Circuit City An LBO Candidate Turnaround Management December 9, 2008 Advisor: Professor Laura Resnikoff Aaron Baker Lauren Cassidy Josh Goodman Josh Siegel Erik Ulin TURNAROUND MANAGEMENT FINAL PAPER CIRCUIT CITY STORES TABLE OF CONTENTS Executive Summary ...................................................................................................................................... 3 Circuit City SWOT Analysis ........................................................................................................................ 5 Strengths ................................................................................................................................................... 5 Weaknesses ............................................................................................................................................... 5 Opportunities ............................................................................................................................................ 5 Threats ...................................................................................................................................................... 6 Position Statement ........................................................................................................................................ 6 Consumer Electronics ................................................................................................................................... 7 Specialty Retailers .................................................................................................................................... 7 Consumer Electronics Specialty Retailers ........................................................................................... 7 Specialty retailers on the web ............................................................................................................... 8 Growth .................................................................................................................................................. 8 Price Competition ................................................................................................................................. 8 Private label growth ............................................................................................................................. 9 Private equity firms buying up specialty retailers .................................................................................... 9 The Consumer ............................................................................................................................................. 11 Negative macro-economic trends affecting all consumers ..................................................................... 11 Circuit City History ..................................................................................................................................... 12 The early days ......................................................................................................................................... 12 The first restructuring ............................................................................................................................. 12 Growth Period......................................................................................................................................... 12 Competition Intensifies ........................................................................................................................... 13 The Second Restructuring ...................................................................................................................... 14 The Third Restructuring ......................................................................................................................... 15 Services .............................................................................................................................................. 15 Current State of Affairs .......................................................................................................................... 16 Previous Diversification Efforts.................................................................................................................. 17 CarMax ................................................................................................................................................... 17 Divx – Digital Video Express: ................................................................................................................ 17 Credit Services ........................................................................................................................................ 18 Management ................................................................................................................................................ 19 Overview ................................................................................................................................................ 19 Incentive compensation plan .................................................................................................................. 20 Annual bonus program ....................................................................................................................... 21 Long-term incentive Awards .............................................................................................................. 22 Managerial challenges ................................................................................................................................ 23 The right fit? ........................................................................................................................................... 23 Recent management changes .................................................................................................................. 24 Investing in the company ........................................................................................................................ 24 The Competitive Landscape ....................................................................................................................... 26 Best Buy ................................................................................................................................................. 26 Discount Retailers................................................................................................................................... 27 CompUSA .............................................................................................................................................. 28 Niche Players .......................................................................................................................................... 28 The Internet............................................................................................................................................. 28 Financial Analysis ....................................................................................................................................... 30 Profitability ............................................................................................................................................. 30 Operations ............................................................................................................................................... 30 Leverage ................................................................................................................................................. 30 1 TURNAROUND MANAGEMENT FINAL PAPER CIRCUIT CITY STORES Liquidity ................................................................................................................................................. 31 Returns .................................................................................................................................................... 31 Ownership ............................................................................................................................................... 31 Industry Analysis ........................................................................................................................................ 32 A Mature Industry .................................................................................................................................. 32 Target Market ......................................................................................................................................... 33 Wal-Mart Effect ...................................................................................................................................... 34 Critical Issues at Circuit City ...................................................................................................................... 36 IT-systems .............................................................................................................................................. 36 Lack of Standard Operating Procedures ................................................................................................. 36 Employee Morale ................................................................................................................................... 37 Incentive programs and career development .......................................................................................... 37 Morale among