“The City Revival Plan” Circuit City Analysis and Restructuring
December 14, 2007
Columbia Business School Turnaround Management Professor Laura Resnikoff
Chester Han, Andrew Huml, Anand Kagalkar, Lena Saito, Kristy Sundjaja
December 14, 2007
Circuit City Stores, Inc. Board of Directors 9950 Mayland Drive Richmond, Virginia
Dear Members of the Board:
We have completed our analysis of Circuit City Stores, Inc (“Circuit City”). The objective of our work was to document a detailed study of Circuit City’s industry, market share, financial structure, and market valuation, then define a comprehensive turnaround plan for sustained and profitable growth.
As you have requested, we have not met with Management in the execution of our work. Therefore, we have made certain assumptions that we have stated throughout. In addition, with any turnaround plan, we expect minor changes to our strategy and approach throughout the plan’s implementation.
The accompanying pages of our report include the following sections: • Executive Summary • Industry and Company Background • Our Recommended Turnaround Plan – “The City Revival Plan”
This report is intended solely for the information and use of the Board of Directors and is not intended to be and should not be used by anyone other than this specified party. Circuit City’s external auditors and regulators may be provided with a copy of this report in connection with fulfilling their respective responsibilities.
Yours truly,
Turnaround Management Team
Disclaimer: This analysis was developed as part of a graduate program assignment; all information used in connection with this analysis is publicly available in annual reports, company publications, and news media. This is a fictitious letter to the Board and for example purposes only; Circuit City’ Board or Management were not contacted and did not solicit this analysis.
Table of Contents
Executive Summary 1 1.1 Overview ...... 1 1.2 The City Revival Plan ...... 1 1.3 Next Steps ...... 2
Industry Analysis 3 2.1 Consumer Electronics Market ...... 3 2.2 Competitive Landscape ...... 3 2.3 New Competition ...... 6 2.4 Existing Competition - Specialty Retailers ...... 8 2.5 Industry Trends ...... 8 2.6 Industry Comparison Data ...... 10
Company Overview 13 3.1 Background ...... 13 3.2 Customers and Product Selection...... 13 3.3 Sourcing and Supply Chain ...... 14 3.4 Multi-Channel Sales Operations ...... 15 3.5 Remodeling Initiative...... 16 3.6 Marketing ...... 17 3.7 Management Structure & Background ...... 18 3.8 Company Initiatives ...... 20
Financial Analysis 21 4.1 Financial Analysis / Stock Performance ...... 21 4.2 Historic Operating Performance ...... 21 4.3 Capital Expenditures ...... 26 4.4 Liquidity...... 26 4.5 Credit Rating ...... 28 4.6 Capital Structure ...... 31 4.7 Valuation ...... 32
Table of Contents
Restructuring Plan 37 5.1 Restructuring Overview ...... 37 5.2 Management’s Approach ...... 37 5.3 Proposed Approach – “City Revival Plan” ...... 39 A. Cost Reduction Plan ...... 39 B. Expand Revenue Opportunities ...... 43 C. Refocus Strategy ...... 47
Appendix Appendix A – Table, Analysis, Models, Etc...... 54 Appendix B – Industry Detailed Analysis, Financial Measures ...... 66 Appendix C – Board of Director Composition ...... 69
Executive Summary 1
Executive Summary
1.1 Overview
Circuit City continues to falter in the computer and electronics retail industry – an industry that has grown 8-14% annually for the last five years (US). In two of the last four fiscal years, Circuit City was not even profitable. The company’s recent quarterly losses of $54.6 million (Q1 2008) and $62.8 million (Q2 2008) demonstrate the Quick Facts December 2007 continued downward trend. At the same time, Best Buy, Wal-Mart and Revenue: $ 12 billion Employees: 46,000 others are recording record sales in consumer electronics and continue US Stores: 650 (approx.) to erode Circuit City’s market share. Canada Stores: 800 (approx.) NYSE Ticker: “CC” What has Senior Management done to reverse this downward slide? - 52 Week High: $25 Low: $5 Consumer Electronics Retail we will argue not enough. While the company has a turnaround plan Headquarters: Richmond, in place, it lacks momentum, adequate execution and proper coverage Virginia, USA Founded: 1949 of the issues. Investors tend to agree, as Circuit City’s per share price www.circuitcity.com has fallen over 80% in the last two years.
1.2 The City Revival Plan
We propose a multi-faceted turnaround plan that covers several aspects of Circuit City’s business. This “City Revival Plan” is organized into three distinct objectives:
A. Cost Reduction Plan
B. Expand Revenue Opportunities
C. Refocus Strategy
The following report details the analysis and formulation of these objectives, but in summary, each objective has implementation costs, expected revenue gains, and targeted cost savings. Related to Objective A, Circuit City’s Selling, General and Administration Expense (SG&A) ranks among the highest in the industry. There are several reasons for this, but most notably is the high number of employees per store and high relocation costs (due to poor store placement). To further reduce SG&A, it
Executive Summary 2
will be necessary to reduce headcount per store, close 75 domestic and 60 international stores, reduce advertising spending proportionately, and minimize inventory carrying costs.
In connection with Objective B, Circuit City is operating in a growing yet increasingly competitive market. Therefore, we have identified a number of revenue opportunities going forward, several of which the company is prepared to address. We anticipate that the Circuit City’s firedogSM service, with adequate investment, will grow revenues from $200 million in fiscal year 2007, to over $700 million by fiscal year 2010. Furthermore, by increasing the company’s sourcing and sales of private label brands, margins can be increased by 1% and an additional $1 billion in revenue can be generated by fiscal year 2010.
After Circuit City restructures and stabilizes its operations, the company must expand globally and reduce their reliance on the US market. As part of Objective C, the company will expand to the consumer electronics markets that are projected to grow 15-20% annually (most notably China). Currently, Circuit City only has stores in North America, while Best Buy already has 10% of their retail space in China and is actively testing other countries. Circuit City does not have to be the first mover in emerging markets, but must start modest global expansion by 2010.
Lastly, Circuit City must realign their compensation structure with the industry. In particular, Senior Management is over compensated in comparison to the much more successful Best Buy. To ensure the turnaround is understood and embraced by Management, compensation will be tied to the overall turnaround objectives.
1.3 Next Steps
While Circuit City has been an underperformer as of late, it still owns a strong brand, several prominent retail locations, and operates in a growing industry. With proper execution of the City Revival Plan, the company can regain market share, return to profitability and, in the long-term, be a global industry leader. Circuit City’s next steps will be critical, and leadership is critical to regain investor confidence and prepare the organization for change.
Industry Analysis 3
Industry Analysis
2.1 Consumer Electronics Market
The U.S. consumer electronics industry continues to grow, and is projected to be a $170 billion market in 2008. This represents a 6-8% growth rate based on recent data from the Consumer Electronics Association1.
The global retail market for consumer electronics is nearly $618 billion, with the U.S. accounting for almost 24 percent of that amount2 (note: Circuit City is primarily based in North America).
2.2 Competitive Landscape
Consumer electronics retailers are experiencing strong demand, but margins are under pressure for another reason — competition.
Industry Analysis 4
Best Buy is considered Circuit City’s direct competitor, and domestically has a similar store format, size, and number of stores (approximately 852 US Best Buy stores verses 642 US Circuit City stores). Best Buy and Circuit City are considered consumer electronic specialty retailers and are described in a following section. Wal-Mart Stores, Inc. (Wal-Mart), Target Corporation and wholesale clubs, such as Costco Wholesale Corporation, BJ’s Wholesales Club, Inc., and Sam’s Club, also sell consumer electronics.
It is important to note that Circuit City, Best Buy and other ‘big-box’ electronics retailers also compete with Internet retailers that offer a wide selection of products and services. Increasingly, consumers have the ability to conduct product research and price comparisons online, spurring additional price competition among retailers for discretionary consumer dollars. Since physical retailers cannot compete with online retailers on price alone, the proliferation of online retailers like Amazon.com, buy.com and others have prompted physical retailers to utilize the Web as an additional direct-to-consumer distribution channel with tie-ins to existing stores (i.e. real-time inventory check, online order to in-store pick-up) and begin using broad-based merchandising strategies as a competitive advantage against online retailers. In this report, we describe competitors that primarily operate physical retail locations like Circuit City given the business model characteristics and similarities.
Key Competitors Best Buy Company, Inc. RadioShack Corporation GameStop Target Corporation Wal-Mart Stores, Inc. (with Sam’s Club Wholesale) Costco Wholesale Corporation BJ's Wholesale Club, Inc. Tweeter Home Entertainment Group, Inc. (bankrupt)
Of the U.S. consumer electronics market, Best Buy, Wal-Mart (without Sam’s Club), and Circuit City make up the top three in revenue. Wal-Mart does not disclose much detail on the breakdown of their revenue by product type, although the industry estimates that they grew consumer electronics retail sales from $21 billion in 2005 to $22.6 billion in 20063
Industry Analysis 5
Top Three U.S. Consumer Electronic Retailers
Operating Revenues ($ BILLION) Company 2006 1. BEST BUY CO INC $ 35.9 2. WAL-MART (Excl. Sam's C.) $ 22.6 3. CIRCUIT CITY STORES INC $ 12.4 Total $ 70.9 Using the annual reports and industry data to determine the overall market share in consumer electronics, Circuit City has been losing or narrowly maintaining market share since 19984. Between 1995 and 2007, the entire market has doubled from $63 billion to $148 billion, all while Circuit City has lost market share to Wal-Mart, Best Buy and others.
Estimated Market Share in US Consumer Electronics 1998-2007
1998 CE Market Share (US) Wal- Best Circuit Mart* Buy City 8% 9% 8%
2003 CE Market Share (US) Best Other Buy 75% 16% Circuit City 8%
Other 2007 CE Market Share (US) 76% Data Not Available for Wal-Mart Wal- Best Mart* Buy 14% 21% Circuit City
7%
Other 58%
*Wal-Mart share data does not include Sam’s Club
Industry Analysis 6
Considering the market share of specific products, it is clear that Wal-Mart and the wholesale clubs are gaining share in each category. Circuit City continues to lose market share in almost every product category they compete. For example, at the close of the last quarter (Q3 2007), the following changes in product segment market share occurred5:
• Plasma TV: Category leader Best Buy grew its share of 42-inch to 60-inch plasma TVs by 1%, while Costco gained 1% and Wal-Mart gained 1.5%, albeit off a small base. Circuit City lost 4.6% share.
• LCD TV: In 40-inch to 60-inch sizes, Wal-Mart gained 4.5% and Costco made a 1% gain, while Best Buy lost 2% and Circuit City lost 4.9%. In 39-inch and smaller TVs, Wal-Mart's gained 8% while Best Buy lost 3.2% and Circuit City lost 2.7%.
• Video Games: GameStop continues to lead in video games (their core business), garnering 5.1% as industry emphasis shifts from consoles to software. Other share gainers were Best Buy (taking 2.3%) and Target (up .7 %), while Circuit City was flat and Wal-Mart gave up 4.1%.
• Notebooks: Best Buy's 3.6% gain likely came from Dell and CompUSA’s loses. Other winners were Wal-Mart, up 1.6%; Apple, up 1%; and Circuit City gained .5%.
2.3 New Competition
Wal-Mart, the discount giant and largest retailer in the world, is expanding its selection of consumer electronics. In 2005, the chain targeted three categories to attract more upscale shoppers: apparel, home décor and electronics. The chain, which emphasizes “Every Day Low Prices” now sells sophisticated flat-panel televisions, often at a discount compared to retailers such as Best Buy and Circuit City. The company remodeled the electronics departments in its existing stores in 2006 and is now adding a wider selection of high-definition televisions and home-theater systems.
Wal-Mart’s expansion in consumer electronics has been detrimental to Circuit City and Best Buy. Circuit City continues to struggle and closed eight US stores in fiscal year 2007. In addition, Circuit City laid-off 3,400 of its highest-paid store staff as part of a $110 million savings program. Subsequently, Circuit City announced an additional 800 job cuts in June. Wall Street’s reaction to Circuit City’s cost-
Industry Analysis 7
saving approach was not positive, and in November 2007, Circuit City invited the laid-off employees to reapply given the disruption to sales (particularly of higher margin warranty products which the longer- tenured employees were more familiar with). This was indicative of Senior Management’s inability to restructure the business with conviction and long-lasting benefits.
Warehouse club stores such as BJ’s Wholesale and Costco Wholesale Corp. are known for selling everyday items in bulk. These wholesale clubs do not generate the level of revenue from electronic sales that Best Buy, Wal-Mart and Circuit City do, although they are providing additional competition (the warehouse clubs keep most revenue undisclosed by category, but rough estimates have Costco TV sales alone reaching $2 billion in 2007).
Both Wal-Mart and warehouse clubs sell electronics at comparable prices to Best Buy and Circuit City, although the consumer perception is that the discount chains have considerably lower prices. While Wal-Mart does typically have the best price for most products, in December 2007, a sample of three products was taken from each retailer’s website. Wal-Mart often sells different models of each brand, as compared to the similar offerings of Best Buy and Circuit City, although the samples used the same exact models across the retailers.
Number of Sample Product Number of Sample Product Number of Sample Product Offerings Price Offerings Price Offerings Price Retailer (Dec Sony KDL- 6, 2007) Sony TVs 37V3000 Vizio TVs Vizio 32' VW32L Tivo DVR TCD652160 Wal-Mart 4$ 1,197.00 5$ 597.00 0 N/A CC 15$ 789.99 7$ 629.99 2$ 269.99 Best Buy 21$ 789.99 0 N/A 3$ 299.99
While this is a very limited sample, and may not be representative of the entire assortment of products and prices, it identified that the product were priced comparably across Wal-Mart, Circuit City and Best Buy. In all cases, Wal-Mart had the lowest selection or product type (i.e. Sony TVs), and not all retailers carried the same products. No one retailer had the best selection or price on the popular products selected.6
This basic analysis demonstrates that Circuit City and Best Buy can, and to some extent, do complete on price with Wal-Mart, and offer a better selection of products. While it is not advantageous to start a price war through advertising, Wal-Mart is generally perceived as having the lowest price - which is not always true.
Industry Analysis 8
2.4 Existing Competition - Specialty Retailers
There have been several companies that have not faired well in the consumer electronics industry as of late. Tweeter Home Entertainment Group Inc., a retailer concentrated in the eastern US, filed for bankruptcy protection in June 2007, stating difficult price competition. On December 7, 2007, CompUSA Inc. was purchased by a distressed advisory and investment firm, Gordon Brothers Group from U.S. Commercial Corp S.A.B. de C.V.. Lastly, RadioShack Corp. has closed more than 500 stores in 2006 and 2007 in an effort to cut costs.7
Best Buy, however, is growing and faring much better than its rivals. One reason is the company’s store locations, which are often more centrally located than those of Circuit City and others.8 Best Buy continues to generate revenue from its Geek Squad unit, which provides in-store repair of items as well as in-home installation of complex consumer electronic. Best Buy has also expanded with Best Buy Mobile, small kiosk stores that promise better service than either cell phone provider stores or independent retailers.
2.5 Industry Trends
The industry is trending toward support and installation services given the demand for complex electronics. Best Buy’s Geek Squad provides computer repair, support, and installation services for customers of US Best Buy stores. Geek Squad launched in 20059 to provide technical support in the market of home entertainment systems and computers. Best Buy’s 10,000 Geek Squad members, known as “agents,” dress in short-sleeved white shirts with clip-on-ties, black pants, and shoes. These agents fix customer computers, install new plasma TVs (which can be purchased at Best Buy) and perform many other technical services. This service is intended to increase revenue while differentiating its offerings from potentially lower-cost competitors like Wal-Mart.
Best Buy also offers services to owners of small businesses that average less than 100 employees. Small businesses spend $132 billion a year on technology goods. Nearly 200 Best Buy stores offer the Best Buy for Business platform. Business customers receive Geek Squad service, an expanded assortment of electronics used in the office, and technology assistance and consultants.10
Industry Analysis 9
“Every customer has their own set of needs. Looking for a custom home theater configuration? Syncing a new device to your computer? Want to play the music on your computer through your home stereo? We're here ready to serve you.”11
In September 2006, Circuit City introduced “firedog”, its own version of technical assistance and home installation of electronics products for consumers. Firedog generated more than $200 million in revenue for the year ended February 2007, which should more than double in fiscal 2008 according to the company’s 10-K. Circuit City estimates the total market for providing home theater installation and personal computer–related services could reach $20 billion a year by 2010.
Private Labels
Consumer electronics retailers are sourcing televisions, MP3 players, and other products from low-cost Chinese manufacturers that they, in turn, sell under their own brand names in order to supplement an already broad product selection. Additionally, private-label products typically generate higher gross margins than branded products. Best Buy offers its Insignia label, with prices that are usually lower than products from manufacturers such as Sony Corp. and LG Electronics Inc. For example, in December 2007, Best Buy offered an Insignia® - 42" 720p Flat-Panel Plasma HDTV for $809.99, while a Panasonic - 42" 720p Flat-Panel Plasma HDTV sold for $1,149.99 (same product specifications and similar features). Circuit City currently provides private-label products, but primarily in its InterTAN (Canadian) segment rather than its US domestic stores.
Industry Analysis 10
2.6 Industry Comparison Data
When comparing the revenue of the specialty electronic retailers, it is clear that Best Buy has been leading the market in revenues. As seen from the chart below, Best Buy went from comparable revenue levels in 1996, to multiples of competitors’ revenue in 200612.
Operating Revenues - Computer & Electronic Retail
40,000
35,000
30,000
25,000 BEST BUY CO INC CIRCUIT CITY STORES INC 20,000 GAMESTOP CORP RADIOSHACK CORP 15,000 Operating Revenue ($ Mil.) ($ Revenue Operating
10,000
5,000
0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year
Best Buy continues to lead US Computer and Electronic Specialty Retailers going into the 2007 holiday season. The following chart summaries the last five quarters, through mid-2007.
Quarterly Revenue - Last 5 Quarters
$14,000.0
$12,000.0 BEST BUY CO $10,000.0 INC CIRCUIT CITY $8,000.0 STORES INC GAMESTOP $6,000.0 CORP
$4,000.0 RA DIOSHA CK CORP Operating Revenue ($ Mil.) $2,000.0
$- Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Note V ar ious Quar te r Ends
Industry Analysis 11
Note: The comparable companies have various year ends and quarter ends. The following table lists the periods used in our analysis. Retailer Last Yearend Quarter Ends - Last 5 BEST BUY CO 13 weeks Ending 13 weeks Ending 14 weeks Ending 13 weeks Ending 13 weeks Ending INC March 3, 2007 2007-09-01 2007-06-02 2007-03-03 2006-11-25 2006-08-26 CIRCUIT CITY 3 months Ending 3 months Ending 3 months Ending 3 months Ending 3 months Ending STORES INC February 28, 2007 2007-08-31 2007-05-31 2007-02-28 2006-11-30 2006-08-31 GAMESTOP 13 weeks Ending 26 weeks Ending 13 weeks Ending 14 weeks Ending 13 weeks Ending CORP February 3, 2007 2007-11-03 2007-08-04 2007-05-05 2007-02-03 2006-10-28 RADIOSHACK 3 months Ending 3 months Ending 3 months Ending 3 months Ending 3 months Ending CORP December 31, 2007 2007-09-30 2007-06-30 2007-03-31 2006-12-31 2006-09-30
Best Buy also has gained and leads in Net Income between 1996 and 2006 and the last five quarters:
Net Income - Computer & Electronic Retail
1,600
1,400
1,200
1,000
BEST BUY CO INC 800 CIRCUIT CITY STORES INC GAMESTOP CORP 600 RADIOSHACK CORP Net Income ($ Mil.) ($ Income Net 400
200
0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
-200 Year
Quarterly Net Income - Last 5 Quarters
$900
$800
$700 BEST BUY CO $600 INC
$500 CIRCUIT CITY STORES INC $400 GAMESTOP $300 CORP RA DIOSHA CK $200 CORP $100 Operating Revenue ($ Mil.) $- Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 $(100)
$(200) Note Various Quarter Ends
Industry Analysis 12
Best Buy also leads the electronic retailers in return on assets and return on equity, while the other competitors have mixed results. Circuit City is underperforming the other retailers in both metrics.
Return on Assets (%) - Computer & Electronic Retail
16
14 BEST BUY CO INC CIRCUIT CITY STORES INC 12 GAMESTOP CORP RA DIOSHA CK CORP 10
8
6 Percent (%) 4
2
0 2002 2003 2004 2005 2006 Year
Return on Equity (%) - Computer & Electronic Retail
45
40 BEST BUY CO INC CIRCUIT CITY STORES INC 35 GAMESTOP CORP 30 RA DIOSHA CK CORP
25
20
15 Percent (%) 10
5
0 2002 2003 2004 2005 2006 Year
Additional analysis demonstrates that Best Buy is leading the industry in almost every measure. Refer to Appendix A for a breakdown of the charts and detailed data regarding the following measures: Return on Revenues (%), Current Ratio, Debt to Capital Ratio, Dividend Payout Ratio and the Price/Earnings Ratio (High/Low).
Company Overview 13
Company Overview
3.1 Background
Circuit City opened its first store around 1950. By 1990, the company had grown to around 500 stores. In the 1990’s, Circuit City continued to expand its retail operation and product offerings into consumer electronics, personal computers and appliances. In 1997, Circuit City Stores changed its business profile by separating its existing stock into two groups: the Circuit City Group and CarMax Group which was a tracking stock under Circuit City. CarMax was eventually separated from Circuit City Stores and became an independent public company in 2002 through a stock dividend to existing Circuit City shareholders and CarMax tracking stock shareholders.
CarMax was a diversification idea, developed and ‘incubated’ in 1993 by the Circuit City management team to operate a chain of used car lots and new car franchises. Circuit City’s management team wanted to apply a mass-merchandising business model to the used car lot business and develop a CarMax “superstore” similar to the retailer’s existing electronics stores. Their prototype lot in Richmond, Virginia had 500 cars on display, each no more than five model years old, and each with no more than 70,000 miles on its odometer. Prices for the vehicles were fixed, eliminating the need to negotiate between customers and sales reps. While revenue continued to increase in the 1990’s, CarMax did not reach profitability until 1999 when it achieved $2 billion in revenue. After almost a decade of incubation, in 2002 Circuit City decided to spin off CarMax to enable to the management team to focus on its core retail electronics business. The deal was a tax-free transaction for the companies13.
Since the 1990’s, Circuit City has tried to refocus its business by spinning off several, non-core business lines including the co-branded Visa credit card programs. Today, Circuit City’s principal activity is to market branded consumer electronics, personal computers and entertainment software through the retail stores, web and phone channels. It operates the Circuit City Superstores and the mall-based Circuit City Express stores in the U.S. and the Source by Circuit City (SM) and licensed dealer outlets in Canada.
3.2 Customers and Product Selection
Circuit City targets the mid to high-end customers in North America. Domestically, it sells brand-name consumer electronics, personal computers, entertainment software, and related services. According to the latest 10-K, the company has five major sales categories:
Company Overview 14
- Video, which includes televisions, imaging products, DVD hardware, camcorders, digital cameras, furniture, and related accessories; - Information Technology, which includes personal computer hardware, telecommunications products and related accessories - Audio, which includes home audio products, mobile audio products, portable audio products, and related accessories; - Entertainment, which includes movie software, music software, game software, game hardware and personal computer software; and - Warranty, services and other, which includes its firedog(SM) home theater installation and services for personal computers.
In 2007, Circuit City joined with Napster to offer a new digital music service, Circuit City + Napster for consumers. The service is powered by Napster's digital music subscription service. This alliance brings three revenue streams to Circuit City: monthly subscription of $14.95 for unlimited access to songs on PCs and music players, song download purchase fee of 99-cents per song, and pre-paid download cards.
3.3 Sourcing and Supply Chain
Circuit City has a relatively high dependence on a small set of suppliers. In the 2007 fiscal year, Circuit City’s five largest suppliers for its U.S. business accounted for approximately 42% of merchandise purchased. The major suppliers were Sony, Hewlett-Packard, Samsung, Toshiba and Apple. For its Canada (InterTAN) business, its five largest suppliers were Rogers Wireless, Motorola, Acer, Apple and Panasonic and the suppliers accounted for approximately 43% of the merchandise purchased. Circuit City also increasingly sources and offers more private-label merchandise to complement its branded product strategy. Its wholly owned subsidiary Circuit City Global Sourcing, Ltd. has offices in China, Hong Kong and Taiwan and is responsible for procuring merchandise from a variety of best value sources.
Since fiscal year 2007, Circuit City started revamping its supply chain organization and improving all the main processes involved. The company’s objectives include improved in-stock positions, reduced net-owned inventory, lower inactive/obsolete inventory and an enhanced product mix. In order to
Company Overview 15
accomplish these objectives, Circuit City is reengineering and implementing a new supply chain system and organization which aims to align sourcing, vendor logistics, distribution, warehousing, inventory management, the point-of-sales systems and all other supply chain processes. In early fiscal year 2008, Circuit City outsourced its IT infrastructure operations to IBM, intending to reduce planned infrastructure costs by approximately 16% over the term of the contract. Over time, the company expects that it can better utilize its customer and supply chain information to react to customer demand and improve replenishment and display of the product at the point of sale.
3.4 Multi-Channel Sales Operations
Circuit City has a multi-channel sales operation, which allows customers to shop in the retail stores (mostly leased), online and via the telephone. In Q1 2008, the U.S. domestic operations consolidated the management structure and its ten sales regions into eight regions. Each of these regions is comprised of multiple districts, which are managed by district managers who, in turn, are responsible for the store operations and are supported by the store managers.
During the summer of 2007, the company split its store associates into two categories: "product specialists" who concentrate on sales, and "product flow teams" that concentrate on prepping the stores, such as setting up merchandise displays. As of August 31, 2007, Circuit City’s domestic segment domestic segment operated 652 Superstores and 13 other stores in 158 U.S. media markets. Domestic segment Superstores are typically staffed with an average of 56 full-time and part-time Associates. In total, Circuit City employs roughly 40,000 domestic hourly and salaried (mostly paid on hourly basis) employees and additional personnel during peak selling seasons.
InterTAN, Inc. in Canada and is divided into four regions, which are managed by regional vice presidents. The four regions are further divided into 21 districts, which are handled by the district managers. The retail stores operate under the trade-name The Source by Circuit City (SM). They are smaller than the U.S. stores and are located in malls and shopping centers. Similar to the U.S. stores, these stores offer a wide range of electronic products and services to the consumer. International segment retail stores are typically staffed by 5 to 20 Associates, including full-time and part-time commissioned sales Associates and a store manager. In Canada, the company also operates dealer
Company Overview 16
outlets which are divided into seven areas across the country. Each of these areas is managed by an area sales manager. Dealer outlets are independent retail businesses that operate under their own trade names but are permitted, under dealer agreements, to purchase any of the products sold by The Source by Circuit City (SM). Apart from the stores, the international segment also operates a website at www.thesource.ca. In 2007, the international segment employees over 3,000 hourly and salaried Associates. Approximately 100 of these Associates, who are engaged in warehousing and distribution operations, are represented by a union. As of August 31, 2007, there are altogether 800 retail stores and dealer outlets, which consist of 508 company-owned stores, 291 dealer outlets, and 1 Battery Plus(R) store. At this time, Circuit city is still exploring strategic alternatives for the international business, which can potentially lead to a sale of the InterTAN operation in calendar year 2008.
Circuit City’s teleweb business is comprised of www.circuitcity.com and the company’s telephone call center. This direct-to-customer channel provides customers with access to the same wide selection of products and warranty services as well as 24/7 customer service. On the company’s website, shoppers can find customer ratings and reviews of products, as well as product and technology and promotion information. The web and retail channels are integrated in such a way that customers can view real-time in-store inventory of products selected on www.circuitcity.com, purchase the products online, and pick up the products in a nearby store. Under Circuit City’s 24/24 Pickup Guarantee policy, customers can pick up their (qualifying) online purchases at their designated store within 24 minutes of purchase confirmation, or customers will receive a $24 Circuit City gift card. In fact, in fiscal year 2007, approximately 54% of online sales were picked up in a store.
3.5 Remodeling Initiative
Visiting a number of Circuit City superstores in the New York and Boston area, we noted that the new store format is bright, well structured, and we were quickly greeted by a member of the sales team. Circuit City has been remodeling its retail stores domestically since 2001, when the new superstore format was introduced. The major changes included a brighter, more contemporary design and an open and floor plan which enable customers to navigate the store more easily. The open floor format also allows the company and display most of its products on the sales floor. Moreover, the company has tried to improve product adjacencies so that customers can conveniently shop for all products and
Company Overview 17
accessories within the same product categories in the same store area. Since then, the company has continued to refine its store prototypes. The company’s latest store prototypes include both 30,000 square foot and 20,000 square foot formats. And recently in October 2007, the company announced that it was testing new concept stores dubbed "The City," with a new look and interactive layout. During fiscal year 2008, the company expects more than half of the openings to be in the 20,000 square foot format. The following table from the February 2007 10-K summarizes the progress of the company’s remodeling effort over the last seven fiscal years.
On the recent Q1 2008 Analyst Conference call, the company discussed their pilot of new format and operating model in 65 of their super stores which have generated more than 6% in sales per labor hour and more than 3% in total sales versus the control group of stores. Nevertheless, management expects the remodeling to continue gradually in 2008 with a target to relocate and open 60-65 stores in the U.S.
3.6 Marketing
In order to support its multi-channel sales operations, Circuit City began a number of brand management initiatives in fiscal year 2007. The company is utilizing multiple marketing channels which include newspaper advertisements, television, direct mailings and online marketing. In November 2007, the company made a move to capitalize on the growth of social networking and launched its CityCenter online community.
In fiscal year 2007, the company’s advertising expenses (net of specific vendor advertising reimbursements) were $424.6 million which is approximately 3.4% Circuit City’s sales. It also offers a rewards credit card in partnership with Chase Card Services to drive customer loyalty. In fiscal year 2008, the company expects to leverage its new information system to optimize its marketing program and localize its newspaper advertisements in different domestic segment geographic markets.
Company Overview 18
3.7 Management Structure & Background
Management Turnover
In the past 18 months, Circuit City has undergone significant management changes and turnover:
- In July 2007, the company named a new CFO - a position that was empty since April 2007.
- In February 2007, the company added the positions of Executive VP of Merchandising, Services and Marketing. A short time later, this person left after less than a year. As a result, the Merchandising, Supply-chain, Services and Marketing teams will report directly, in the near- term, to the Chairman and CEO (who served as the company’s top merchandising officer between 2004 and 2006).
- On March 23, 2006, the CEO of InterTAN resigned. The CFO took the CEO position, but then resigned in less than a year.
The recent management turnover has resulted in significant pressure and distraction on the management team. While there are many potential reasons for the departure of key members of Management, this could indicate significant differences among members of Senior Management regarding the future direction of the company and/or demoralization. This will be discussed in our approach and we believe it is important to identify key personnel and stabilize the executive team throughout the turnaround plan.
Management’s Experience
The current management team has significant experience working in the consumer electronics and retail industry, mostly at Best Buy and Circuit City. However, none has experience in leading and managing a major turnaround effort. Summarized below are brief credentials of the top four officers:
- CEO: came from Best Buy where he was the Executive VP of the customer segments between 2004 and 2006 and Executive and Senior VP position in New Business Development, Digital Technology Solutions and Merchandising between 1996 and 2006. Prior to that, he was an Executive VP at TOPS Appliance City, a retailer of home appliances and consumer electronics.
- CFO: is from Yankee Candle where he was Senior Vice President, Finance and Chief Financial Officer between 2005 and 2007. Prior to that, he was the President of Finance for Best Buy Co.,
Company Overview 19
Inc. from 2002 to 2005 and had several financial leadership positions at Sears from 1996 to 2002.
- Executive VP, Multi-Channel Sales: appointed to the post this February, the Executive VP has been with the company since 1983 where he started in a Circuit City store and was promoted internally over the years.
- Senior VP, Supply Chain and Space Planning: appointed to the post this February, the Executive VP acted as the business lead for the merchandising systems transformation. She joined Circuit City in 2005 after holding several inventory and supply chain management positions at Best Buy.
Management Compensation
For fiscal year 2007, the management team’s annual bonus compensation is measured and awarded solely upon earnings per share results as prescribed by the Compensation and Personnel Committee of the Board of Directors. The committee’s primary rationale for using EPS was to use was a widely accepted, easily understood method that also captures revenue growth and expense management.
We question whether EPS is the most effective measure given the historically poor financial results and the corresponding decline in shareholder value. In fact, we found the executive compensation packages exorbitant when compared to Best Buy which has performed far better than Circuit City over time. The following table compares the fiscal year 2007 compensation packages for the top two management positions of Circuit City and Best Buy:
FY2007 CC
Non-Equity Other Com & Change in Pension Stock Award Option Incentive Plan Value & Non-Qualified Deferred Position Salary ($) Awards ($) Compensaion ($) Comp Earnings ($) Total ($) Chairman, President & CEO 894,615 1,074,852 4,777,004 - 208,477 6,954,948 EVP, CFO 570,192 544,120 504,513 - 57,068 1,675,893
FY2007 BBY
Non-Equity Other Com & Change in Pension Stock Award Option Incentive Plan Value & Non-Qualified Deferred Position Salary ($) Awards ($) Compensaion ($) Comp Earnings ($) Total ($) Vice Chairman & CEO 1,172,995 1,289,219 453,605 2,650,969 30,116 5,596,904 EVP, CFO 597,643 1,130,530 1,038,195 847,500 9,093 3,622,961
Board of Directors
Company Overview 20
The Board members have experience across various industries including retail, financial, branding, HR consulting and academia. While they are relatively “independent”, only two of them sit on another board outside Circuit City. Please refer to Appendix C for a list of the Circuit City Board Members, the other boards the specific members are involved with, and their prior experiences.
3.8 Company Initiatives
As a company, Circuit City has undergone restructuring efforts since 2001 when it first started remodeling its stores. The prolonged and ineffective restructuring initiatives and recent management changes are distracting the company from operating optimally. For fiscal year 2008, Circuit City management team stated that they would continue to focus on their long-term strategy and transformation efforts with home entertainment and services, multi-channel and real estate serving as the foundation for its strategic initiatives. Management also stated that they would accelerate transformation efforts. Unfortunately, the company’s most recent disappointing quarterly results demonstrate yet another failure by management to turn the business around.
Financial Analysis 21
Financial Analysis
4.1 Financial Analysis / Stock Performance
Circuit City’s stock price has fallen significantly from the beginning of 2007, approximately 70%, to around $7.00 per share. From the second quarter of 2003 to third quarter of 2006, Circuit City performed well compared to S&P 500. The charts illustrate the five year historic performance of Circuit City’s stock price (red), the S&P 500 (orange), and Best Buy’s stock price (blue). Based on this information, it is clear that Circuit City’s stock price lost considerable value over the last 18 months.
Five Year Performance of Circuit City’s Stock Price
Source: Google Financials
4.2 Historic Operating Performance
Although there isn’t one specific cause for Circuit City’s operating losses, one prominent driver is SG&A. From 2002, Circuit City’s SG&A expense increased dramatically from 19% to 24% of sales. In earlier years, it operated efficiently by containing its SG&A to 19% to 20% of sales. A more in-depth analysis of SG&A reveals that Circuit City has been spending a considerable amount on remodeling and relocating stores. It is estimated by the management that in as much as 400 out of 600 stores are either operating inefficiently or in the wrong demographic locations.14 Another reason for higher SG&A expense is above average payroll costs. When we compare the average number of employees per store,
Financial Analysis 22
Circuit City employs roughly twice as many employees per store compared to Best Buy (roughly 60 vs. 30 people on average in the US).
SN&A as a % of Sales Company 2007 1. BEST BUY CO INC 18.8% 2. GAME STOP 18.9% 3. CIRCUIT CITY STORES INC 22.8% 4. RADIO SHACK 40.4%
The following four tables and charts compare Circuit City’s and Best Buy’s operating performance relative to gross margin, SG&A expense, EBIT and EBITDAR margin. (Note: Circuit City and Best Buy have different fiscal year ends).
Circuit City Operating Performance Circuit City (US$ Millions) 2007 2006 2005 2004 2003 Revenue 12,430 11,514 10,414 9,857 10,055 Gross Profit 2,928 2,810 2,552 2,284 2,397 SG&A 2,842 2,596 2,471 2,320 2,439 EBIT 86 214 81 -36 -42 Depreciation 177.8 160.6 151.6 197.6 159.8 Amortization 3.6 2.6 1.9 0 0 Stock Based Compensation 24.2 26.9 19.1 37.6 53.3 Rent 347 322.8 318.3 286.3 314.4 EBITDAR 638.6 726.9 571.9 485.5 485.5 Gross Margin 76.44% 75.59% 75.49% 76.83% 76.16% SG&A (% Sales) 22.86% 22.55% 23.73% 23.54% 24.26% EBIT (% Sales) 0.69% 1.86% 0.78% -0.37% -0.42% EBITDAR Margin 5.14% 6.31% 5.49% 4.93% 4.83%
Best Buy Operating Performance Best Buy (US$ Millions) 2007 2006 2005 2004 2003 Revenue 35,934 30,848 27,433 24,548 20,943 Gross Profit 8,769 7,726 6,495 5,871 4,945 SG&A 6,770 6,082 5,053 4,567 3,935 EBIT 1,999 1,644 1,442 1,304 1,010 Depreciation 509 456 459 385 310 Amortization 0 0 0 0 0 Stock Based Compensation 121 132 -1 8 1 Rent 660 552 501 468 440 EBITDAR 3,289 2,784 2,401 2,165 1,761
Financial Analysis 23
Gross Margin 75.60% 74.95% 76.32% 76.08% 76.39% SG&A (% Sales) 18.84% 19.72% 18.42% 18.60% 18.79% EBIT (% Sales) 5.56% 5.33% 5.26% 5.31% 4.82% EBITDAR Margin 9.15% 9.02% 8.75% 8.82% 8.41%
Although Best Buy and Circuit City have comparable gross margins suggesting similar product mix and purchasing power, Circuit City clearly lacks adequate cost controls.
Gross Margin - Best Buy vs. Circuit City
26.00%
24.00% CC BBY 22.00%
20.00% 2003 2004 2005 2006 2007 Years
SG&A Margin - Best Buy vs. Circuit City
25.00% 23.00%
21.00% CC 19.00% BBY 17.00% 15.00% 2003 2004 2005 2006 2007 Years
A high level of SG&A can also be seen in Circuit City’s international operations. After it was acquired in May 2004, InterTAN stores became unprofitable soon after.
International Segment (Millions) 2007 2006 2005 Net Sales 570 623 454.9 Gross Profit 188.4 226.4 182.6 SG&A 208.8 229.6 148.6 Earnings Before Tax (20.4) (3.2) 34
Financial Analysis 24
Working Capital The company funds its working capital primarily through cash and short-term investments on hand, its revolving credit facility and trade debt. For the last five years, Circuit City invested about $560 million (4.51% of sales) towards working capital. The following tables illustrate the working capital requirements of Circuit City and Best Buy.
Circuit City 2007 2006 2005 2004 2003 Minimum Cash (assumed 1% of sales) $124.3 $115.1 $104.1 $98.6 $100.6 Accounts Receivable 382.6 220.9 230.6 170.6 140.4 Merchandise Inventory 1,636.5 1,698.0 1,455.2 1,517.3 1,409.7 Deferred Income Tax 34.9 29.6 31.2 - 64.5 Income Tax Receivable 42.7 5.6 - - - Prepaid Expense and other assets 47.4 41.3 23.2 22.1 18.2 Total Current Assets 2,268.3 2,110.5 1,844.3 1,808.5 1,733.3
Merchandise Payable 922.2 850.4 635.7 - - Expenses Payable 281.7 202.3 170.6 - - Accounts Payable 1,203.9 1,052.7 806.3 833.8 963.7 Accrued Expenses and other current liabilities 404.4 379.8 433.1 149.6 113.9 Accrued Compensation 98.5 84.7 0.0 0.0 0.0 Accrued Income Taxes 75.9 75.2 71.2 44.5 Deferred Tax 0.0 0.0 0.0 79.4 91.4 Total Current Liabilities 1,706.9 1,593.1 1,314.6 1,134.0 1,213.4
Working Capital 561.5 517.4 529.7 674.5 519.9
Best Buy 2007 2006 2005 2004 2003 Minimum Cash (assumed 1% of sales) $359.3 $308.5 $274.3 $245.5 $209.4 Account Receivables 548.0 449.0 375.0 343.0 312.0 Merchandise Inventories 4,028.0 3,338.0 2,851.0 2,607.0 2,077.0 Total Current Assets 4,935.3 4,095.5 3,500.3 3,195.5 2,598.4
Accounts Payable 3,934.0 3,234.0 2,824.0 2,460.0 2,195.0 Unredeemed Gift card Liabilities 496.0 469.0 410.0 300.0 222.0 Accrued Compensation and related expenses 332.0 354.0 234.0 269.0 174.0 Accrued Liabilities 990.0 878.0 844.0 724.0 538.0 Accrued Income Taxes 489.0 703.0 575.0 380.0 374.0 Total Current Liabilities 6,241.0 5,638.0 4,887.0 4,133.0 3,503.0
Working Capital (1,305.7) (1,542.5) (1,386.7) (937.5) (904.6)
Financial Analysis 25
Immediately, we can see that Best Buy maintains negative working capital, suggestive of a very low cash conversion cycle, while Circuit City’s working capital looks fairly high in comparison. Specificially, we note higher days on hand as far as inventories, receivables and payables are concerned. In fact, the Circuit City’s average cash conversion cycle over the past four fiscal years is 35 days vs. 8 for Best Buy. Clearly, Circuit City lags behind Best Buy in its working capital management and there is considerable room for improvement. The following table compares Circuit City with Best Buy in terms of the working capital components of the cash conversion cycle.
Inventory, A/R, A/P DOH – Circuit City and Best Buy 2007 2006 2005 2004 2003 Average
Inventory DOH Circuit City 62.86 71.21 67.56 73.13 67.19 68.39 Best Buy 54.12 52.69 49.70 50.95 47.39 50.97 Inv DOH difference 8.74 18.51 17.86 22.18 19.80 17.42
A/R DOH Circuit City 11.23 7.00 8.08 6.32 5.10 7.55 Best Buy 5.57 5.31 4.99 5.10 5.44 5.28 A/R DOH difference 5.67 1.69 3.09 1.22 (0.34) 2.26
A/P DOH Circuit City 46.55 42.94 37.73 39.63 - 41.71 Best Buy 51.55 50.00 48.66 46.75 - 49.24 A/P DOH difference (5.00) (7.05) (10.93) (7.12) - (7.53)
Financial Analysis 26
4.3 Capital Expenditures
Circuit City’s capital expenditures primarily include spending for the construction of new stores and remodeling and relocation of existing stores. These expenditures have been funded through internally generated funds, landlord reimbursements, sale-leaseback transactions and long-term debt. A majority of the capital expenditures (as much as 95%) were spent in expanding/enhancing the domestic operations.
Circuit City Capital Expenditures Capital Expenditure ($Millions) 2007 2006 2005 2004 2003 Capital Expenditure 285.7 254.5 269.2 175.8 150.7 Sale of PP&E 38.6 55.4 106.4 46.6 89.9 Net Capital Expenditure 247.1 199.1 162.8 129.2 60.8 Net Growth 24.1% 22.3% 26.0% 112%
Circuit City Store Growth Segment 2007 2006 2005 2004 2003 Domestic 654 631 617 607 626 International 509 540 531 ◄Acquisition of InterTAN Total 1163 1171 1148 607 626
4.4 Liquidity
The primary sources of liquidity for Circuit City are cash and short-term investments, borrowing capacity under its $500 million credit facility and landlord reimbursements. The major uses of liquidity include operational expenditures, capital expenditures, and share purchases. The following three tables illustrate the company’s five-year historic cash flows.
Circuit City Five Year Historic Cash Burn Capital Expenditure 2007 2006 2005 2004 2003 Cash Flow From Operating Activities 316.34 364.94 455.88 (125.51) (163.11) Cash Flow From Investing Activities (334.71) (593.88) (81.04) (135.34) (90.87) Cash Flow From Financing Activities (160.78) (318.43) (276.39) (89.08) (30.75) Cash Due To Exchange Rate & 4.32 (16.32) (2.27) 248.74 (78.85) Divestment Net Cash Flow (174.83) (563.69) 96.19 (101.20) (363.58) Beginning Cash Balance 315.97 879.66 783.47 884.67 1248.25 Ending Cash Balance 141.14 315.97 879.66 783.47 884.67
Financial Analysis 27
Circuit City Historic Five Year Cash Flows ($ Millions)
$600.0
$400.0
$200.0
$0.0
($200.0) 2003 2004 2005 2006 2007
Operating ($400.0) Investing
($600.0) Financing Other ($800.0)
Circuit City Historic Five Year Cash Burn ($ Millions)
Ne t Cas h Flow
200.0
100.0
0.0
(100.0) 2003 2004 2005 2006 2007 (200.0)
(300.0)
(400.0) (500.0) (600.0)
Financial Analysis 28
4.5 Credit Rating
On a relative basis, we compared the snapshot (latest twelve months through August 2007) credit statistics of Circuit City to a selected peer group of various publicly-traded retail competitors, highlighting the business diversity and financial strength of the various players that Circuit City competes against. Notably, only two competitors, Conns (a southern regional retail electronics chain) and PC Mall (an online consumer electronics and IT equipment company) do not have corporate credit ratings from the nationally recognized credit rating agencies. Similarly, at the time of this analysis, Circuit City does not have formal ratings either. Therefore, we needed to use judgment to arrive at a prospective ‘Implied S&P Rating’ which incorporates statistics, size, and business model comparisons, and other cross-sectional qualitative factors (e.g. brand, geographic diversity).
Based on our evaluation of the above, we believe S&P would rate Circuit City below investment grade at BB with a negative outlook. This is comparable to companies in the peer group including RadioShack Corporation, GameStop Corp and Amazon. While Circuit City remains unprofitable at the operating profit level through the latest twelve months (primarily as a result of the $92 million write-down of InterTAN goodwill), we believe S&P would look favorably at the company’s strong net cash and investments position of $365 million. This is enhanced by the Circuit City’s committed revolving credit facility of $500 million which, when taken together, would mitigate most liquidity concerns that S&P or other credit rating agencies would have.
As a result of the Company’s excess liquidity, most of the credit stats for Circuit City, exhibit very strong levels, particularly those in the coverage and leverage categories. Nevertheless, given the company’s history of unsuccessful restructuring efforts and management’s inability to prove that they can manage a highly promotional and consumer-driven business effectively, we believe S&P would provide a negative outlook on the Company. An additional consideration in this analysis is the accounting treatment of non-cancelable leases which most ‘brick-and-mortar’ retail companies utilize. The accounting treatment is to expense rental payments rather than capitalizing the lease obligations. As we discuss in the Valuation section, this treatment distorts comparisons across companies that may treat leases differently and also favorably improves the credit statistics.
Financial Analysis 29
One way to remove the effects of this distortion is to employ a methodology favored by S&P called the Lease Analytics Method. This method examines the future five-year, non-cancelable lease stream found in every 10-K and allows an analyst to present value these future commitments and treat them collectively as debt15 (similar to how capital leases are accounted for). We employed this same methodology and re-cut our analysis of the relative credit statistics for all the peer group companies including Circuit City.
As one would expect, the credit stats for all companies including Circuit City are worsened in fairly dramatic form. It would be fair to state that most companies in this peer group, if forced to account for all operating leases as debt, would have to shave at least a notch or two from their current rating. Circuit City fairs no worse than its peers in this regard, with our belief that S&P would notch the original implied BB rating two full notches to CCC, an extremely risky near-default position.
In this scenario, given the lack of full interest coverage and high levels of pro forma leverage, we don’t believe Circuit City would be able to sustain this position for very long, even in light of its strong net cash position. This reflects part of the reason why a leveraged buy-out of the Company would prove disastrous. At first glance, the combination of its strong cash position and its stock price of $7.44 per share trading below tangible book value of $8.80 per share might entice would-be bidders of the company; however, when one considers the economic cost of maintaining the future lease obligations ($2.1 billion for Circuit City), it becomes apparent that the company cannot take on further debt obligations in its current unstable financial condition without real assets or other forms of collateral to borrow against (e.g. real estate). See Appendix A for full analysis and statistics.
Financial Analysis 30
SUMMARY: PRESENT VALUE OF OPERATING LEASES ANALYTICS Amounts in $MMs
Book Acctg Incremental 1st-Yr Lease Implied Company PV Debt [1] Rate [2] Interest Exp. Payment Depreciation Best Buy Co. Inc. $5,658 3.4% $192 $741 $549 RadioShack Corp. 787 8.5% 67 211 144 GameStop Corp. 710 9.1% 64 219 155 Office Depot, Inc. 2,914 9.2% 267 503 236 OfficeMax Inc. 1,660 6.5% 109 342 233 Staples Inc. 4,028 9.8% 397 677 280 Conns Inc. [3] 93 7.0% 7 18 11 hhgregg, Inc. 150 10.1% 15 28 13 Costco Wholesale Corp. 1,212 5.4% 66 137 72 Target Corp. 1,765 5.4% 96 142 46 Wal-Mart Stores Inc. 7,662 4.7% 364 842 478 Amazon.com Inc. 536 6.0% 32 129 97 PC Mall Inc. 7 7.8% 1 4 3
Circuit City Stores Inc. $2,111 12.8% $271 $350 $79
Source: Forward minimum noncancelable lease payments obtained from individual company SEC filings [1] Present value of operating leases calculated using S&P Lease Analytics Methodology [2] Book accounting interest rate derived from LTM interest expense / avg. debt, adjusted for FY capitalized interest. These rates also represent the discount rates to present value the forward lease commitments per S&P Lease Analytics. [3] Estimated (vs. calculated) interest rates, given nominal debt balances
Discussion of Amended and Restated Credit Agreement16 On July 8, 2004, Circuit City and its subsidiaries including the then-recently acquired InterTAN Canada Ltd., entered into a $500 million Credit Agreement with Fleet National Bank, Bank of America, GE Capital and others to provide support for letters of credit and for short-term borrowing requirements. The facility is scheduled to mature in June 2009. Loans are secured by Circuit City’s accounts receivable and inventory and the Company and its subsidiaries can borrow loans that bear an interest spread over LIBOR or over the prime rate. The applicable spreads were listed as CONFIDENTIAL in the credit facility so full all-in rates were unavailable. The maximum credit extensions, including loans and outstanding letters of credit, permitted under the credit facility are determined by calculating a borrowing base that is a percentage of the company’s eligible inventory and accounts receivable. The facility maintains separate sub-limits for each of the Domestic ($400 million) and International ($100 million) and at August 31, 2007, Circuit City had no short-term borrowings, and outstanding letters of credit were $58.1 million, leaving $441.9 million available for borrowing.
Financial Analysis 31
Major Affirmative Covenants: Provide regular financial statements and Borrowers’ Certificate in timely fashion; Provide notice of Material Events; Maintenance of properties and Insurance on properties
Major Negative Covenants: Cannot incur indebtedness relating to the acquisition of fixed or capital assets exceeding $150 million Limit unsecured indebtedness to $300 million Limitations on acquisitions ($5 million singly or $25 million cumulatively) and investments not to exceed $50 million in any fiscal year Limitations of sale of non-collateral assets to $50 million
4.6 Capital Structure
As of December 12, 2007, Circuit City’s enterprise value was $890 million. This value was less than the $1.2 billion in equity market value because Circuit City held large amount of cash and short-term investments on its balance sheet. Its debt balance of $59 million to equity ratio is approximately 6.6% and its equity market value over this past year has dropped by 75% from $4 billion to a little over $1 billion. The following table illustrates Circuit City’s historic capital structure. To determine the lease equivalent debt we utilized S&P’s Lease Analytics methodology which was described previously.
Circuit City Five Year Historic Capital Structure Capital Structure (March 31st) 2007 2006 2005 Total Debt (MM) 50 52 20 Market Value Of Equity 4076 3037 2532 Debt/Equity Ratio 1.23% 1.71% 0.8% Total Shares Outstanding (MM) 170.7 175.1 188.3
At February 28, 2007, Circuit City had following future minimum operating lease payments net of sublease income. In calculating net lease obligations, we subtracted the sublease income (under the assumption that the sublease party is sufficiently credit worthy) and ultimately determined the lease equivalent debt to be $2.1 billion utilizing a book discount interest rate of 12.8%.
Financial Analysis 32
Circuit City Future Minimum Lease Payments
Millions 2008 2009 2010 2011 2012 Thereafter Minimum Lease Commitments 384 384 382 370 365 2,381 Sublease Income 34 33 33 32 31 232 Net Lease Obligation 350 351 349 338 333 2,148 Total Minimum Lease 3,870 Interest Rate 12.8% Lease Equivalent Debt 2,111
4.7 Valuation
Relative Valuation
Despite recognizing more than $12.1 billion in revenue through the latest twelve months ended August 31, 2007, due to poor management, inconsistent profitability and repeated failures to meet Wall Street’s expectations, Circuit City currently maintains market and enterprise value multiples of LTM Revenue and EBITDA of 0.1x and 8.9x, respectively and 2008 estimated Revenue and EBITDA multiples of 0.1x and 7.8x. The seemingly typical looking EBITDA multiples are not indicative of strong performance, however, since Circuit City’s LTM and 2008E EBITDA margins are 0.8% and 0.9%, respectively.
While the low revenue multiples are reflective of poor operating profitability and margins of Circuit City, this is also symptomatic of the retail industry at large as well (See Appendix A). Most companies in the retail industry generate operating (EBIT) margins lower than 10%. In fact, our comparison of Circuit City’s competitors, all of whom are characterized as retailers (Specialty, Regional, Discount, Online), indicate that the average operating margin across the peer group is 5.7% through the latest twelve months.
When the company’s performance is analyzed side-by-side with other retailers in our selected peer group, Circuit City lags across every measure ranging from historical CAGR (compounded annual growth rates), profitability and returns, thereby producing lower valuation metrics. EBITDA margins for the peer group drive only slightly higher with an industry average of 7.3%, suggesting that replacement costs through depreciation expenses are generally moderate. This is primarily attributable to the fact that most retail companies in our selected peer group rent their stores through long-term leases rather than purchase the real estate outright. The corresponding accounting treatment is to
Financial Analysis 33
expense the rental payments through the income statement rather than capitalizing the lease onto the balance sheet and depreciating the asset over time. This accounting distortion tends to boost credit- related statistics and also increases return measures like ROC (return on capital) since the capital base is unencumbered by assets placed onto the balance sheet. See Appendix A for a full trading and performance valuation of Circuit City relative to our selected peer group.
Projected Cash Burn Analysis
While it is clear that Circuit City is experiencing tremendous headwinds with regards to competitive pressures and operational challenges, its $365 million net cash and short-term investments position, and $500 million credit facility (with $442 million of availability as of August 2007) are sufficient to ensure that the Company remains viable, even with the performance issues.
We have run a separate Status Quo forecast and analysis, with underlying revenue, cost and investment assumptions replicating fiscal year 2007 performance. The resulting EBITDA margins increase from 2.2% in 2008 to 3.0% by 2012, primarily resulting from operational leverage as more stores are opened. This analysis also assumes that Circuit City continues to repurchase approximately $200 million worth of its own shares each and every year throughout the forecast period, similar to its actual historical record. A summary of the corresponding cash flow outputs are shown below.
STATUS QUO CASH BURN ANALYSIS P R O J E C T I O N S 2008 2009 2010 2011 2012 Net Cash Flow (Operating + Investing + Financing) $345.5 ($439.3) $375.4 ($107.8) $18.8 Increase (decrease) in cash & equivalents 345.5 (439.3) 375.4 (107.8) 18.8 Cash & equivalents at beginning of year 141.2 486.8 47.5 422.9 315.2 Cash & equivalents at end of year (excl. ST invest) $486.8 $47.5 $422.9 $315.2 $333.9 Interest income on cash & equivalents $4.9 $17.0 $1.7 $14.8 $11.0
Short-term investments Beginning balance $598.3 $185.2 $226.2 $0.0 $0.0 Sales (Purchases) of investment sec. 413.2 (41.0) 226.2 - - Ending Balance $185.2 $226.2 $0.0 $0.0 $0.0 Interest income on short-term investments $20.9 $6.5 $7.9 $0.0 $0.0
Revolver Beginning balance $0.0 $228.0 $0.0 $249.5 $256.5 Available cash flow after req. amortization (228.0) 267.2 (249.5) (7.0) (79.5) Borrowings / (Paydown) 228.0 (228.0) 249.5 7.0 79.5 Ending balance $228.0 $0.0 $249.5 $256.5 $336.1 Interest expense on Revolver $0.0 $16.0 $0.0 $17.5 $18.0
Financial Analysis 34
As we can see, throughout the projected period, Circuit City builds up a substantial amount of debt under the revolver and has exhausted the short-term investments completely, yet continues to maintain sufficient liquidity with strong cash balances of $334 million by 2012. Additionally, even if the company were to do worse than the assumed status quo, it can always seek to hold more cash by curtailing the activities of its share repurchase program (which management indicated it would do in its most recent 10-Q as a result of their “desire to maintain a strong cash position as the business was undergoing a significant amount of change and as we faced an uncertain macroeconomic environment”).
Finally, the company could also reduce or completely eliminate its dividend policy. We do not recommend this course of action since the cash consumption of approximately $20 - $24 million per year (with a $0.04 / quarter dividend) represents a relatively nominal amount while the investor reaction of cutting the dividend would potentially cripple an already battered stock price.
Liquidation Analysis
Before turning to the Discounted Cash Flow Analysis, we wanted to establish a floor value for Circuit City based on its latest balance sheet (August 2007), with the full expectation that this value represents at best, a theoretical one since Circuit City is not facing bankruptcy, let alone a Chapter 7 liquidation. However, we deemed this exercise necessary in order to compare values across multiple methodologies. Based on reasonable estimates of recovery rate percentages, we derived Low – High scenarios which yielded net proceeds from asset sales of approximately $1.6 billion to $2.0 billion before distribution to claimants.
As we can see from the table below, however, in either of the Low or High scenarios, equity holders are left with nothing, indicating convincingly that Circuit City is better off alive as a going concern. Forced liquidation would destroy tremendous value to both creditors and equity holders.
Net Liquidation Proceeds Available for Distribution $1,593.3 $1,957.3
Unaudited Claimant Recovery % Claimant Recovery ($) Distribution of Proceeds 8/31/2007 Low High Low High Claims Merchandise payable and expenses $1,403.4 100.0% 100.0% $1,403.4 $1,403.4 Employee salaries and expenses 429.2 44.3% 100.0% 189.9 429.2 Debt (incl. capital and finacing leases) 59.0 0.0% 100.0% - 59.0 Lease costs 352.6 0.0% 18.6% - 65.7 Income taxes 21.1 0.0% 0.0% - - Other 135.1 0.0% 0.0% - - Equityholders - - (See Appendix A for full analysis and explanations for recovery percentages)
Financial Analysis 35
Income Statement, Cash Flow & Discounted Cash Flow (DCF) Analysis
Our analysis of value based on projected free cash flows yielded positively encouraging results. The underlying operational assumptions behind the forecast, investments and corresponding cash flows represent the outcome of our team’s specific recommendations (which are described in detail in the next section) regarding Circuit City’s strategic and competitive challenges. Our forecast, then, is the actualization of targeted strategic and tactical decisions to improve profitability, free up capital and ultimately enhance cash flows.
A significant aspect of our recommendation is to close down 75 domestic Superstores and 60 company- owned international stores by 2009. While this may seem severe, based on our analysis of the company’s operational and competitive positioning, we believe strongly that Circuit City must excise the ‘bad apples’ immediately in order to reap the ensuing positive gains quickly. The Company’s current ‘slow-roll’ approach to selectively choosing stores for Remodeling, Relocation and Closure ultimately conveys a lack of urgency on the part of management and fundamentally fatigues employees who have been loyal to Circuit City in anticipation of improved performance, fewer episodic layoffs or changes to compensation structure. These closures would send a clear signal to Circuit City’s competitors, employees and investors that the Company is serious about managing its position and operations to enhance value.
As a result of this major decision, we anticipate and have modeled a net operating loss for fiscal year 2009 in anticipation of improving financial results beginning in 2010. As a financial consideration, we have also assumed dividends remain at their current levels and that the company continues with its share repurchase program beginning in 2009, but with a reduced amount of $150 million each year. Based on the cash flow characteristics of our planned turnaround program, we believe Circuit City can easily support these important measures which ultimately return value back to shareholders. The combination of our recommendations yields increasing EBITDA levels from $176 million in 2008 to $852 million by 2012, a 48% compound annual increase in profits despite only a 2.5% compound increase in net sales over the same period. The corresponding margins also expand from 1.4% in 2008 to 6.1% in 2012, again reflecting the cost improvement aspects of our plan. With the recommended restructuring plan, one can note the improving financial condition of the company as evidenced by stronger credit statistics over time.
Financial Analysis 36
H I S T O R I C A L P R O J E C T I O N S CREDIT RATIOS 2005 2006 2007 2008 2009 2010 2011 2012 EBIT / Interest 19.6 68.3 (3.4) (3.7) (27.5) 142.9 164.5 208.0 EBITDA / Interest 54.0 120.3 116.0 38.1 19.8 197.6 225.9 277.2 (EBITDA - Capex) / Interest (4.7) 39.3 (72.1) (31.5) (21.5) 145.0 159.7 198.9 Free Cash Flow / Debt 6.1 1.4 0.5 (2.5) 1.0 11.0 13.2 14.3 Debt / EBITDA 0.1 0.2 0.3 0.3 0.5 0.1 0.1 0.0 FFO / Debt 5.6 4.0 6.3 4.6 3.0 13.4 15.4 18.9 Total Debt / Capital 1.0% 4.0% 3.1% 2.8% 2.8% 2.4% 2.0% 1.6% Pre-tax ROC 4.1% 10.6% -0.3% -0.9% -7.2% 29.2% 28.1% 29.1%
The resulting free cash flows arising from the business restructuring resolves itself into tangible value creation with our estimate of Circuit City’s price per share of $22.45, which is approximately 3x the current value of its shares. This assumes a terminal growth rate of 3.0% and a discount rate of 12.5%. While our weighted average cost of capital (WACC) analysis calculates a rate of 11.4% for Circuit City based on the betas of the selected peer group, we believe this rate understates the Company’s risk profile given: 1) its current turnaround mode, 2) the backdrop of a possible economic slowdown in the US in calendar 2008 and 3) its own historical levered beta of 1.38 which is higher than the group average levered beta of 1.28 (and used in the WACC calculation). For these reasons, we utilized the higher rate of 12.5%, ultimately deciding to take the WACC calculation into consideration when formulating the final rate. We also charted a sensitivity table highlighting how the price per share is a function of both discount rate and terminal growth. (See Appendix A for WACC analysis)
While this estimate of value is fundamentally sound, there are major obstacles to overcome in reaching this increased value. Management needs to signal to investors that they are committed to this plan. The transparency of quarterly earnings reports provides a forum to discuss milestones and performance targets associated with the plan which can be tracked by the investment community. Correspondingly, management needs to be focused on execution as this will be the ultimate test of whether management can restore the confidence of its various stakeholders in this new plan. The inability of management to consistently execute has negatively impacted its share price over time and has frustrated its shareholders, as evidenced by Highfields Capital Management’s (a public/private investment vehicle based in Boston, MA) proposal to take over the company back in early 2005 for $17.00 per share, which represented a 20%+ premium to the prior day closing price. Unless the company can regain the confidence of its investor base by executing consistently and remaining committed to the transparent nature of the plan, it is unlikely that Circuit City’s share price will reach our estimated DCF value of approximately $22.00.
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Restructuring Plan
5.1 Restructuring Overview
Circuit City requires a detailed and structured approach to their turnaround. Management’s approach does not provide the framework, incentive structure, and proper focus to execute necessary action. In the following sections we outline Management’s approach and our proposed approach – “The City Revival Plan”.
The City Revival Plan has three distinct objectives, and each objective has implementation costs, expected revenue gains, and/or targeted cost savings. Please refer to the analysis for each action plan, but in summary, we are proposing the following objectives:
A. Cost Reduction Plan • Close Stores - Reduce SG&A by closing 75 domestic and 60 international stores. • Store Placement - Perform a more thorough due diligence before opening new stores to avoid future relocation and closing expenses. • Reduce Inventory – Leverage existing and roll-out new rPOS system to reduce inventory levels and carrying costs. • Reduce Advertising – Gradually reduce advertising spend by $160 million (off the $425 million) while stores are closed. Monitor reductions in conjunction with sales. • Enhance Collection Practices – Best Buy has roughly half the A/R DOH.
B. Expand Revenue Opportunities • firedog – Grow firedog business to $700 million by 2010. • Private Label - Increase private label sales to $1.1 billion by 2010. • Suspend Domestic Store Revitalization Program
C. Refocus Strategy • InterTAN – Retain the business unit and include in the turnaround plan. • Global Expansion (Long Term) – Explore global expansion opportunities. • Human Capital Compensation – Re-align compensation system.
5.2 Management’s Approach
Since fiscal year 2007, Circuit City’s management team has been reiterating that the company is in the midst of multi-year turnaround. However, management hasn’t outlined a clear turnaround strategy or specific action plan which enables the company to achieve the goal of improved operational performance. Management explains that the current turnaround is to improve customer experience in a multi-channel operation, thus requiring changes in every single division. Indeed it is a broad plan,
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forcing both management and associates to expend significant time and resources, consequently distracting the company from operating efficiently. Moreover, management continues to change its plan, which has turned into a constantly evolving, interminable turnaround while operational and financial performance continues to deteriorate. The following management initiatives are currently underway:
(1) Remodeling the Retail Stores and Operation
• The company introduced the Domestic Segment Superstore Revitalization plan in fiscal year 2001.
• Retail operation changes have been made as well. During fiscal year 2008 Q1, the company reduced the domestic operating regions from ten to eight
• During fiscal year 2008 Q2, the company changed the retail standard operating platform to improve customers’ in-store experience and rolled out new procedures to more than 650 stores: trained over 40,000 Associates for new operating processes and created two to three customer focus areas allowing boundary-less selling. The initial results of the new operating model has been positive as evidenced by 65 regional and district learning centers. This group outperformed the control stores by more than 6% in sales per labor hour and more than 3% in total sales. There are also improvements to store growth profit margin and average daily close rates.
• Retail point-of-sale system (RPOS) had been rolled out to 134 stores by fiscal year 2008 Q2. This supports store-level inventory, scheduling of services, warranty sales and credit applications as well as point of sale transactions. RPOS implementation is a lengthy process and requires changes in every store management system and while the initial plan was to complete roll out all over the stores before the 2008 holiday season, the implementation has been paused at that point to minimize disruption to holiday sales.
(2) Sell the International Segment
• Circuit City is exploring strategic alternatives including a possible sale for InterTAN, Inc., the company’s international segment.
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(3) Implement IT infrastructure
• Earlier in fiscal year 2008, the company outsourced its IT infrastructure operations to IBM.
(4) Firedog Service
• During fiscal year 2007 Circuit City introduced firedog(SM) services, a new brand for home- theater installations and PC services.
5.3 Our Proposed Approach – “City Revival Plan”
The following three sections detail the City Revival Plan - first focusing on cost saving initiatives (A), expanding revenue opportunities (B), then redefining the short and long term strategies (C).
A. Cost Reduction Plan
Our cost reduction plan to turnaround Circuit City directly addresses the deteriorating SG&A expense category which currently includes the following components. 1. Payroll, fringe benefit costs and stock-based compensation expense 2. Occupancy costs of store and corporate facilities 3. Depreciation related to store and corporate assets 4. Advertising 5. Vendor allowances to promote a vendor’s products 6. Costs related to relocating and remodeling store distribution centers and locations 7. Professional service fees 8. Other administrative costs, such as credit card service fees, supplies, and bad debt.
Of these components the major contributors to SG&A expense are occupancy costs, advertising, and remodeling and relocating expenses. We address these major components in the following sections.
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Savings from Store Relocation and Closing
Costs related to relocation/remodeling of stores can be reduced by conducting proper due diligence with respect to underlying demographics and profitability before opening new stores. Based on the company’s history of closing and relocating stores (average of 10 stores closed annually and average of 16 stores relocated annually from 2003-2007), it is clear that Circuit City can be more selective and thoughtful as it relates to new store locations.
Relocations cost the company a significant amount in severance expense, ineffective store specific advertisement, inventory write downs and actual relocation expenses. On average, we estimate that Circuit City expenses approximately $0.7, $1.4 and $3.1 million to open, relocate, and close a store respectively (See Appendix A for Per Store Expenses) which does not include the capital expenditures relating to some of these activities. This number of annual relocations is staggering compared to Best Buy’s historical performance. Best Buy has closed or relocated roughly two stores annually in the last two years.
Management estimates that Circuit City currently has about 400 of its stores operating inefficiently or in undesired locations17. In light of this situation, we recommend closing about 75 under-performing stores within one year. This will not only free up a significant amount of capital but also will reduce occupancy and rental expenses in underperforming markets. While these closures save SG&A expense they also reduce Circuit City’s aggregate revenues. On an average Circuit City spends annually about $3.5 million per store in store expenses and $486 thousand in general and administrative expenses ($4 million in total). We propose to close 75 domestic (closing cost of $3.1 million per store) and 60 international underperforming stores (closing cost of $250 thousand per store – significantly smaller than domestic superstore). These closures will save Circuit City about $75 million in the current year or reduce SG&A expense by 2.7%. In Objective B of the City Revival Plan, we will also detail the effect of the store closing on projected revenue and net income through 2010.
Another major SG&A expense component is the advertising expense. Circuit City has historically spent about 3.6% of its revenue on advertising. Best Buy spends about 1.9% of its revenues on advertising. The following table compares the advertising expenses of both companies.
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Advertising Expense – Circuit City & Best Buy 2007 2006 2005
Circuit City Revenue 12430 11514 10414 Advertising 425 432 366 %age 3.50% 3.75% 3.51%
Best Buy Revenue 35934 30848 27433 Advertising 692 644 597 %age 1.92% 2.08% 2.17%
Best Buy’s lower advertising/revenue percent could be explained by the size of Best Buy’s operations and its brand image in the marketplace. However, we believe that with centralized planning and efficient allocation of advertising resources, Circuit City can reduce its advertising expense to about 2.3% of its revenues without a significant impact to sales. This reduction will decrease SG&A expense by $160 million or 5.8% in the current year.
Working Capital Management Circuit City can further achieve reductions in investment through better management of its working capital. Currently, the company has invested about $800 million in its working capital. Sustainably reducing its working capital will have direct impact on the company’s return on capital metrics and correspondingly, valuation. The major components of working capital include inventories, receivables and payables. Following table compares Circuit City with Best Buy with respect to working capital management.
Working Capital Target Current Target
Inventory DOH Circuit City 62.86 56.60 Best Buy 54.12 54.12 Inv DOH difference 8.74 2.48
A/R DOH Circuit City 11.23 7.30 Best Buy 5.57 5.31 A/R DOH difference 5.67 1.99
A/P DOH Circuit City 46.55 47.80 Best Buy 51.55 50.00 A/P DOH difference (5.00) (2.2)
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We believe that Circuit City can utilize its improved IT infrastructure to better predict consumer demand in real-time to reduce its inventory levels to a manageable level. Currently about 124 stores have advanced IT systems that feed into Circuit City’s supply-chain management decisions. We recommend that Circuit City upgrade the remaining stores with these systems over the course of 3-4 years. We believe this system-wide rollout can reduce inventory days on hand from 63 days to 56 days by 2012. Achieving this target will free up about $165 million in working capital and save $20 million (12.5% cost of capital X $165 million) in inventory holding costs and another $5 million in inventory obsolescence / write down costs.
We also recommend that Circuit City implement stronger receivables collection policies to reduce its bad debt expense by $10 million or by 50%. Thorough diligence on new store locations should help augment receivables collections since the demographics are also likely to become more favorable. Reaching the following target days on hand will free up about $330 million in cash.
Cash Freed Current Target Inv DOH 62.86 56.60 A/R DOH 11.23 7.30 A/P DOH 46.55 47.80 Inventory 1636.51 1473.46 A/R 382.56 248.60 A/P 1203.91 1236.32 Cash Used 815.15 485.75 Cash Freed 329.40
If this capital reduction plan is implemented, Circuit City can achieve a total savings of about $270 million going forward. This savings amounts to about 2.26% sales or 10% of SG&A expense. Overall, we anticipate the cost reduction will be 2.16% of sales. Following table provides the cost savings breakdown. SG&A Component Cost Savings Current Inventory Management 25 Bad Debt Expense 10 Store Expenses 75 Advertising Expenses 160
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Total Cost Savings 270
B. Expand Revenue Opportunities
Customer Service --firedogSM
The brand firedogSM was launched in September 2006, which provides services such as home theater installation and consumer PC-related services. These services not only increase the average ticket price per customer, but also provide Circuit City with the flexibility to used bundled pricing as a mechanism to combat price competition. The growth of these services is also significantly higher than the overall product market for consumer electronics. As such, it is imperative for Circuit City to effectively roll-out a coherent strategy to strengthen its business through firedogSM services. We build our assumptions for firedogSM related business as follows:
Estimation for firedogSM business fiscal year 2007 2008 2009 2010 market size $MM growth 1.5 5,926 8,889 13,333 20,000 CC sales $MM 200 400 600 900 market share 3.4% 4.5% 4.5% 4.5% average of price $176.83 $176.83 $176.83 $176.83 number of deals 1,131,057 2,262,113 3,393,170 5,089,754 deals per business day 4,524 9,048 13,573 20,359 deals per store 1,762 3,524 5,285 7,928 per business day 7.0 14.1 21.1 31.7 hours per deal 3.0 3.0 3.0 3.0 full time staff per store 1.0 1.5 2.0 2.0 annual cost per full time staff $45,000 $45,000 $45,000 $45,000 annual full time cost total $28,890,000 $43,335,000 $57,780,000 $57,780,000 full time staff work hours per day 7.0 7.0 7.0 7.0 contractor work hours per day 14.1 31.8 49.4 81.1 hourly payroll for contractor $25 $25 $25 $25 hourly payroll total $56,741,740 $127,527,230 $198,312,720 $325,556,580
other cost 20% $40,000,000 $80,000,000 $120,000,000 $180,000,000 NOI $74,368,260 $149,137,770 $223,907,280 $336,663,420 37.2% 37.3% 37.3% 37.4%
Source: Turnaround Team Estimation
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- Market size: The company assumes the market to be $20 billion by fiscal year 2010. We assume the yearly growth to be multiple of 1.5 as an extrapolation of the company’s market sizing estimates.
- Market share: We conservatively estimate the maintenance of Circuit City’s initial market share after fiscal year 2008 while the market grows rapidly.
- Average of price: $176.83. We calculate the average of Home Theater Installation top sellers as $244, Computer Services as $64 and took the weighted average of each category sales in domestic segment. Portion of Car Electronics Installation are considered to be small, based on related product market size.
Percent of domestic segment net sales by category
Years Ended Februrary 28 2007 2006 2005 Video 42% 42% 39% Information technology 25% 25% 28% Audio 15% 15% 14% Entertainment 11% 11% 12% Warranty, services and other 7% 7% 7% Net Sales 100% 100% 100%
Source: Circuit City Stores, Inc. Form 10-K
Based on reasonable and conservative assumptions, we can see that this business is highly profitable, much more so than the existing product business, with net operating income (NOI) margins of 37%.
To support the in-store business growth, we recommend negotiating an alliance with telecommunications companies like Verizon or AT&T. Since these companies are aiming to aggressively to take market share away from cable companies in the competitive HDTV market, we believe it would be a win-win strategy to forge an alliance whereby firedogSM provides installation services for the telcos. Circuit City can offer their customers the convenience of one-stop service (arrange and set up the purchase and installation of products in one day) while facilitating the service offering with Verizon on the back-end so that the customer experiences a seamless transaction. This is
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similar to Circuit City’s partnership with Comcast, but Verizon (with FIOS service) and others present additional opportunities.
Private Label
The company’s major competitors such as Wal-Mart and Best Buy have been offering private label for flat panel TVs, DVD players, MP3 players and other consumer electronics. Circuit City sells most of their private-label and brand-name consumer electronics mix in Canada, its International Segment. We assume the significant difference in gross margins between Circuit City’s domestic and international segment is related to the product mix: Canada is keeping average margins of 36.6% during the most recent fiscal year. Improving gross margin is one of the crucial issues for the company to return to profitability; the domestic segment margins dropped to 19.8% in three months ended August 31, 2007 from 23.1% last year. Though we recommend caution to prevent aggressive changes in the company’s sourcing operations during the turnaround phase, we believe it prudent to begin selling more private label products as soon as possible. Our projections are as follows: , $billion fiscal year 2007 2008 2009 2010 Consumer electronics market size U.S. growth 7.0% 160.3 170.1 182.0 194.7 private label growth 50.0% 8.012.018.027.1 private label % 5.0% 7.1% 9.9% 13.9% CC sales total (including Canada market) 12.4 12.3 13.2 14.3 private label sales 0.2 0.2 0.5 1.1 private label % 2.0% 2.0% 4.0% 8.0% gross margin of private label products $million 112 98 200 401 gross margin of private label products % 45.0% 40.0% 38.0% 35.0% additional cost to introduce products in U.S. $million 0 0 20 20 sourcing 001010 advertisement 001010
Suspend the Domestic Superstore Revitalization Plan
Circuit City has continued making business changes in the midst of a multi-year turnaround. Unfortunately, significant improvements in the company’s operational or financial performance remain to be seen. What is worth noting is that Senior Management seems too focused on making incremental changes and re-engineering processes without considering the broader strategy for turning the entire business around. While incremental changes can have beneficial impacts to the organization as a whole,
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this assumes that the other aspects of the organization are operating at or near peak efficiency levels, which Circuit City is clearly not. Rather, these changes and constant restructurings are affecting the output and morale of the individuals who work at Circuit City. For example, the already-trained Associates are constantly adjusting their sales processes and procedures each time a new system or structure gets rolled out. These changes on site distract the Associates from paying attention to set an optimal product mix to each customer, thereby impacting sales and potentially squeezing the company’s margins. Circuit City should also stop testing its new retail store format and roll it out to the optimal numbers of stores immediately.
The positive news is that the 20,000 square foot format is outperforming other stores at the start of fiscal year 2008. The 65 pilot stores, which had completed installation of the new operating model early, demonstrated its effectiveness by outperforming the control stores more than 3% in total sales. A 3% gain on domestic sales at new stores could be anywhere from $0.5-1 million annual revenue gain per new store (estimated). Our estimation for Superstore remodeling activity costs are detailed in the following table.
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Domestic Segment Superstore Revitalization related cost estimation
Activities and related action Cost estimation
Superstore Openings Lease store sites Pre-open expenses $0.7 construct the building Capital expenditure $3.9 hire and train Associates for the new location Total cash out $4.6
Superstore Relocation close store (store-closing sale) Relocation expenses $1.4 termination of previous lease (average lease impairment expense $0.9) starting next lease Capital expenditure $1.5 construct the building move in-store PP&E and inventory move and train Associates for the new location Total cash out $2.9
Superstore Remodel close store for approximately 1 month Remodel expenses $0.4 remodel the building Capital expenditure $0.0 move in-store PP&E and inventory move and train Associates Total cash out $0.4
Superstore Closures close store (store-closing sale) Closures expenses $3.1 termination of lease contract write off book value of PP&E* write off book value of inventory* other expenses (removing or demolition cost) reduce staff, severance pay Total cash out $3.1
Source: Turnaround Team Estimate 1. Expenses estimation are based on historical data from 10-K, FY2003 to FY2007. 2. Capital expenditure estimation are based on data from 10-K, FY2007. *Some expenses would not cause cash outs, but we ignore it as for the valuation.
C. Refocus Strategy
The final stage of the City Revival Plan considers the short and long-term strategy of the company, and the incentive structure of Senior Management. In the short-term, we believe Circuit City should retain and turnaround InterTAN rather than selling the recent operation. In the long term, Circuit City should learn from Best Buy’s global expansion success or failures, then expand appropriately. All of this must be completed while combating the domestic market share losses to Best Buy and other discount retailers. To ensure Senior Management is adequately motivated to see through the execution of these strategies, and the overall turnaround plan, we conclude with the “Performance Driven Human Capital Strategy”.
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Short-Term Strategy
As previously mentioned, the acquisition of InterTAN was completed by Circuit City in May 2004 for $259.3 million. InterTAN operates in Canada under the banner “The Source by Circuit City” (509 stores) and “Battery Plus” (1 store). The company also maintains relationships with dealer outlets (296 stores) which typically operate under their own trade names. The following is an excerpt from the fiscal year ended February 28, 2007 10-K:
International segment stores operating under the trade name “The Source By Circuit City” typically have a small store format and are strategically located in malls and shopping centers. Each store provides readily available products and services to meet a wide range of consumer electronic needs. Dealer outlets are independent retail businesses that operate under their own trade names but are permitted, under dealer agreements, to purchase any of the products sold by The Source By Circuit City. The dealer agreements contain a sub-license permitting the dealers to designate their consumer electronics department or business as a The Source By Circuit City dealer. International segment retail stores are typically staffed by 5 to 20 Associates, including full-time and part-time commissioned sales Associates and a store manager. At February 28, 2007, the international segment had 3,071 hourly and salaried Associates.
It appears Circuit City Management is considering selling the acquisition, which analysts considered to be overpriced when Circuit City acquired it. The following is an excerpt of Phil Schoonover, Chairman, President and CEO, in the September 20, 2007 Earnings Conference Call:
Next, an update on InterTAN. The new leadership team is solidly in place in Canada and gaining traction. InterTAN improved its pretax profit performance despite lower sales. We are continuing to explore strategic options to maximize shareholder value but the current challenges in the credit markets we do not expect any action regarding InterTAN will occur before the holidays.
We believe Circuit City must change their approach to InterTAN and avoid announcing a potential divesture. InterTAN will not garner fair value given the credit conditions of the U.S. market, weak economic outlook through mid-2008, and the inability of Circuit City to realize the expected synergies that include additional management expertise, sourcing synergies, and increased internet sales in Canada. Circuit City paid a 14% premium for InterTAN, and while this is a sunk cost, we believe the above factors make it unlikely that a new buyer would consider paying a premium18.
Based on a summary review of the financials, it is difficult to determine how Circuit City came to the initial $259 million acquisition price ($150-$175 million appears more reasonable based on a discounted cash flow estimate with the limited information available). The current InterTAN valuation will likely
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be much less than the purchase price given the declining net income (see below) and inventory write- downs: “Results also include $3.3 million…of international segment net sales, for inventory write-offs associated with plans to exit certain product lines, clearance sales”19 We estimate that InterTAN could be valued as low as $100-$150 million, which appears inline with the accountants estimate given the $92 million impairment for the international segment’s goodwill20.
InterTan Data - Pre and Post CC
$700.0
$600.0
$500.0
$400.0
$300.0 Net Sales Net Income (loss) $200.0
$100.0
$- 1999 2000 2001 2002 2003 2005 2006 2007 $(100.0)
$(200.0)
InterTAN ($mil, post and pre-CC) 2007 2006 2005 2003 2002 2001 2000 1999 Net Sales $ 570.2 $ 540.2 $ 398.9 $ 403.5 $ 393.8 $ 468.7 $ 484.2 $ 500.0 Net Income (loss) $(107.3) $ (7.3) $ 15.9 $ 7.7 $ 13.5 $ 23.5 $ 25.1 $ (24.0)
InterTAN ($mil, pre-CC) 2003 2002 2001 TOTAL Cash, end of year $ 10.3 $ 14.6 $ 86.2 $ 111.1 Total Stockholder’s Equity $ 97.4 $ 88.4 Furthermore, the sale of InterTAN would be considered another Senior Management failure that continues to erode analyst and investor confidence. Also consider the fact that Brian Levy, InterTAN’s CEO, recently resigned from Circuit City effective March 23, 2006 with an annual salary of $3.1 million and was paid out $2.5 million at resignation.21 While we cannot speculate regarding the reason for his resignation, one of the key benefits of acquiring InterTAN was gaining the management expertise (according to Circuit City pre-acquisition statements); thus Mr. Levy’s resignation is not likely a positive indicator.
Lastly, Circuit City spent considerable expense to build the “The Source by Circuit City” brand, which has value in the market and can be built upon. This value is demonstrated by the increasing revenue. The
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actual issue with InterTAN appears to be poor cost management, demand planning and inventory management.
As a result of the above, we believe that InterTAN should remain a key asset of Circuit City, and it will be included and held to the standards of the City Revival Plan. There is limited information provided by Circuit City regarding InterTAN, although it is clear the following actions must be taken:
• Reduce InterTAN SG&A: While InterTAN operates on a different model (small stores) than Circuit City and Best Buy, their SG&A was $208.8 million, or 36.6% of sales. Much higher than Circuit City Stores (22%) or Best Buy (18%), although below the comparable RadioShack stores (40%) (note: some InterTAN stores were previously branded RadioShack). By reducing SG&A to a target of 30%, there will be a savings of $13 million.
• Close Unprofitable InterTAN Stores: We recommend closing 60 unprofitable stores (without store by store data, we assume the same percentage of InterTAN stores will need to be closed as compared with Circuit City US stores). The cost of closing the stores was detailed in part A, but we expect these unprofitable stores will eliminate the need for the goodwill impairment of $92 million.
• Better Anticipate and Plan for Consumer Demand: As mentioned, Management took a $3.3 million write-down on inventory. This is $3.3 million that could have been avoided or greatly reduced with better demand planning and inventory management.
• Realize Synergies Anticipated with Acquisition: There were three key synergies for Circuit City stores sited during the acquisition: gaining key management, private-label product best practices, and sourcing strategies were among the most cited. Management should ensure strict goals are in place to realize these synergies and cost savings. At a minimum, if they have not already been fully implemented, they could expect $0.1-1 million additional in savings.
These savings could amount to over $108 million and while InterTAN posted a $107 million loss in fiscal year 2007, with our approach the business could potentially become profitable.
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Long-Term Strategy
Best Buy has a much larger international footprint than Circuit City, and they continue to expand. At March 3, 2007, Best Buy operated 135 Five Star stores in China and one Best Buy store in Shanghai. This amounts to 10% of Best Buy’s total retail floor space.22 Best Buy also plans to open test stores in Mexico and Turkey. While the US consumer electronics market shows signs of increased growth at 8%, it has become increasing more competitive and does not compare with the 15-20% growth rates expected in selected international markets (refer to analysis below). Therefore, Circuit City must implement a long term global expansion strategy after it becomes more financially stable from the turnaround.
Circuit City does not necessary have to be the first mover in the global market marketplace. There is an opportunity to leverage Best Buy’s international expansion lessons learned, and allow Best Buy to complete its own market tests. After Best Buy has opened stores in Turkey and Mexico, Circuit City should monitor their success or failure closely. If they are successful, and with the expectation Circuit City will be successfully turned around by 2011 with this plan, they should begin to expand globally. There are several benefits to a global expansion strategy including market share capture, hedging of currency concerns (due to a weakening US dollar) and increasing purchasing power. Regardless of the ancillary benefits, the higher growth rates of the international markets justify the expansion, as we can see with China’s market.
China’s estimated population was 1.3 billion in July 2007.23 Since 1985, urban real per-capita disposable incomes have risen from ~$252 in 1985 to $1,036 per annum in 200524. Data on proportion of the population traveling abroad are limited, but the McKinsey Global Institute estimated similarly that 1.9 million urban households could be considered “Global,” with annual household incomes greater than 200,000 rmb (~$25,000). An article published in The Economist in April 2007 suggested that there are approximately 120 million Chinese consumers (of which ~320,000 were dollar millionaires) who can easily afford consumer electronics. In 2006, the consumer electronics market in China was approximately $60 billion25, and with an expected annual market growth between 15 and 20 percent through 2008, could grow to a market size in excess of $100 billion. While any international expansion strategy is risky and we don’t presume to simply replicate the existing domestic retail strategy offshore, we do believe the risk-reward line favors moving to a global retail strategy. We recommend that Senior Management remain prudent about moving too aggressively, but with a keen eye towards the success or
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failure of Best Buy and other international retailers, we urge Circuit City management to develop an international expansion strategy consistent with local cultures and business practices.
Lastly, Circuit City must consider the increasing competition with Wal-Mart and wholesale clubs. In the end, the most efficient producer typically is the most successful. Several items noted in the City Revival Plan will allow Circuit City to be more efficient and better complete with Wal-Mart, but Circuit City should also build upon better product mix, service, and comparable prices in their marketing campaigns.
Performance Driven Human Capital Strategy
An effective human capital strategy will be critical to motivating Senior Management and completing the City Revival Plan. Currently, we question the effectiveness of the present human capital strategy and the capability of the current CEO to accomplish the turnaround plan. We would advise the Board of Directors to take the following actions to truly align compensation with short- and long-term business objectives and the interests of shareholders; attract, motivate, reward and retain contributing executive leadership, and reward achievement of high levels of performance:
a. Lower Base Compensation and Implement Indexed Performance Bonus: Given the poor performance of Circuit City and the short-term turnaround objective, we recommend lowering the base compensation of the executive leaders to a level that is between the 50th and 75th percentile of compensation levels for comparable positions as reported by our peer group of companies (similar to the current Best Buy structure). We can maintain the maximum performance bonus as a percentage of base compensation, i.e., 200% of CEO today. However, instead of using EPS performance as the performance metric, the Board should index Circuit City performance relative to peer group performance as well as the company’s own historical performance. We would recommend a combination of metrics which include revenue growth rates, operating margins, and prudent capital allocation measures like ROC (return on capital).
b. Consider a CEO Replacement: While the current CEO has significant retail experience, we are not confident that he is the right person for the turnaround situation. Since his appointment in 2006, Circuit City has had multiple missteps such as firing high performance sales employees and in turn rehiring them within months. There is a no clear vision or turnaround plan. On the
Restructuring Plan 53
recent analyst conference call, the CEO focused on explaining why they failed to deliver but did not articulate a clear plan to correct the poor results. We would recommend putting him on a short leash and start looking for a replacement with retail turnaround experience by the end of fiscal year 2008 if we do not see any significant improvement.
c. Search for CMO and EVP of Merchandising and Services More Diligently: The Board should quickly find the replacement for the CMO and Executive VP of merchandising and services positions. The Board should strive to avoid short-term management turnover so the search needs to be thorough and careful. We would not recommend combining these two positions as the company previously did. Given our turnaround plan, the CMO should focus on the refocused marketing strategy while the Executive VP of merchandising and services should focus on a number of the cost and revenue initiatives. The first job is responsible for driving traffic and maximizing ROI of marketing expenses; the second job is responsible for closing sales and driving profits.
The performance driven culture should flow from the top to the bottom of the company. Apart from commissions, sales employees and supervisors should be rewarded for identifying cost reduction measures, revenue growth opportunities and sharing best practices across stores. The management team will need to communicate this system clearly, and align the culture and employees towards the turnaround objectives.
Appendix 54
6.1 Appendix A – Table, Analysis, Models, Etc.
CREDIT RATIOS (PER STANDARD S&P RATINGS METHODOLOGY) Amounts in $MMs Coverage Ratios Leverage Ratios Profitability Total EBITDA / (EBITDA - Cpx) / EBIT / Free Cash Total Debt / Total Debt / Pre-tax S&P Credit Rating Company Debt Interest Interest Interest Flow / Debt EBITDA Capital ROC Rating Outlook Best Buy Co. Inc. $1,977 56.7 38.7 44.7 56.8% 0.8 36.6% 37.3% BBB Stable RadioShack Corp. 383 11.6 10.4 8.9 130.4% 0.8 35.3% 34.3% BB Negative GameStop Corp. 706 6.7 4.6 5.1 36.9% 1.4 31.4% 17.1% BB Stable Office Depot, Inc. 631 17.1 9.1 12.2 4.7% 0.6 17.4% 19.5% BBB- Negative OfficeMax Inc. 1,854 3.8 2.3 2.7 -6.0% 4.0 45.9% 8.1% BB- Stable Staples Inc. 330 47.1 35.3 38.1 270.3% 0.2 5.7% 27.6% BBB+ Stable Conns Inc. 0 NM NM NM NM 0.0 0.1% 19.6% None None hhgregg, Inc. 119 5.3 3.4 4.5 15.2% 1.6 67.8% 36.8% B+ Stable Costco Wholesale Corp. 2,222 34.3 12.7 25.5 31.1% 1.0 20.4% 14.9% AStable Target Corp. 14,138 10.9 4.2 8.4 2.8% 2.0 46.7% 17.8% A+ Stable Wal-Mart Stores Inc. 47,437 14.4 6.5 11.2 9.2% 1.7 42.0% 19.2% AA Stable Amazon.com Inc. 1,273 10.7 8.1 7.6 62.8% 1.6 62.6% 28.6% BB Positive PC Mall Inc. 65 7.1 6.6 5.9 8.5% 2.5 47.4% 15.5% None None
High: 56.7 38.7 44.7 270.3% 4.0 67.8% 37.3% Average: 18.8 11.8 14.6 51.9% 1.4 35.3% 22.8% Median: 11.3 7.3 8.6 23.1% 1.4 36.6% 19.5% Low: 3.8 2.3 2.7 -6.0% - 0.1% 8.1% Implied S&P Rating Circuit City Stores Inc. $59 73.1 NM NM -80.9% 0.6 3.5% -5.4% BB Negative
Source: Capital IQ unadjusted data All companies' base performance data is through the latest twelve months as of the last reported financial statements
SUMMARY: PRESENT VALUE OF OPERATING LEASES ANALYTICS Amounts in $MMs
Book Acctg Incremental 1st-Yr Lease Implied Company PV Debt [1] Rate [2] Interest Exp. Payment Depreciation Best Buy Co. Inc. $5,658 3.4% $192 $741 $549 RadioShack Corp. 787 8.5% 67 211 144 GameStop Corp. 710 9.1% 64 219 155 Office Depot, Inc. 2,914 9.2% 267 503 236 OfficeMax Inc. 1,660 6.5% 109 342 233 Staples Inc. 4,028 9.8% 397 677 280 Conns Inc. [3] 93 7.0% 7 18 11 hhgregg, Inc. 150 10.1% 15 28 13 Costco Wholesale Corp. 1,212 5.4% 66 137 72 Target Corp. 1,765 5.4% 96 142 46 Wal-Mart Stores Inc. 7,662 4.7% 364 842 478 Amazon.com Inc. 536 6.0% 32 129 97 PC Mall Inc. 7 7.8% 1 4 3
Circuit City Stores Inc. $2,111 12.8% $271 $350 $79
Source: Forward minimum noncancelable lease payments obtained from individual company SEC filings [1] Present value of operating leases calculated using S&P Lease Analytics Methodology [2] Book accounting interest rate derived from LTM interest expense / avg. debt, adjusted for FY capitalized interest. These rates also represent the discount rates to present value the forward lease commitments per S&P Lease Analytics. [3] Estimated (vs. calculated) interest rates, given nominal debt balances
RE-CAST CREDIT RATIOS FOR CAPITALIZED OPERATING LEASES (PER S&P LEASE ANALYTICS METHODOLOGY) Amounts in $MMs Coverage Ratios Leverage Ratios Profitability Adj. EBITDA / (EBITDA - Cpx) / EBIT / Free Cash Total Debt / Total Debt / Pre-tax Company Debt Interest Interest Interest Flow / Debt EBITDA Capital ROC Best Buy Co. Inc. $7,635 11.6 5.9 9.3 14.7% 2.8 69.1% 19.9% RadioShack Corp. 1,169 5.1 3.3 4.0 42.7% 2.1 62.5% 23.5% GameStop Corp. 1,416 4.1 1.9 3.2 18.4% 2.5 47.8% 15.1% Office Depot, Inc. 3,545 3.9 1.7 3.0 0.8% 2.8 54.2% 14.9% OfficeMax Inc. 3,514 2.5 0.7 1.9 -3.2% 6.2 61.6% 7.7% Staples Inc. 4,358 5.4 3.6 4.5 20.5% 1.8 44.5% 20.3% Conns Inc. 94 11.9 8.0 10.0 -9.4% 1.2 23.7% 16.6% hhgregg, Inc. 269 3.1 1.7 2.7 6.7% 2.9 82.7% 24.5% Costco Wholesale Corp. 3,434 17.4 6.2 13.1 20.1% 1.5 28.3% 14.0% Target Corp. 15,903 9.6 3.7 7.4 2.5% 2.2 49.6% 17.1% Wal-Mart Stores Inc. 55,099 12.3 5.4 9.6 7.9% 2.0 45.7% 18.2% Amazon.com Inc. 1,809 7.8 5.1 5.6 44.2% 2.1 70.4% 23.9% PC Mall Inc. 72 6.3 5.0 5.3 7.6% 2.8 50.0% 15.1%
High: 17.4 8.0 13.1 44.2% 6.2 82.7% 24.5% Average: 7.8 4.0 6.1 13.4% 2.5 53.1% 17.7% Median: 6.3 3.7 5.3 7.9% 2.2 50.0% 17.1% Low: 2.5 0.7 1.9 -9.4% 1.2 23.7% 7.7% Implied S&P Rating Circuit City Stores Inc. $2,170 1.4 (0.1) 0.7 -2.2% 5.9 57.0% 4.7% CCC Negative
Source: Capital IQ unadjusted data plus pro forma adjustments to account for additional debt from operating lease capitalization All companies' base performance data is through the latest twelve months as of the last reported financial statements
Appendix 55
cker
CC x BBY NM 6.1 x MALL NA
0.1 x0.1 x 7.8
Enterprise Value / CY 2008E
NM TM
S I C R E T M N I O T A U L V A
8.1% 0.4 x 7.9x 11.1 x 0.4 x 7.6x 11.3 x OMX ROC Revenue EBITDA EBIT Revenue EBITDA EBIT Ti TM EBIT Enterprise Value / L U R N S N R U % 19.6% x 0.6 x 6.3 x 7.6 x 0.5 x 5.4 x 6.2 CONN % 36.8% x 0.5 x 7.5 x 8.8 x 0.4 x 6.5 x 7.8 HGG % 19.5% 0.3 x 4.6x 6.5 x 0.3 x 4.9x 7.9 x ODP % 27.6% 0.8 x 8.1x % 10.0 x% 17.8% 19.2% 0.8 x 0.9 x 0.6 x 7.4x 8.2x 8.6x 9.0 x 10.7 x 11.0 SPLS x 0.8 x 0.6 x 7.6x 7.9x 9.8 x 10.1 x TGT WMT %% 37.3% 34.3% 0.6 x x 0.5 8.5x x 4.9 10.8 x x 6.4 0.5 x x 0.6 7.3x x 5.0 9.1 x 6.3 RSH % 17.1% 1.6 x 19.3x 25.3 x 1.2 x 12.7x 17.3 x GME % 14.9% 0.5 x 13.4x 18.0 x 0.4 x 11.0x 14.0 x COST
E T R
NA 2.2% 5.1% 20.9% 31.9% 7.2% 15.5% 0.2 x 7.8x 9.4 x 0.1 x 3.8% 2.2% 0.9% -14.3% -21.2% 5.4% 8.1% 0.2x 4.6 x 6.4 x 0.1x 4.9 x 6.1 x 7.7% 5.6% 11.9% 14.1% 15.3% 12.6% 19.5% 0.6x 8.1 x 10.7 x 0.5x 7.5 x 9.1 x 7.8% 5.7% 13.7% 14.1% 16.4% 13.1% 22.8% 0.8x 11.6 x 15.4 x 0.7x 9.1 x 12.5 x 7.9% 4.3% 26.7% 19.7% 12.9% 12.6% 28.6% 2.8 x 45.3x 64.1 x 2.0 x 25.8x 47.3 x AMZN 5.9%5.1% 3.6% 3.4% 6.7% 2.8% 11.1% -4.1% 14.5% 18.4% 10.2 5.4% 5.8% 4.9% 12.1% 20.6% 24.3% 19.5 9.8% 7.2% 49.9% 49.9% 48.3% 12.1 3.8% 3.0% 10.2% 6.2% 5.3% 8.3 7.4% 5.8% 10.5% 11.2% 10.9% 13.1 11.6% 9.1% 49.9% 49.9% 48.3% 19.9% 37.3% 2.8x 45.3 x 64.1 x 2.0x 25.8 x 47.3 x 11.6% 9.1% 0.9%10.2% -14.3% 8.4% -21.2% 19.9 11.9% 18.6% 22.4% 18.1 10.8% 8.4% 12.3% 15.6% 17.1% 12.4
940 CY 2008CY PerformanceEst. [1] 3-Year Historical (FY) CAGR Pre-tax L
8.9% 7.7% 15.1% 13.7% 12.6% 15.0
P E R F O R M A N C E D A T A A T A D E C N A M O R F E R P
12.1% 2.3% 1.9% 12.1% 2.3% 1.9% 1,481 25.4% 5.1% 3.6% 9,429 49.3% 11.2% 8.6% 4,087 30.9% 6.6% 5.6% 1,492 23.1% 6.3% 4.4% 18,241 28.7% 10.2% 8.2% 21,117 26.6% 8.5% 6.5% 7,867 30.1% 6.4% 4.5% 15,860 24.2% 7.5% 5.8% 406,208 12.3% 3.4% 2.5% 70,806 33.7% 11.4% 8.8% 70,096 LTM Performance 720 1,103 9,141 4,346 1,161 5,933 13,149 19,334 15,504 64,400 61,401 370,449
38.0% 9.9% 8.2%
High:Average:Median: 27.6% 49.3% 26.6% 11.4% 7.3% 6.7% 8.8% 5.7% 5.6% Low: 198 198 450 450 568 568 3,645 3,645 2,365 2,365 9,732 9,732 4,564 37,261 15,953 29,404 57,695
238,071
143 143 473 473 450 1,856 2,399 9,435 4,105 37,897 16,652 30,468 44,184
91.28 23.55 $7.44 $1,254 $889 $12,144 22.5% 0.8% -0.8% $12,656 0.9% -0.3% 7.9% 9.3% 41.3% -2.3% -5.4% 0.1x 8.9 x 19.72 10.72 18.30 13.97 24.61 53.18 58.62 15.04 Price Market Enterprise 12/12 Value Value Revenue Gross % % EBITDA EBIT % Revenue EBITDA % EBIT % Revenue EBITDA % EBIT % ROA $50.84 $21,240 $21,744 $38,049 24.0% 6.7% 5.3% $42,294 7.1% 5.6% 13.5% 14.1% 15.3% 16.4
193,152
BLIC COMPARABLE COMPANIES COMPANIES BLIC COMPARABLE rp. s c. .Inc. . lesale Corp. 70.19 nsumer Electronics) Retailers Electronics) nsumer ers Corp. ilers Retailers ores Inc.ores 48.23 . t, Inc. t, estic) CE Retailers Amazon.com Inc. PC Mall Inc. Mall PC Conns Inc. Conns Costco Who Staples Inc. Staples hhgregg, Inc Target Corp St Wal-Mart BestCo Buy GameStop Co RadioShack Depo Office In OfficeMax SELECTED PU Circuit StoresCity Inc. Online CE Reta CE Online Source: Unadjusted data obtained fromCapital IQ (12/12/2007) [1] CY 2008 estimatesobtained from ThomsonOneFirst Call (12/11/2007) Regional (Dom Discount Retail Primary CE (Co CE Primary CE/IT Specialty Amounts in$MM
Appendix 56
CIRCUIT CITY STORES LIQUIDATION ANALYSIS Amounts in $MMs Actual Estimated Estimated Unaudited % Recovery Liquidation Value ($) Balance Sheet: Book Value 8/31/2007 Low High Low High Note Ref. Assets to Be Liquidated Cash & equivalents $130.9 100.0% 100.0% $130.9 $130.9 [1] Short-term investments 293.5 100.0% 100.0% 293.5 293.5 [1] A/R, net 305.0 85.0% 95.0% 259.2 289.7 [2] Merchandise inventory 1,833.2 35.0% 45.0% 641.6 825.0 [3] Deferred income taxes 107.2 Income tax receivable 103.5 85.0% 95.0% 88.0 98.3 [4] Prepaid expenses & other 73.9 10.0% 10.0% 7.4 7.4
Property & equipment, gross 2,355.5 25.0% 35.0% 588.9 824.4 [5] (Accum. depreciation) (1,381.1) Property & equipment, net 974.4
Deferred income taxes 26.6 Goodwill 134.9 Intangible assets, net 18.8 30.0% 35.0% 5.7 6.6 [6] Other long-term assets 35.6 5.0% 5.0% 1.8 1.8
Total Asset Proceeds $4,037.5 50.0% 61.4% $2,016.9 $2,477.5
Less: Estimated Costs of Liquidation Trustee Fees @ 3.0% 0.03 $60.5 $74.3 Wind Down Costs - SG&A / Operations 0.125 252.1 309.7 Professional Fees @ 5.5% 0.055 110.9 136.3 Subtotal $423.5 $520.3
Net Liquidation Proceeds Available for Distribution $1,593.3 $1,957.3
Unaudited Claimant Recovery % Claimant Recovery ($) Distribution of Proceeds 8/31/2007 Low High Low High Claims Merchandise payable and expenses $1,403.4 100.0% 100.0% $1,403.4 $1,403.4 Employee salaries and expenses 429.2 44.3% 100.0% 189.9 429.2 Debt (incl. capital and finacing leases) 59.0 0.0% 100.0% - 59.0 Lease costs 352.6 0.0% 18.6% - 65.7 Income taxes 21.1 0.0% 0.0% - - Other 135.1 0.0% 0.0% - - Equityholders - -
Note References: [1] Cash and liquid, short-term investments can be realized at face value. Going into the holiday season, it's likely balance has shrunk from higher advertising costs and working capital; however, likely to be replaced with short-term A/R. Therefore, balance taken at face value. [2] A/R primarily from credit card payment processors (Visa, MC, Amex) which are short-term in nature (<10 days) and have very low risk [3] Inventory in salable condition can be sold in orderly fashion to combination of consumers and other retailers [4] Government receivable generally collectible and carries low risk [5] Company has land and buildings of $307M and furniture, fixtures & equipment of $1,075M (per FY 2007 10-K) [6] Intangibles like trade names of Circuit City and InterTAN, and other contractual agreements could reasonably yield nominal value
Appendix 57
REVENUE / COST / INVESTMENT BUILDUP: TURNAROUND PLAN Amounts in $MMs
Rev enue Model Ass um ptions DO MES TIC SEGMENT New Superstore format (sq. feet size in 000s) 20.0 New Su persto re forma t Sell ing sq . ft. % [1] 80.0% Old store format (sq. feet size in 000s) 30.0 Old store format Selling sq. ft % [1] 60.0% H I S T O R I C A L P R O J E C T I O N S Fiscal Year 2005 2006 2007 2008 2009 2010 2011 2012 Beginning Superstores 599 612 626 642 685 610 612 620 Sup erstor e O pening s 31 18 23 45 - 2 8 12 Relocations 28 10 12 19 5 10 11 10 Remodels 1 - 2 2 7 7 7 7 Closures 19 4 8 2 75 - - - Total Ending Superstores 612 626 642 685 610 612 620 632
Avg. sales / Avg. Superstore ($MM) $16.5 $17.7 $18.7 $18.1 $18.5 $19.9 $20.8 $21.6 % growth 7.2% 5.5% -3.5% 2.5% 7.5% 4.5% 4.0%
Total Sq Ft. (000s) 20,923 20,728 21,173 22,013 19,763 19,803 19,963 20,203 Selling Sq. Feet (000s) 12,953 12,990 13,244 13,928 12,578 12,610 12,738 12,930 % Selling sq. ft. of Total 61.9% 62.7% 62.6% 63.3% 63.6% 63.7% 63.8% 64.0% Net sales / total sq. ft. (actual dollars) $479 $529 $560 $544 $606 $614 $641 $670 Net sales / selling sq. ft. (actual dollars) $773 $845 $895 $860 $953 $964 $1,005 $1,047
Net Domestic Sales $10,014.6 $10,974.0 $11,859.6 $11,977.0 $11,980.4 $12,152.9 $12,803.8 $13,532.1 % growth 9.6% 8.1% 1.0% 0.0% 1.4% 5.4% 5.7%
Cost of Sales and SG&A 2005 2006 2007 2008 2009 2010 2011 2012 Cost of sales $7,629.0 $8,369.5 $9,119.6 $9,246.3 $9,165.0 $9,236.2 $9,730.9 $10,284.4 SG&A Expenses Store expenses (excl. closures & Dep & Amort.) $1,838.1 $1,936.1 $2,081.3 $2,131.9 $2,132.5 $1,944.5 $2,048.6 $2,097.5 General & administrative (excl. closures) 226.4 252.5 304.7 323.4 323.5 255.2 256.1 270.6 Stock-based compensation 18.5 25.9 22.5 35.9 35.9 36.5 38.4 40.6 Depreciation & amortization 143.9 149.3 165.9 179.7 179.7 182.3 192.1 203.0 Store closures 47.4 - 38.4 6.1 230.4 - - - Remodel expenses 0.3 - 0.7 0.8 2.8 2.8 2.8 2.8 Relocation expenses 40.8 7.1 4.5 26.8 7.0 14.1 15.5 14.1 Pre-opening expenses 15.8 9.0 14.8 32.7 - 1.5 5.8 8.7 Total SG&A expenses $2,331.2 $2,379.9 $2,632.8 $2,737.3 $2,911.8 $2,436.8 $2,559.3 $2,637.3
Costs (% of Domestic Sales) Cost of sales 76.2% 76.3% 76.9% 77.2% 76.5% 76.0% 76.0% 76.0% Store expenses (excl. closures & Dep & Amort.) 18.4% 17.6% 17.5% 17.8% 17.8% 16.0% 16.0% 15.5% General & administrative (excl. closures) 2.3% 2.3% 2.6% 2.7% 2.7% 2.1% 2.0% 2.0% Stock-based compensation 0.2% 0.2% 0.2% 0.3% 0.3% 0.3% 0.3% 0.3% Depreciation & amortization 1.4% 1.4% 1.4% 1.5% 1.5% 1.5% 1.5% 1.5% Store closures 0.5% 0.0% 0.3% 0.1% 1.9% 0.0% 0.0% 0.0% Remodel expenses 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Relocation expenses 0.4% 0.1% 0.0% 0.2% 0.1% 0.1% 0.1% 0.1% Pre-opening expenses 0.2% 0.1% 0.1% 0.3% 0.0% 0.0% 0.0% 0.1% Total costs 99.5% 98.0% 99.1% 100.1% 100.8% 96.1% 96.0% 95.5%
EBIT $54.4 $224.6 $107.2 ($6.5) ($96.5) $479.9 $513.6 $610.4 % margin 0.5% 2.0% 0.9% -0.1% -0.8% 3.9% 4.0% 4.5%
Appendix 58
REVENUE / COST / INVESTMENT BUILDUP: TURNAROUND PLAN Amounts in $MMs
INTERNATIONAL SEGMENT 2005 2006 2007 2008 2009 2010 2011 2012 International Sales $398.9 $540.2 $570.2 $527.4 $532.7 $468.8 $496.9 $526.7 % growth 35.4% 5.6% -7.5% 1.0% -12.0% 6.0% 6.0%
Cost of sales 232.3 334.2 381.8 353.4 356.9 302.4 315.5 331.8 SG&A Expenses Store expenses (excl. closures & Dep & Amort.) $101.8 $136.2 $143.1 $132.9 $133.7 $114.9 $121.7 $129.0 General & administrative (excl. closures) 27.5 64.7 38.1 36.9 32.0 23.4 24.8 26.3 Stock-based compensation 0.7 1.0 1.7 1.4 1.4 1.3 1.3 1.4 Depreciation & amortization 9.5 13.9 15.6 13.2 11.2 8.4 8.9 9.5 Store closures - - 10.3 - 12.1 - - - Total SG&A expenses $139.5 $215.8 $208.8 $184.4 $190.4 $148.0 $156.9 $166.3
Costs (% of International Sales) Cost of sales 58.2% 61.9% 67.0% 67.0% 67.0% 64.5% 63.5% 63.0% Store expenses (excl. closures & Dep & Amort.) 25.5% 25.2% 25.1% 25.2% 25.1% 24.5% 24.5% 24.5% General & administrative (excl. closures) 6.9% 12.0% 6.7% 7.0% 6.0% 5.0% 5.0% 5.0% Stock-based compensation 0.2% 0.2% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% Depreciation & amortization 2.4% 2.6% 2.7% 2.5% 2.1% 1.8% 1.8% 1.8% Store closures 0.0% 0.0% 1.8% 0.0% 2.3% 0.0% 0.0% 0.0% Total costs 93.2% 101.8% 103.6% 102.0% 102.7% 96.1% 95.1% 94.6%
EBIT $27.1 ($9.8) ($20.4) ($10.4) ($14.6) $18.4 $24.5 $28.6 % margin 6.8% -1.8% -3.6% -2.0% -2.7% 3.9% 4.9% 5.4%
Capital Expenditures / D&A 2005 2006 2007 2008 2009 2010 2011 2012 Capex ($) Domestic (excl. Opening / Relocation spend) [2] $89.4 $146.7 $167.1 $107.8 $149.8 $151.9 $160.0 $169.2 Superstore Opening / Relocation Capex [2] 162.9 85.2 107.7 204.0 7.5 22.8 47.7 61.8 International 9.2 22.6 10.9 9.5 9.6 8.4 8.9 9.5 Total Capex $261.5 $254.5 $285.7 $321.3 $166.8 $183.1 $216.7 $240.4
Capex (% sales) Domestic (excl. Opening / Relocation spend) [2] 0.9% 1.3% 1.4% 0.9% 1.3% 1.3% 1.3% 1.3% Superstore Opening / Relocation Capex [2] 1.6% 0.8% 0.9% 1.7% 0.1% 0.2% 0.4% 0.5% International Segment 2.3% 4.2% 1.9% 1.8% 1.8% 1.8% 1.8% 1.8% Total Capex % 2.5% 2.2% 2.3% 2.6% 1.3% 1.5% 1.6% 1.7%
Depreciation & Amortization ($) Domestic Segment $143.9 $149.3 $165.9 $179.7 $179.7 $182.3 $192.1 $203.0 International 9.5 13.9 15.6 13.2 11.2 8.4 8.9 9.5 Total Depreciation & Amortization $153.4 $163.2 $181.5 $192.8 $190.9 $190.7 $201.0 $212.5
Depreciation & Amortization (% sales) Domestic Segment 1.4% 1.4% 1.4% 1.5% 1.5% 1.5% 1.5% 1.5% International 2.4% 2.6% 2.7% 2.5% 2.1% 1.8% 1.8% 1.8% Total Depreciation & Amortization % 1.5% 1.4% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%
Sale of property and equipment (proceeds) [3] $106.4 $55.4 $38.6 $4.0 $150.0 $0.0 $0.0 $0.0 % of sales 1.0% 0.5% 0.3% 0.0% 1.2% 0.0% 0.0% 0.0%
Appendix 59
REVENUE / COST / INVESTMENT BUILDUP: TURNAROUND PLAN Amounts in $MMs
Working Capital / Other Assets & Liabilities 2005 2006 2007 2008 2009 2010 2011 2012 Assets ($) A/R, net $230.6 $220.9 $382.6 $375.1 $337.9 $315.5 $266.0 $281.2 Merchandise Inventory 1,455.2 1,698.0 1,636.5 1,651.1 1,618.7 1,573.9 1,607.4 1,645.5 Prepaid expenses and other current assets 23.2 41.3 47.4 50.0 50.1 50.5 53.2 56.2 Deferred taxes (current + long-term) 111.1 127.5 66.8 93.8 93.8 94.7 99.8 105.4 Other assets (incl. tax receivables, other) 40.8 49.7 72.5 62.5 62.6 63.1 66.5 70.3
Liabilities ($) Merchandise payable $635.7 $850.4 $922.2 $931.2 $933.1 $944.3 $1,004.6 $1,072.2 Expenses payable 170.6 202.3 281.7 278.4 285.7 286.2 301.4 318.5 Accrued expenses and other current liabilities 508.3 540.4 503.0 500.2 500.5 504.9 532.0 562.4 Other liaibilities (incl. straight-line rent, lease term.) 424.7 440.1 451.5 437.7 438.0 441.8 465.5 492.1
Assets (%) A/R, net (% sales) 2.2% 1.9% 3.1% 3.0% 2.7% 2.5% 2.0% 2.0% Merchandise Inventory (% COGS) 18.5% 19.5% 17.2% 17.2% 17.0% 16.5% 16.0% 15.5% Prepaid expenses & other assets (% sales) 0.2% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% Deferred taxes (% sales) 1.1% 1.1% 0.5% 0.8% 0.8% 0.8% 0.8% 0.8% Other assets (% sales) 0.4% 0.4% 0.6% 0.5% 0.5% 0.5% 0.5% 0.5%
Liabilities (%) Merchandise payable (% COGS) 8.1% 9.8% 9.7% 9.7% 9.8% 9.9% 10.0% 10.1% Expenses payable (% COGS) 2.2% 2.3% 3.0% 2.9% 3.0% 3.0% 3.0% 3.0% Accrued expenses and other (% sales) 4.9% 4.7% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Other liabilities (% sales) 4.1% 3.8% 3.6% 3.5% 3.5% 3.5% 3.5% 3.5%
Net Operating Assets - Liabilities 121.6 104.2 47.3 85.2 5.8 (79.4) (210.7) (286.5) % of sales 1.2% 0.9% 0.4% 0.7% 0.0% -0.6% -1.6% -2.0%
A/R Days 8.1 7.0 11.2 11.0 9.9 9.1 7.3 7.3 Inventory Days (COGS) 67.6 71.2 62.9 62.8 62.1 60.2 58.4 56.6 A/P Days (COGS): includes Merch. & Expenses Pay. 37.4 44.1 46.2 46.0 46.7 47.1 47.5 47.8 Cash Conversion Cycle 38.2 34.1 27.9 27.7 25.2 22.3 18.3 16.1 Net Working Capital $879.5 $866.2 $815.1 $816.7 $737.8 $658.9 $567.4 $536.0 % sales 8.4% 7.5% 6.6% 6.5% 5.9% 5.2% 4.3% 3.8%
[1] Stated by executive management in Q1 2008 Earnings call [2] Capex required to open Superstore estimated at approximately $3.9. Capex required to relocate Superstore estimated at approximately $1.5M [3] Proceeds estimated at $2.0M in furniture and fixtures sales per store closure
Appendix 60
PER STORE EXPENSE BREAKDOWN OF ACTIVITIES Source: FY 2005 - 2007 10-Ks Domestic Stores International Fiscal Superstore Superstore Superstore Stores Year Openings Relocations Remodels Closures EOY Closures 2007 23 12 2 8 642 51 2006 18 10 - 4 626 2005 31 28 1 19 612 2004 8 18 4 20 599 2003 8 11 3 1 611
Domestic Store-Related Expenses Fiscal Pre-Open Relocation Remodel Closures Year Expenses Expenses Expenses Expenses Total Expenses 2007 $14.8 $17.4 $0.7 $38.4 $71.3 $10.3 2006 9.0 7.1 - NA 16.1 2005 15.8 40.8 0.3 47.4 104.3 2004 8.6 30.5 2.2 38.4 79.7 2003 7.2 19.1 28.8 NA 55.1
Per Store (Domestic) Expenses Fiscal Pre-Open Relocation Remodel Closure Closure Year Expenses Expenses Expenses Expenses Total Expenses 2007 $0.6 $1.5 $0.4 $4.8 $7.2 $0.2 2006 0.5 0.7 NM NA 1.2 2005 0.5 1.5 0.3 2.5 4.8 2004 1.1 1.7 0.6 1.9 5.2 2003 0.9 1.7 9.6 NA 12.2 Average $0.7 $1.4 $2.7 $3.1 $6.1
$0.7 $1.4 $0.4 $3.1 Assumed Avg. Cost ($M) [4]
Domestic: [1] FY 2007 Relocation expenses adds back $12.9M benefit for reversal of lease charges for previously vacant stores re-opened [2] FY 2004 Remodel expenses exclude $21.7M of refixturing which overstates expenses [3] FY 2003 Remodel expenses include costs associated with remodeling of the video departments in 299 Superstores, full-store lighting upgrades in 311 Superstores and relocation of 11 Superstores [4] Assumed Average Remodel costs exclude FY 2006 expenses; See note [3] for explanation International: [5] Assumed closing of both company-owned stores and Battery Plus stores per FY 2006/7 10-Ks
Appendix 61
INCOME STATEMENT & CASH FLOW: TURNAROUND PLAN Amounts in $MMs
Circuit City Price (12/12) $7.44 Annl. Price per share increase (for Diluted shares calculation) $1.50 Assumed proceeds from option exercies (% of share buybacks) 20.0% Annual Dividends per share $0.16 Proceeds from sale of furniture/fixtures per Superstore closure ($M) [1] $2.0 Tax rate 38.0% Min. cash required for Operations (% sales) 1.0%
INCOME STATEMENT [2] H I S T O R I C A L P R O J E C T I O N S FY = February 2005 2006 2007 2008 2009 2010 2011 2012 Net Sales Domestic segment $10,014.6 $10,974.0 $11,859.6 $11,977.0 $11,980.4 $12,152.9 $12,803.8 $13,532.1 International segment 398.9 540.2 570.2 527.4 532.7 468.8 496.9 526.7 Total Sales 10,413.5 11,514.2 12,429.8 12,504.5 12,513.1 12,621.7 13,300.7 14,058.8 % growth 10.6% 8.0% 0.6% 0.1% 0.9% 5.4% 5.7%
Gross Profit Domestic segment 2,385.6 2,604.5 2,740.0 2,730.8 2,815.4 2,916.7 3,072.9 3,247.7 International segment 166.6 206.0 188.4 174.1 175.8 166.4 181.4 194.9 Total Gross Profit 2,552.2 2,810.5 2,928.4 2,904.8 2,991.2 3,083.1 3,254.3 3,442.6 % gross margin 24.5% 24.4% 23.6% 23.2% 23.9% 24.4% 24.5% 24.5%
SG&A Domestic segment 2,331.2 2,379.9 2,632.8 2,737.3 2,911.8 2,436.8 2,559.3 2,637.3 International segment 139.5 215.8 300.8 184.4 190.4 148.0 156.9 166.3 Total SG&A 2,470.7 2,595.7 2,933.6 2,921.7 3,102.3 2,584.8 2,716.1 2,803.6
Operating income (loss) Domestic segment 54.4 224.6 107.2 (6.5) (96.5) 479.9 513.6 610.4 International segment 27.1 (9.8) (112.4) (10.4) (14.6) 18.4 24.5 28.6 Finance income 5.6 ------Total Operating income (EBIT) $87.1 $214.8 ($5.2) ($16.9) ($111.1) $498.3 $538.1 $639.0 % margin 0.8% 1.9% 0.0% -0.1% -0.9% 3.9% 4.0% 4.5%
Interest expense 4.5 3.1 1.5 4.6 4.0 3.5 3.3 3.1 Interest income 14.4 21.8 27.2 25.9 19.1 20.6 31.3 44.0 Earnings from Operations $97.0 $233.5 $20.4 $4.4 ($96.0) $515.5 $566.2 $680.0 Income Tax Expense 36.4 86.0 30.5 1.7 - 195.9 215.2 258.4 Net earnings (loss) from Cont. Operations [3] $60.6 $147.5 ($10.1) $2.7 ($96.0) $319.6 $351.0 $421.6 Earnings (loss) from Disc. Operations 1.1 (5.4) 0.1 - - - - - Cumulative Change in Accounting - (2.4) 1.8 - - - - - Net earnings (loss) $61.7 $139.8 ($8.2) $2.7 ($96.0) $319.6 $351.0 $421.6 Diluted Shares Outstanding 196.2 180.7 170.4 165.3 151.9 140.4 130.4 121.4 Diluted EPS $0.31 $0.77 ($0.05) $0.02 ($0.63) $2.28 $2.69 $3.47
Operating profit (EBIT) $87.1 $214.8 ($5.2) ($16.9) ($111.1) $498.3 $538.1 $639.0 Plus: Depreciation & amortization 153.4 163.2 181.5 192.8 190.9 190.7 201.0 212.5 EBITDA $240.5 $378.0 $176.3 $176.0 $79.8 $689.1 $739.1 $851.5 % margin 2.3% 3.3% 1.4% 1.4% 0.6% 5.5% 5.6% 6.1%
H I S T O R I C A L P R O J E C T I O N S CREDIT RATIOS 2005 2006 2007 2008 2009 2010 2011 2012 EBIT / Interest 19.6 68.3 (3.4) (3.7) (27.5) 142.9 164.5 208.0 EBITDA / Interest 54.0 120.3 116.0 38.1 19.8 197.6 225.9 277.2 (EBITDA - Capex) / Interest (4.7) 39.3 (72.1) (31.5) (21.5) 145.0 159.7 198.9 Free Cash Flow / Debt 6.1 1.4 0.5 (2.5) 1.0 11.0 13.2 14.3 Debt / EBITDA 0.1 0.2 0.3 0.3 0.5 0.1 0.1 0.0 FFO / Debt 5.6 4.0 6.3 4.6 3.0 13.4 15.4 18.9 Total Debt / Capital 1.0% 4.0% 3.1% 2.8% 2.8% 2.4% 2.0% 1.6% Pre-tax ROC 4.1% 10.6% -0.3% -0.9% -7.2% 29.2% 28.1% 29.1%
Total debt $20.8 $81.2 $57.7 $50.5 $43.6 $40.9 $38.4 $35.7 Equity 2,079.9 1,954.6 1,791.2 1,730.1 1,489.8 1,666.9 1,877.1 2,159.3 Total capital $2,100.8 $2,035.9 $1,848.9 $1,780.6 $1,533.4 $1,707.8 $1,915.5 $2,195.0
Appendix 62
H I S T O R I C A L P R O J E C T I O N S CASH FLOW STATEMENT [2] 2005 2006 2007 2008 2009 2010 2011 2012 Operating activities: Net earnings (loss) $61.7 $139.8 ($8.2) $2.7 ($96.0) $319.6 $351.0 $421.6 Net (earnings) loss from Disc. Ops. (1.1) 5.4 (0.1) - - - - - Depreciation & amortization expense 153.4 163.2 181.5 192.8 190.9 190.7 201.0 212.5 Impairment of goodwill - - 92.0 - - - - - Stock-based compensation expense 18.3 24.4 26.7 37.4 37.4 37.7 39.8 42.0 (Gain) loss on dispositions of PPE (0.2) 2.4 (1.4) - - - - - Provisions for deferred taxes (116.3) (14.3) 72.7 - - - - - Cumulative Change in Accounting - 2.4 (1.8) - - - - - Other - (1.7) 1.7 - - - - - Changes in operating assets/liabilities: A/R, net (58.7) 16.6 (133.2) 7.4 37.3 22.3 49.5 (15.2) Retained interests in sec. receivables 32.9 ------Merchandise inventory 160.0 (231.1) 49.4 (14.6) 32.4 44.9 (33.6) (38.1) Prepaid expenses & other current 7.2 (17.3) (9.6) (2.6) (0.0) (0.4) (2.7) (3.0) Other assets 3.8 (3.1) 0.5 (17.0) (0.1) (1.4) (8.5) (9.5) Merchandise payable 28.2 211.4 73.3 9.0 2.0 11.2 60.3 67.6 Expenses payable (17.2) 40.9 55.7 (3.3) 7.3 0.5 15.2 17.1 Accrued expenses & other current liab. 54.0 43.2 (81.4) (2.8) 0.3 4.3 27.2 30.3 Other long-term liabilities 63.5 (17.0) (1.5) (13.9) 0.3 3.8 23.8 26.5 Net change in operating assets/liabilities 273.7 43.5 (46.6) (37.9) 79.4 85.2 131.2 75.8 Net Cash from Operations $389.5 $365.0 $316.4 $195.0 $211.7 $633.3 $723.0 $751.8
Investing activities: Purchases of PP&E ($261.5) ($254.5) ($285.7) ($321.3) ($166.8) ($183.1) ($216.7) ($240.4) Proceeds from sale of PP&E 106.4 55.4 38.6 4.0 150.0 - - - Sales (Purchases) of investment sec. (125.3) (394.9) (76.0) 309.4 (43.8) (307.0) (349.6) (353.9) Other investing activities - - (11.6) - - - - - Proceeds from sale of finance ops. 475.9 ------Acquisitions, net of cash acquired (262.3) ------Net Cash from Investing ($66.9) ($593.9) ($334.7) ($7.9) ($60.6) ($490.1) ($566.3) ($594.4)
Financing Activities: Net Proceeds (Payments) on Revolver ($1.1) $20.1 ($21.3) $0.0 $0.0 $0.0 $0.0 $0.0 Net Proceeds (Payments) on long-term debt (28.0) (0.8) (5.5) (7.2) (6.9) (2.7) (2.5) (2.7) Changes in overdraft balances 36.3 (22.5) 19.3 - - - - - Repurchases of common stock (259.8) (338.5) (237.2) (46.8) (150.0) (150.0) (150.0) (150.0) Issuance of common stock 27.2 38.0 89.7 9.4 30.0 30.0 30.0 30.0 Dividends paid (13.8) (12.8) (20.1) (26.5) (24.3) (22.5) (20.9) (19.4) Excess tax benefits from stock payments - - 15.7 - - - - - Redemption of preferred share purchase - (1.9) ------Other financing - - (1.4) - - - - - Net Cash from Financing ($239.3) ($318.4) ($160.8) ($71.1) ($151.2) ($145.2) ($143.4) ($142.1)
Net Cash Flow from Cont. Operations $83.3 ($547.3) ($179.0) $116.0 ($0.1) ($2.0) $13.4 $15.4 Net Cash Flow from Disc. Operations (14.5) (18.0) 5.7 - - - - - Exchange Rate Effect on Cash 2.0 1.7 (1.4) - - - - - Increase (decrease) in cash & equivalents 70.8 (563.7) (174.7) 116.0 (0.1) (2.0) 13.4 15.4 Cash & equivalents at beginning of year 809.0 879.7 316.0 141.2 257.3 257.2 255.1 268.5 Cash & equivalents at end of year $879.7 $316.0 $141.2 $257.3 $257.2 $255.1 $268.5 $283.9 Interest income on cash & equivalents $4.9 $9.0 $9.0 $8.9 $9.4
Appendix 63
Rate P R O J E C T I O N S DEBT / INVESTMENTS SCHEDULE 2008 2009 2010 2011 2012 Available cash flow ($193.3) $43.7 $304.9 $363.0 $369.3 Plus: Surplus cash (excess of 1.0% sales) $16.2 $132.2 $130.9 $122.1 $127.9 Less: Minimum cash required @ 1.0% sales 125.0 125.1 126.2 133.0 140.6 Net cash flow available for debt retirement ($302.2) $50.7 $309.7 $352.1 $356.6
Long-term debt 8.00% Beginning balance $57.7 $50.5 $43.6 $40.9 $38.4 (Req. amortization of long-term debt) [4] (7.2) (6.9) (2.7) (2.5) (2.7) Ending balance $50.5 $43.6 $40.9 $38.4 $35.7 Interest expense on long-term debt $4.6 $4.0 $3.5 $3.3 $3.1
Short-term investments 3.50% Beginning balance $598.3 $289.0 $332.8 $639.8 $989.4 Sales (Purchases) of investment sec. 309.4 (43.8) (307.0) (349.6) (353.9) Ending Balance $289.0 $332.8 $639.8 $989.4 $1,343.3 Interest income on short-term investments $20.9 $10.1 $11.6 $22.4 $34.6
Revolver 7.00% Beginning balance $0.0 $0.0 $0.0 $0.0 $0.0 Available cash flow after req. amortization (20.4) 376.6 946.7 1,339.0 1,697.2 Borrowings / (Paydown) - - - - - Ending balance $0.0 $0.0 $0.0 $0.0 $0.0 Interest expense on Revolver $0.0 $0.0 $0.0 $0.0 $0.0
[1] See Capex on Revenue / Cost / Investment Buildup Assumptions [2] Projected income statement and cash flows exclude effect of Discontinued Operations [3] Assumed no projected NOL benefit from losses given nominal dollar amount of projected losses. Company reported $1.5M NOL carryforward in 10-K [4] Schedule obtained from debt maturity schedule in FY 2007 10-K
Appendix 64
8.6 - 0.3 x 5.3 x 43.3 3.0% 218.8 658.2 27.08 25.41 23.92 22.60 21.41 20.34 250.1 3.75%
$408.1 $431.1 $28.99 Terminal $4,538.2
$14,480.6
) (247.6) - - 75.8 42.0 19.98 21.01 22.14 23.40 24.81 26.40 212.5 639.0 242.8
(240.4
- - 39.8 19.63 20.62 21.71 131.2 22.91 24.26 25.76 201.0 538.1 204.5
(216.7)
- - 85.2 37.7 19.30 20.25 21.29 22.45 23.73 25.16 190.7 498.3 189.4
(183.1) Terminal Growth P R O J EI C T O N S
VALUATION SENSITIVITY VALUATION
-
79.4 37.4 18.99 19.90 20.90 22.00 150.0 23.23 24.60 190.9 2.75% 3.00% 3.25% 3.50% analysis to derive price per share. (166.8) (111.1)
4.0 -
2008 2009 2010 2011 2012 37.4 0.6% 0.1% 0.9% 5.4% 5.7% (16.9) (37.9) 192.8 2.50% (321.3) ($16.9) ($111.1) $309.0 $333.6 $396.2 $25.52 $26.13 $26.78 $27.47 $28.21 ($126.1) $142.1 $308.7 $305.3 $269.7 ($141.9) $179.8 $439.5 $489.0 $486.0 $12,504.5 $12,513.1 $12,621.7 $13,300.7 $14,058.8
14.0% 18.68 13.5% 19.56 13.0% 20.52 12.5% 21.58 12.0% 22.76 11.5% 24.06 11.0%
$22.45
rate Discount (5.2)
214.8 10.6% 8.0%
H I L S O T R I C A 2005 2006 2007 59.0 87.1
$7.44 168.6 424.4 38.0% 12.5% 3.00% $22.45 $899.6 201.7%
2,518.4 $3,418.0 $3,783.4 $10,413.5 $11,514.2 $12,429.8
Implied Multiple of LTM Revenue LTM of Multiple Implied EBITDA LTM of Multiple Implied % Value Increase Plus: PV of Terminal Value Terminal PV of Plus: Undiscounted Terminal Value Discount rate (different from WACC) [1] WACC) from (different rate Discount rate growth Terminal Marginal tax rate tax Marginal % growth [2] Taxes Less: Less: Debt (8/31) Plus: Cash, short-term investments (8/31) investments short-term Cash, Plus:
PLAN FLOW: TURNAROUND DISCOUNTED CASH Current share price (12/12) [1]choice The of usinghigher a discountrate than WACCis in the valuation explained write-up [2] Conservatively did not incorporate benefita tax despite losses at the operatinglevel [3] Non-cash compensation relatedto expense stock optionsand is non-cash. Addingline item backalso simplifies share count is $2.0M closure Superstore per furniture/fixtures of sale from Proceeds Assumes [4] Price / share Actual Share Outstanding(9/30) Sum of PV of Cash Flows PV of Free Cash Flows Changes Operating in assets/liabilities (see Statement) Cash Flow Cash Flow Free Plus: Proceedsfrom sale of PP&E [4] PP&E of Puchase Equity Value Plus: Stock-based compensation [3] expense FY = February Total Sales Plus: Depreciation Amounts in $MMs Assumptions Net operating profit after-tax Total Operating income (EBIT) Enterprise Value
Appendix 65
0.19 1.35 0.76 0.64 2.06 1.10 0.90 1.25 2.20 0.77 1.10 1.15 0.67 1.05 1.34 (5) 4.7% 9.7% 38.0% 14.2% 11.7% 13.5% 11.4% 12.8% 11.0% 12.1% 10.7% 11.4% 10.3% 10.7% 10.0% 10.0% Beta ## ## ## ## ## ## ## ## ## ## ## ## ## ## 7.3% 0.0% 3.4% 2.0% 7.5% 9.3% 9.9% 9.6% 9.6% 21.9% 13.7% 11.7% 13.0% 11.3% 12.3% 11.0% 11.7% 10.6% 11.0% 10.3% 10.3% Equity ## ## ## ## ## ## ## ## ## ## ## ## ## ## (4) 473 143 45.0% 9.9% 9.9% 9.3% 9.5% 13.2% 11.7% 12.5% 11.3% 11.9% 11.0% 11.2% 10.6% 10.6% 10.2% Equity ## ## ## ## ## ## ## ## ## ## ## ## ## ## 0 65 631 4,105 15.4% 330 16,652 383 2,399 15.9% 706 9,435 9.6% 9.8% 8.9% 9.4% 12.7% 11.7% 12.1% 11.3% 11.4% 10.9% 10.8% 10.5% 10.2% 10.2% Cost of of Equity Cost ## ## ## ## ## ## ## ## ## ## ## ## ## ## Pre-Tax CostDebt of 1.56 0.24 47,437 193,152 24.6% 2.06 1.28 1,854 1,856 99.9% 0.82 2,222 30,468 2.27 $1,273 $37,897 0.92 1.81 1.28 1.01 14,138 44,184 32.0% 1.47 1,9770.72 21,240 1.22 Source:Capital WACC IQ Template customized Turnaround by Team 9.8% 9.2% 9.7% 8.6% 9.3% 12.2% 11.7% 11.6% 11.3% 11.0% 10.9% 10.4% 10.5% 10.1% Beta Debt Levered Total Val. Mkt. Debt/ Unlevered ## ## ## ## ## ## ## ## ## ## ## ## ## ## 9.4% 8.8% 9.6% 8.2% 9.2% 11.7% 11.7% 11.1% 11.3% 10.5% 10.9% 10.0% 10.4% 10.0% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00% 11.50% 12.00% 12.50% 13.00% 13.50% 14.00% ## ## ## ## ## ## ## ## ## ## ## ## ## ## (6) 9.5% 9.0% 8.4% 9.5% 7.9% 9.1% 11.2% 11.7% 10.6% 11.3% 10.1% 10.8% 10.4% 10.0% 5.00% 11.00% Wal-Mart Stores Inc. Stores Wal-Mart Target Corp. Office Depot, Inc. Depot, Office Inc. Staples RadioShack Corp. OfficeMax Inc. OfficeMax PC Mall Inc. Mall PC GameStop Corp. GameStop Costco WholesaleCostco Corp. Conns Inc. Conns Company NameCompany Amazon.com Inc. Amazon.com Best Co.Buy Inc. ## ## ## ## ## ## ## ## ## ## ## ## ## ## ## ## (3) CC CC 0.00% 5.00% 95.00% 90.00% 10.00% 85.00% 15.00% 80.00% 20.00% 25.00% 75.00% 70.00% 30.00% Ticker 100.00% E/(D+P+E) D/(D+P+E) WMT TGT ODP SPLS RSH OMX MALL GME COST CONN AMZN BBY Average CC Levered Beta BETA CALCULATION BETA WACC SENSITIVITYWACC ANALYSIS CC D/E WACC SENSITIVITYWACC ANALYSIS CC Marginal Tax Rate MarginalCC Tax Average Unlevered Beta for Comps OF CAPITAL ANALYSIS OF CAPITAL 1.15 4.3% 0.0% 4.5% 7.2% 6.2% 7.0% 0.0% 7.0% 4.7% 0.0% 4.5% 0.0% 4.5% 0.2% 0.0% 0.0% 11.7% 11.4% 38.0% 11.2% 38.0% 38.0% 4.51% 6.24% 95.5% Financial Analysts Journal Feb. 2003 (1) (2) (1) Market Risk Premium Risk - Rf) (Rm Market MultipliedCC Levered by: Beta Premium Risk Market Adjusted (Rf) Return of Rate Risk-Free Add: CC Cost of Preferred (Rp) CC RateMarginal Tax CC Cost of Debt(Rd) CC D/E CC D/(D+P+E) Cost of Equity Portion Marginal Tax Rate Size Premium MultipliedCC E/(D+P+E) by: Add: Size Premium Cost of Equity Risk-Free of Return (Rf) Rate After-Tax Cost of of Debt Cost After-Tax CC RateMarginal Tax D/(D+P+E) CC Multiplied by: CC Cost of Debt(Rd) Market Risk Premium Risk - Rf) (Rm Market Cost of Debt Portion Debt of Cost CC Cost ofPreferred (Rp) Multiplied by: CC P/(D+P+E) CC Multiplied by: Cost of Preferred Portion WACC WEIGHTED AVERAGE COST WEIGHTED Circuit City Stores Inc. (NYSE:CC) Inc. Stores Circuit City (in millions) WACC CALCULATION WACC INPUTSWACC * Unlevered and Levered Beta formulas Levered adjustment and tax * Unlevered exclude Ezzell per Miles (1985), and confirmed Arzac by (1) Interest Treasury Bond on 30-Year as of 12/12/2007. Source: Bloomberg equity risk run compound average (2) Long premium: Ibbotson Stock & Long Run Chen, Returns: Participating in Economy, the Real since Inc.(3) hhgregg, excluded data was indicated Beta zero was (4) Market based on prices values as of 12/12/2007 Beta (5) Unlevered =Beta Levered / ( 1 + ((D/E))* Beta(6) Levered = Unlevered Beta * ( 1 + ((D/E))*
Appendix 66
6.2 Appendix B – Industry Detailed Analysis, Financial Measures
The following Appendix details specific financial data for the key retailers in the electronics retail industry: Best Buy, Circuit City, GameStop, and RadioShack. The charts for Revenue, Net Income, and Return on Assets and Equity can be found in Section 2. The data was obtained from the company filings and demonstrates that Best Buy is the industry leader, while Circuit City is well below the industry average on several metrics, most notably, revenue, net income, ROI, and ROE.
Note: The comparable companies have various year ends and quarter ends. Retailer Last Yearend Quarter Ends - Last 5 BEST BUY CO 13 weeks Ending 13 weeks Ending 14 weeks Ending 13 weeks Ending 13 weeks Ending INC March 3, 2007 2007-09-01 2007-06-02 2007-03-03 2006-11-25 2006-08-26 CIRCUIT CITY 3 months Ending 3 months Ending 3 months Ending 3 months Ending 3 months Ending STORES INC February 28, 2007 2007-08-31 2007-05-31 2007-02-28 2006-11-30 2006-08-31 GAMESTOP 13 weeks Ending 26 weeks Ending 13 weeks Ending 14 weeks Ending 13 weeks Ending CORP February 3, 2007 2007-11-03 2007-08-04 2007-05-05 2007-02-03 2006-10-28 RADIOSHACK 3 months Ending 3 months Ending 3 months Ending 3 months Ending 3 months Ending CORP December 31, 2007 2007-09-30 2007-06-30 2007-03-31 2006-12-31 2006-09-30
Operating Revenues ($ Millions) Company Q2'08 Q1'08 Q4'07 Q3'07 Q2'07 BEST BUY CO INC $ 8,750.0 $ 7,927.0 $ 12,899.0 $ 8,473.0 $ 7,603.0 CIRCUIT CITY STORES $ 2,643.0 $ 2,485.0 $ 3,933.0 $ 3,080.0 $ 2,818.0 GAMESTOP CORP $ 1,611.0 $ 2,617.0 $ 1,278.0 $ 2,303.0 $ 1,011.0 RADIOSHACK CORP $ 960.0 $ 934.0 $ 992.0 $ 1,458.0 $ 1,059.0
Net Income ($ Millions) Company Q2'08 Q1'08 Q4'07 Q3'07 Q2'07 BEST BUY CO INC $ 250.0 $ 192.0 $ 763.0 $ 150.0 $ 230.0 CIRCUIT CITY STORES $ (62.8) $ (54.5) $ (12.2) $ (15.9) $ 10.0 GAMESTOP CORP $ 51.9 $ 46.5 $ 24.7 $ 129.8 $ 13.5 RADIOSHACK CORP $ 46.3 $ 47.0 $ 42.5 $ 84.5 $ (16.3)
Compound Growth Rate (%) Company 10-Yr. 5-Yr. 1-Yr.
BEST BUY CO INC 16.5 12.9 16.5 CIRCUIT CITY STORES 5.7 5.3 7.2 GAMESTOP CORP NA 36.5 72 RADIOSHACK CORP -2.7 0 -6
Appendix 67
Return on Assets (%) Return on Equity (%) Company 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002 BEST BUY CO INC 10.8 10.3 9.9 9.8 8.3 24 23.5 23.7 26 23.7 CIRCUIT CITY STORES INC NM 3.8 1.6 NM 1 NM 7.5 2.8 NM 1.7 GAMESTOP CORP 5 5.16.77.57.412.712.210.711.119.2 RADIOSHACK CORP 3.411.414.213.411.611.835.739.939.935.8
Return on Revenues (%) Company 2006 2005 2004 2003 2002 BEST BUY CO INC 3.8 3.7 3.4 3.3 3 CIRCUIT CITY STORES INC NM 1.3 0.6 NM 0.4 GAMESTOP CORP 3 3.3 3.3 4 3.9 RADIOSHACK CORP 1.5 5.3 7 6.4 5.8
Return on Revenues (%) - Computer & Electronic Retail
8
7 BEST BUY CO INC CIRCUIT CITY STORES INC 6 GAMESTOP CORP RA DIOSHA CK CORP 5
4
3
2 (%) Percent
1
0 2002 2003 2004 2005 2006 Year
Note: Charts begin with oldest year, while tables begin with most recent year.
Current Ratio - Computer & Electronic Retail
3
BEST BUY CO INC 2.5 CIRCUIT CITY STORES INC GAMESTOP CORP
2 RADIOSHACK CORP
1. 5
1
0.5
0 2002 2003 2004 2005 2006
Year
Appendix 68
Debt to Capital Ratio (%) - Computer & Electronic Retail
50
45 BEST BUY CO INC 40 CIRCUIT CITY STORES INC GAMESTOP CORP 35 RADIOSHACK CORP
30
25
20
15
10
5
0 2002 2003 2004 2005 2006
Year
Current Ratio Debt / Capital Ratio (%) Debt as a % of Net Working Capital Company 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002
BEST BUY CO INC 1.4 1.3 1.4 1.3 1.3 8.6 3.3 10.6 12.3 23.3 21.2 9.2 27.2 39.4 77.1 CIRCUIT CITY 1.7 1.7 2.1 2.5 2.4 2.7 2.6 0.5 1 0.5 4.3 4.3 0.8 1.3 0.6 GAMESTOP CORP 1.3 1.3 1.4 1.7 1.7 38 46.1 4.1 0 0 238.8 412.5 22.1 0 0 RADIOSHACK CORP 1.6 1.6 1.9 1.9 2.1 34.6 45.7 35.1 41.3 44.8 56.2 77.2 62 67 67.3
Dividend Payout Ratio (%) - Computer & Electronic Retail 50
45 BEST BUY CO INC 40 CIRCUIT CITY STORES INC GAMESTOP CORP 35 RA DIOSHA CK CORP 30
25
20
15 Percent %
10
5
0 2002 2003 2004 2005 2006 Year
Appendix 69
6.3 Appendix C – Board of Director Composition
Board Composition Individual Name Board Role Other Board Involvement Functional Experience Company Experience
Alan Kane Independent AMERICAN EAGLE OUTFITTERS Independent Chairman Fashion Institute of Technology; Columbia Director INC (1) President/CEO (1) Graduate School of Business; Federated Department Stores, The May Company, Grossman's Inc. Allen King Independent UNIVERSAL CORP Universal Corporation and Universal Leaf Tobacco Director Co. Barbara Feigin Independent VF CORP VF Corporation, Grey Global Group Director Carolyn Byrd Independent AFC ENTERPRISES INC GlobalTech Financial, LLC, Coca-Cola Financial Director Corporation, Rare Hospitality International, Inc. and AFC Enterprises, Inc. Carolyn Woo Independent AON CORP; NISOURCE INC Mendoza College of Business, University of Notre Director Dame J Spainhour Independent TUPPERWARE BRANDS CORP Executive VP/CFO (1) ServiceMaster Company, Ann Taylor Stores Director (Tupperware prior to 12/2005) Corporation James Hardymon Lead LEXMARK INTERNATIONAL INC; Chairman (1) Textron, Inc., American Standard Companies, Inc. Independent WABCO HOLDINGS INC Chairman/CEO (1) and Lexmark International, Inc Director President/CEO (1) Vice Chairman/COO (1) Mikael Salovaara Independent Goldman, Sachs & Co.; Greycliff Partners Director Philip J. Chairman BestBuy, TOPS Appliance City, Sony Schoonover Ronald Brill Independent Executive VP/CFO (1) Home Depot, Inc., Pharmaca Integrative Director Pharmacy, Inc. Ronald Turner Independent BRINKS CO Chairman/President/CE Ceridian Corporation Director O (2) President/CEO (2)
Ursula Fairbairn Independent AIR PRODUCTS & CHEMICALS President/CEO (1) Fairbairn Group, LLC, American Express Comany, Director INC; CENTEX CORP; SUNOCO Union Pacific Corporation, IBM Corporation INC; VF CORP Source: Deloitte, Company Website
Appendix 70
End Notes / References
1 Website located at http://www.ce.org/Research/Sales_Stats/1891.asp as of December 3, 2007 2 Ibid 3 “Wal-Mart Looks to Grab Gains in Gadgets”, WSJ, by Kris Hudson, August 2, 2007 4 Based on Best Buy and Circuit City Annual Reports and CE Industry Figures 5 “Best Buy, Wal-Mart Grew CE Share In 3rd Quarter”, by Alan Wolf , TWICE, 11/5/2007 6 Based on data gathered from www.walmart.com, www.circuitcity.com, www.bestbuy.com on December 6, 2007 7 “RadioShack to close 400 to 700 stores”, Associated Press, Feb 17, 2006 8 Factiva, Circuit City report as of November 18, 2007 9http://connection.ebscohost.com/content/article/1039062643.html;jsessionid=2ECCA132F8DEC1A7530EEA266DDA4A79 .ehctc1 as of November 28, 2007 10 Factiva, Circuit City report as of November 18, 2007 11 http://www.firedog.com/fdandyou.html?cm_re=firedog-_-content-_-firedog%20and%20you as of December 6, 2007 12 Sources: Dow Jones, Factiva, Google Financials, Nov. 2007 13 http://www.fundinguniverse.com 14 Circuit City Conf Call, September 20, 2007 15 Standard and Poor’s Corporate Ratings Criteria 2006 16 Amended and Restated Credit Agreement dated as of July 8, 2004, First Amendment to Amended and Restated Credit Agreement dated as of November 17, 2004, Second Amendment to Amended and Restated Credit Agreement dated as of July 15, 2005, Third Amendment to Amended and Restated Credit Agreement dated as of October 18, 2005 17 Ibid 18 Circuit City Stores, SC TOC, Intertan Inc, 4/1/04 SEC File 5-42871 19 February 2007 Circuit City 10-K Executive Compensation, page 34 20 February 2007 Circuit City 10-K, page 30 21 February 2007 Circuit City 10-K Executive Compensation, page 27 22 March 2007 Best Buy 10-K, page 7 23 CIA World Fact Book 24 McKinsey Global Institute, p12 25 “Chinese consumer electronics market ranks second worldwide”, English Peoples Daily Online, March 2006