Why Circuit City must be sold now

Last week I wrote that Circuit City is in deep trouble and today, BusinessWeek wrote up a news story claiming the retailer may have hired Goldman Sachs to help it find a company that's willing to take this dog and turn it around. And while I'm not sure it will have such good luck doing it, it's about time Circuit City executives wake up and realize that something needs to be done.

In case you haven't been following the Circuit City saga, the company's stock price has lost nearly 75 percent of its value in the past 12 months and although it was hovering at around $19 per share a year ago, it's now languishing at about $4.50 per share.

But what's more important than the financial crisis at the company is its inability to compete on too many levels with Wal-Mart and Best Buy. Most notably, Circuit City is simply unable to compete at the executive level.

Let's be honest -- any company that has lost 75 percent of its stock value, has attempted a resurgence plan that failed miserably and is being pressured by major shareholders to oust its executives is nothing more than a poorly run enterprise. And as any shareholder of the company knows, the best way to solve that problem is to get rid of the anchors and find some new management that may actually know how to run a company.

Philip Schoonover, Circuit City's CEO, is probably one of the worst executives in the retail industry. Presiding over corporate degradation and a financial crisis of epic proportions, Schoonover fired 3,400 of the company's most experienced employees, has spoken about increasing customer satisfaction and relocating underperforming stores, but has yet to produce any real benefits, and managed only a meek response to shareholders in December when he was forced to tell them how poorly he has done: "Our current focus is to rebuild our selling culture."

Nice one, Phil.

Of course, I'm not the only one who believes Schoonover can't lead Circuit City. Wattles Capital Management, a firm that currently owns about 6.5 percent of the company said Schoonover and the rest of his cronies should be removed from office as soon as possible and replaced with people who know what they're doing.

"Phil's actions in the past year show that he doesn't understand retail; he's completely mismanaged the company, and it's time for him to go," said Mark Wattles, principal of the investment firm, in an interview with BusinessWeek.

And now, in the face of shareholder resentment and at wit's end, Schoonover and the rest of his buddies at Circuit City have found it necessary to hire Goldman Sachs to get out as soon as possible and leave the sinking ship in someone else's hands. And while that may work for them, the real question is who wants this dog?

If I had to guess, Circuity City will probably be acquired within the next three months. During that time, the executives will be nothing more than lame ducks just waiting for the other shoe to drop. Meanwhile, Circuit City will be forced to endure even greater losses on some of its 677 stores and try to figure out a way to stay afloat in an environment that has become hostile from all sides.

But for the preservation of the company, I agree with Wattles and the other shareholders that see Circuit City for what it really is -- a barely relevant electronics retailer that has yet to understand that its time is up.

But it's for that reason that Circuit City must be sold now. The management (for once) is making the right decision in hiring Goldman Sachs and allowing someone with some actual foresight to run the company and figure out what's best for all parties involved. Of course, the results may hurt Schoonover's feelings.

With a pathetic showing each quarter and no real initiatives to turn the tide, it wouldn't surprise me if the incoming firm guts the company entirely. In fact, those 677 stores may drop significantly and the new management will finlly do something to turn the company around. And if they were smart, they would downsize a bit, reduce expenditures as quickly and efficiently as possible and put the company back in black. From there, it can worry about its stock price and go about changing the the way it does business.

Circuit City is a sinking ship. And although some say its size alone will help it stay afloat, I think that's wishful thinking. With a floundering stock price, losses that keep getting worse and extremely poor management, there's not much more for this company to do other than find someone who's willing to take it off the shareholders' hands.

Until then, let's watch as the executives and the board run this company into the ground.