Circuit City Cuts Wages to Juice Profits

The electronics retailer is also outsourcing its IT functions and mulling a sale of its Canadian unit as it faces heated competition
Circuit City Stores (CC) said Mar. 28 that it's planning to lay off around 3,400 store employees – but only to hire them again at lower wages. The Richmond, (Va.) consumer electronics retailer will also outsource its information technology department and possibly sell its Canadian unit InterTAN, in an effort to manage costs and survive better in its battles against rivals.

Circuit City is hoping to cut its expenses by around $110 million during fiscal 2008 and at least $140 million beginning in fiscal 2009. "We are taking a number of aggressive actions to improve our cost and expense structure, which will better position us for improved and sustainable returns in today's marketplace," said CEO Philip J. Schoonover in a press release Mar. 28.

His company is handing pink slips to store associates that were paid higher salaries than the market rate, in order to hire people at the going rate instead. Along similar lines, the company is also planning to outsource its information technology infrastructure operations to the Armonk, N.Y. services provider IBM (IBM). That deal will affect around 130 Circuit City employees, around 50 of which will transition to jobs with IBM and remain on-site during the contract, in a move expected to cut Circuit City's expenses by more than 16%.
Such moves, of course, come with ugly trade-offs. Without its highest paid staffers, Circuit City is expecting to have consolidated net sales growth of 8% during fiscal 2007, down from the 9% to 10% originally forecast.

In February, the company was able to terminate the lease on a previously closed distribution center in Columbus, Ohio. The company has recorded a loss of $4.8 million for exiting this lease obligation, but will reduce its future net cash outflows associated with the lease by around $6 million. The company completed the previously announced closure of a distribution center in Louisville, Kentucky, that was used primarily for store fixtures and signage.

Circuit City also hired Goldman Sachs for financial advice on what to do with and whether to sell its unit InterTAN, an Ontario consumer electronics retailer that had been acquired in 2004 for around $284 million.

CEO Schoonover has had it rough during recent months. Consumer electronics retailers have been frantically trying to beat each other to customers by slashing their prices on things like flat panel TVs, effectively crimping the entire industry's ability to make money (see BusinessWeek.com, 12/13/06, "Static Ahead for Electronics Retailers"). At the same time, Schoonover has been spending on putting new services into place that rivals like Best Buy (BBY) already have; for example, Circuit City Stores, Inc. worked on a plan with IBM last year that was intended to update the retailer's technology for things tracking and managing sales, inventory and customer information.

Investors cheered the cost-saving moves. Circuit City shares rose 1.5% to $19.16 per share on the New York Stock Exchange March 28.

In one example of how analysts adjusted their forecasts, Standard & Poor's Corp. analyst Michael Souers downgraded his operating earnings per share estimate for Circuit City's fiscal 2007 (ended February) by 4 cents to 61 cents per share, but raised S&P's fiscal 2008 estimate to $1.01 from 95 cents.

source:www.businessweek.com