Best Buy Outshines Circuit City in Q4

Best Buy (NYSE: BBY) edged further ahead of rival Circuit City (NYSE: CC) in the battle for consumer electronics and entertainment spending in the fourth quarter, with high-end TVs and other devices helping drive Best Buy's gains and costs associated with a restructuring plan dragging down Circuit City's.

Best Buy's profit was up 18.5 percent for the quarter that ended in early March, to US$763 million. Its revenue was up 21 percent to $12.9 billion, exceeding Wall Street analyst estimates.

Circuit City, meanwhile, turned in a loss for the quarter, largely due to plans to close stores and lay off employees as part of a larger restructuring push.

Circuit City's sales rose just 1.2 percent to $3.93 billion, below analyst forecasts. Same-store sales were down slightly year-over-year. The company lost $12.2 million in the quarter, compared with a profit of $141 million in the year-ago period.

Long-Term Goals

Circuit City's results reflect "significant charges associated with our actions to position the company for long-term success," but also pricing pressure in the electronics marketplace, including lower prices for flat-panel TVs, which had lower average selling prices than a year ago, CEO Philip Schoonover said.

Schoonover also cited "volatility" in the personal computer sector tied to the release of Microsoft's (Nasdaq: MSFT) Windows Vista operating system, which may have caused some consumers to delay purchases.

"We are disappointed in our financial performance, which largely reflects the effects of permanent changes in the television category and transitory changes in the PC category," he added. "We are responding to these market conditions by accelerating our strategy to transform Circuit City into a world-class, multichannel consumer electronics retailer."

Investors reacted to both reports the same way -- by selling off the retailers' stocks. Best Buy shares fell about 0.8 percent in morning trading Wednesday to $48.36, while Circuit City stock was down 0.4 percent to $17.93.

Bright Spots

For Circuit City, online sales represented one of the few bright spots. For the full fiscal year 2007, online sales grew 50 percent, the company said, and reached the $1 billion level. The company forecast Web and call-center sales growth for 2008 of 30 to 40 percent.

The company also got a boost from its services unit, with its Firedog business generating $400 million in sales from helping consumers set up home theaters and wireless networks.

Atlanta-based Best Buy said it felt it had "gained significant market share in electronics, particularly flat-panel TVs" in the quarter. The gains were the result of investments in employee training that resulted in better customer service, COO Brian Dunn said.

"Customers want to engage with someone who understands their unique needs, wants and desires -- and more and more, they won't accept something that feels solely like a transaction," he stated. "This is great news for Best Buy, because of the work we've done over the last three years, and because of the performance of our store teams. I've never been more confident about our ability to serve customers."

Both companies indicated they would remain aggressive in seeking growth. Circuit City will open or relocated some 60 stores this year, and as many as 100 in the 2009 fiscal year, the company said. Best Buy is setting aside cash for acquisitions and other strategic initiatives, such as the recent purchase of Internet firm Speakeasy, according to the company.

Best Buy also has international expansion on its mind, with plans to test stores in Mexico and Turkey in addition to a recently announced expansion into China.

Margin Call

Despite the stark differences in their results, both retailers are facing the same harsh conditions, notably shrinking profit margins as electronics prices continue to fall. Flat-screen TV prices -- which once offered fat profit margins to retailers -- may drop in price as much as 20 percent to 25 percent over the next year.

Retailers continue to see smaller profit margins on computers and digital alternatives will likely pressure the profits in selling DVDs and CDs.

For that reason, services may be the key to success in the space. Not only do the retailers earn more when they sell set-up services or support to a customer, but they also create customer loyalty, increasing the likelihood they'll return for their next purchase.

One-Stop Shop for SMBs?

Best Buy's Speakeasy purchase -- at a price tag of $97 million -- may show that the retailer thinks it can expand its services menu and become more of a one-stop shop for small businesses that want some outside tech support, Gartner (NYSE: IT) analyst Ken Dulaney told the E-Commerce Times.

"They're hoping to add to what happened with Geek Squad (the retailer's tech support service), he noted. "They want to get customers to come back to them well beyond the original purchase."

Meanwhile, Circuit City is facing a backlash on its plan to fire some 3,400 workers and replace them with lower-paid new hires.

The move came with risks, including the possibility that employee productivity will drop and morale will be hurt, Sanford C. Bernstein & Co. retail analyst Colin McGranahan said in a research note.

"The question remains as to whether Circuit City can rebuild in time for the all-important holiday season," he wrote.