins are going to at least hold versus last year."

For fiscal 2006, Circuit City said it now expects total sales growth of 8 to 10 percent, up from a previous expectation of 5 to 8 percent.

It also said it expects domestic comparable store sales growth in the mid- to upper-single digit range. That is up from its earlier view of growth in the low- to mid-single digit range.

The company narrowed its expectations for operating margin, or earnings from continuing operations before income taxes as a percent of sales, to a range of 1.6 percent to 2 percent, from its previous view of 1.3 percent to 2.3 percent.

In terms of the management transition, Circuit City said McCollough will retire as CEO on February 28, and will retire as chairman of the board at its 2006 annual shareholder meeting.

Schoonover will become CEO March 1.

As of the close on Friday, shares of Circuit City trade at roughly 25 times next year's earnings, while shares of Best Buy trade at almost 18 times next year's earnings, according to Reuters data.