Circuit City and its impending doom

Circuit City is in deep trouble. And Don Reisinger thinks he has a solution for fixing all those problems.

Don Reisinger
Don Reisinger
Former CNET contributor Don Reisinger is a technology columnist who has covered everything from HDTVs to computers to Flowbee Haircut Systems. Besides his work with CNET, Don's work has been featured in a variety of other publications including PC World and a host of Ziff-Davis publications.
4 min read

The fate of Circuit City is very much in doubt. After months of poor performance and even worse management, the company reported its second-quarter earnings on Monday for the month ending August 31, and let's just say that Circuit City is in deep trouble.

According to the company, it incurred a net loss during the quarter of $239 million on $2.3 billion in revenue. During the same quarter in 2007, the company lost almost $63 million on $2.6 billion in revenue. In the past six months, Circuit City has lost over $400 million--almost four times as much as it lost during the same period in 2007.

"Clearly, the performance of the company is unacceptable to all of our stakeholders, and it is imperative that we take the right steps to accelerate our turnaround," stated James A. Marcum, chief executive officer of Circuit City Stores. "The management team and the board of directors are conducting a comprehensive review of all aspects of our business to determine the best methods of delivering substantially improved financial performance and maximizing shareholder value.

"We recognize that this will require that we intensify our efforts to correct problems in our business. In particular, to be successful, all of our actions must start with improving the customer experience in our stores. As we move forward, we intend to improve how we operate, strengthen our market position, and build a stronger future for the company."

Here's a clue, Marcum: sell the company to the highest bidder as soon as possible and get out before it's too late. It's your only option.

At the time of this posting, Circuit City's stock price is a laughable $1.21. Compare that to Best Buy's $37.59 stock price and you quickly learn everything you need to know about the position Circuit City presently finds itself in.

But let's take a quick look at Best Buy. Obviously Circuit City is being affected by the current state of the economy and less people are willing to spend money on tech toys than they were last year, so the same should be true for Best Buy, right?

Guess again.

According to its latest filings, Best Buy's revenue is hovering at around $9 billion--well in-line with prior year numbers--and its profit during the quarter ending August 30 is $200 million. More importantly, its revenue is up by almost $1 billion over the previous quarter.

So what gives? Why is Best Buy such a successful company when Circuit City is slowly turning into the laughingstock of the tech retail world? It's simple: there's only room for one big-box tech retailer.

Let's face it--CompUSA (although it has made a comeback to some extent), died at the hands of online tech retailers and Best Buy. It faced many of the same issues currently plaguing Circuit City--little customer traffic, for one--and it couldn't stand up to the experience and prices offered at Best Buy and online.

Circuit City keeps talking about its need to improve the customer experience in stores, but I have no idea how it will accomplish such a feat.

First off, it needs customers in its stores. Obviously people buy products at Circuit City stores, but if there's a Best Buy within a close proximity, I'm willing to bet that the Best Buy will have hundreds of people looking to buy products, while the Circuit City has a handful. I have gone to both stores (they're within about 5 minutes of each other) in my area on the same day. The Best Buy is flooded with customers looking to pick up HDTVs, digital cameras, and other tech toys, while the Circuit City is practically empty.

Assuming Circuit City can increase the number of customers that patronize its stores (which it probably won't be able to do), it'll need to improve the customer experience by reducing its prices, employing more sales representatives to help its customers, and provide an experience in the stores that's more conducive to buying products from the company. Of course, the only problem with that scenario is that the company isn't in the financial condition to do anything of the sort.

Regardless, Circuit City is a public company and it's forced to maximize shareholder value. In order to do that, it needs to find any way to turn a profit and try to fend off the Best Buy and online onslaught. With that in mind, maybe it can turn most of its business online and keep only those stores that are performing extremely well. Or maybe it can go back to the table with Blockbuster and work out a deal to increase the value to both firms.

Or maybe Circuit City can raise the white flag and start finding a potential suitor.

It's that last option that makes the most sense at this point. Let's face it--Circuit City will never be able to stand up to Best Buy and its chances of creating a strong online presence are just as slim. Worse, its financial health keeps getting worse and the company seems like it's at wit's end. And as a shareholder, seeing your executives at wit's end means it's not a company worth owning any longer.

And so, at this time when immediate action is not only advisable, it's entirely necessary, Circuit City finds itself in an unenviable position. The company needs to find a way to turn things around, but it won't be able to do that unless it can invest in those changes. And at this point, that's practically impossible.

Realizing that, Circuit City really only has two options: sell to the highest bidder or face total annihilation. It's a sad state of affairs and I'm sure the company won't like to hear it, but at this point, selling it to the highest bidder is its only option.

And considering it tried desperately to get Blockbuster to bite, I think it knows that all too well.

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