I been looking at retailers lately – not something I know a lot about. I know enough to know I can hurt myself if I get these wrong – as my post about being a fuddy-duddy old guy reveals.
However I have come across this retailer in relatively good categories with a very low valuation and acceptable looking – though economically cyclic - run of same store sales increases. Here are the numbers:
Fiscal year | Same store sales |
1992 | 1% |
1993 | 7% |
1994 | 8% |
1995 | 15% |
1996 | 5% |
1997 | -8% |
1998 | -1% |
1999 | 8% |
2000 | 8% |
2001 | -4% |
2002 | -10% |
2003 | 4% |
2004 | -3% |
2005 | 1% |
2006 | 8% |
2007 | 6% |
2008 | -8% |
The same store sales were up 50 percent over the period 1992 to 2007 – not a great 15 years – but not diabolical. They were down 8% in 2008 – which – given the economy looks bad – but again not pinch yourself bad.
And this stock looks cheap. Really cheap. Breathtakingly cheap.
I am going to leave a few spaces before the rest of this post….
More space…
And more…
So it’s a bait-and-switch – the company is Circuit City – and whilst the same store sales look sort of acceptable they were anything but acceptable when compared to the competitor. Here are Circuit City’s same store sales compared to Best Buy:
Fiscal year | Circuit City | Best Buy |
1992 | 1% | 14% |
1993 | 7% | 19% |
1994 | 8% | 27% |
1995 | 15% | 20% |
1996 | 5% | 6% |
1997 | -8% | -5% |
1998 | -1% | 2% |
1999 | 8% | 13% |
2000 | 8% | 11% |
2001 | -4% | 5% |
2002 | -10% | 2% |
2003 | 4% | 2.4% |
2004 | -3% | 7.1% |
2005 | 1% | 4.3% |
2006 | 8% | 4.9% |
2007 | 6% | 5.0% |
2008 | -8% | 2.9% |
And now you can see what happened. Circuit City just got crushed. Best Buy had superior sales per-square-foot or sales per unit of cost structure – and that difference got bigger and bigger and bigger.
As it did they could cut price – so whilst Circuit City’s same store sales sort of kept up with the costs their gross margin per unit of costs most certainly did not.
It is impossible to analyse the stock except in the context of its competition. Circuit City’s problems are not it sales per-se – but its sales relative to its competitors. Underperform by that much for that long and – despite your glorious past – there is nothing left. Every investor should have emblazoned on their forehead that “competition is a wealth hazard” and anyone that tries to sell you a stock without analysing the competition should be sacked. [Simple but blunt.]
I visited Circuit City headquarters once. In those days it had a billion dollars of unencumbered cash on its balance sheet. That cash represented past profits. Past glories of which there were many. Circuit City was a fantastic company once…
Circuit City it seemed tried many things to get the sales up (and match Best Buy). The above mentioned cash disappeared when CC had a bad experiment in credit cards. It should be easy enough to drive sales if you lent to people who had no intention of paying you back. Given that, it is surprisingly hard to find the credit card boost in CC’s numbers.
Also about just before I visited them they (finally) got rid of whitegoods – and tried to match the software (music, DVDs etc) offering at Best Buy. They had to refurb all the shops. Lots of cost – and only a few years of interesting same store sales growth.
People seemed to be down on Circuit City sacking its expensive sales staff and rehiring cheap ones a few years before insolvency. But the expensive sales staff hardly helped the sales keep up with Best Buy and would have been sacked anyway when the company was liquidated. The problem lay elsewhere and being sacked two years ago was a relative blessing (the new hires will be hunting for work in this labour market).
Consider this an open thread. What is it that Circuit City did worse than Best Buy? I have my ideas – and will jot them in the comments where appropriate – but I really want yours.
Also – if anyone has a good memory – can they tell me why both companies had lousy sales in 1997?
John
14 comments:
Just a guess, but Dell. Would seem to fit the timeline. Lots of disposable income went into computers that year. Maybe straight out of their hands?
1997- As per your "fuddy duddy" post it was also in the middle of some interesting years for music. I remember it as near the death of the CD.
The year prior I heard my first MP3, and went home from college to tell all of my friends about it.
There was one year, and I can't remember it well enough, but there was a version of "real player" that would automatically rip any cd inserted into the machine to a very low quality MP3. Most of the MP3's from this real player version ended up populating Napster.
My guess would be something to do with cd's and music. Can't find anything to back it up.
I don't know if I could speak to a difference in sales, but one item in particular Best Buy does (did) much better than circuit city was asset protection (theft prevention). During college, I had worked at Circuit City over the holidays as a temp sales person in home audio. Circuit City, had no on site security, none. The company would post ridiculous stories on the internal email system, of people coming in to the store, loading up a shopping cart with goods (gameboys or something equally compact and expensive), and walking out. I believe the only measure of prevention was a sales associate or manager, asking the thief if they needed help ringing up as they neared the door, then calling the police once it was confirmed that they had in fact stolen the merchandise as they drove away.
Compare this to Best Buy, where as you enter the store, the first thing you typically see is a dedicated asset protection manager watching a security monitor. I don't know much more about Best Buy's security as I didn't work their, but this difference alone likely saved the company serious money in theft prevention. If the rest of the two companies' relative operations were this disparate, there's no wonder we now see CC in liquidation.
I was looking at CC stock about 5 years ago, and could have done quite well with it for a couple years, but I'm sure if I had bought it I would have ridden it to zero. As it happened, I mentioned the idea to a friend of mine who knows nothing about finance but is much more technologically oriented than I am -- he does research in computer science for a national lab -- and he commented that their stores were confusing and that it was much easier for him to find things he wanted at Best Buy. In light of that and the reconsideration it provoked, I didn't buy it. I should probably buy him a beer.
John - great post on Circuit City vs. Best Buy. In my opinion it was inferior selection and service. They were stuck in an old business model. In California you really had a choice between CC, BB or Frys. Fry's had the best selection and prices - but abominable service and made returns nearly impossible. I remember going to CC to get a wireless mouse - they had one - just one and the sales people didn't know where it was and didn't know anything about it. They also did a poor job stocking the best stuff like flat screens and laptops. It only takes one bad experience to put you off for life.
Gloomy, gray stores with lousy product presentation.
I remember visiting a Circuit City (the one by Union Square in Manhattan) about two years ago, and trying for nearly 10 minutes to catch the eye of a sales person because I needed some help locating some hardware. Every sales person I saw either avoided eye contact, walked quickly past me, or was too busy chatting with other staff by the "firedog" tech support booth. I remember walking out of that store thinking it was a company doomed to fail.
In addition, the store was not laid out in any kind of easy to navigate fashion, did not feature good signage, and you basically had to walk around at random until you stumbled upon what you were looking for.
I'm not a huge fan of Best Buy either, but at least their sales staff are responsive, and their stores make it a bit easier to find your stuff.
So, yeah, Circuit City failed because they were absolutely terrible at, um, selling stuff. Profound, I know.
The CC store on Union Square in NYC is/was one of my favorites go-to places in the city: the best kept secret to go to the bath room if needed. No lines at all, very much unlike the Starbucks in the Virgin Megastore next door.
It will be missed...
(Ok, kinda off topic, maybe...)
I have to say that I think Anon 3:06 has got to be a Best Buy employee or something. I live in California. I almost bought a computer at BestBuy which is close to home, but walked out when I thought about that d**n restocking fee.
A week or so later I schlepped down to Fry's -- where I knew from experience I could get a no questions asked return if I had any problems. Fry's is a great electronics store -- that return policy gave me the guts to build my own computer years ago -- a bit of knowledge that's served me well these last few years. I'd choose Fry's over Best Buy anyday for my shopping.
Hey, maybe it's even a good stock pick!
You are missing a major part of the story -- Wal-Mart and Costco. Look at the growth in their electronic departments in the last decade. Circuit was banking that customers would pay for its service and that it had brands WMT and COST couldn't get. Well the service went out the window, and WMT and COST have gotten a lot of the key brands. Huge dollar share shift.
Also, Circuit had some crappy real estate, at the same time BBY was going into new power strip centers with clean, bright stores. It makes a difference.
Also, I would look at what was happening in the world of personal computers in 1997, since CC and BBY used to live and die by PC product cycles, ASPs, etc. I believe 1997 was when the sub-$1000 PCs were growing popular, so units may have been up but prices were dropping, which would impact their comps. And Apple was issuing "junk" bonds!
More selection? The Best Buy's in this state seem like they are twice the size of the Circuit City's.
They had many TV's, but not much else.
When trying to price compare for a new $2.5k TV, I found that Circuit City had their own model numbers for (at least) Mitsu TV's. The only reason I could think of for this, was to avoid price matching policies.
Agree with the bad layout or signage. TV's and major appliances were obvious. Everything else was random.
On theft: A friend of a friend of a friend, had a friend who was a drug addict (DA). DA would steal big ticket items directly from the CC delivery truck.
Apparently, CC would conveniently load the the truck with deliveries for the next day, then leave the truck in the lot overnight.
At the time of the telling of the story, DA had hit the same store 5 times. DA would cut the lock, roll up the door and take plasma or LCD TVs.
DA was quite amused at CC's failure to learn. On DA's 5th attempt, CC had (finally) tried to prevent access to the roll up door by backing up tightly to the building. DA broke into the cab, placed in neutral, pushed truck forward and went about his "work".
DA complained that he could make a lot more money, if only he knew how to steal the whole truck...
There are too many things that BB did better than CC. Most of them are easy to identify as a customer - product, service (particularly friendly service), cleanliness and layout. The major thing that this analysis misses is inventory turnover, which is much much better at BB likely due to management incentive systems (like store-level ROI) and historical decisions. When selling products with declining prices failure to turn inventory quickly affects both your capital requirement (like in all businesses) as well as your operating margins. This in my opinion is the key. One other reason why the BB store had a natural advantage is because there is no stock room where inventory is hiding from the customer, this was something that was largely impossible to correct for CC because their stores were built out a certain way.
For a variety I reasons I re-read your post. It occurred to me that many of the respondents may have missed your point. As I understand it you are asking why did CC go into Ch.11 given its SSS were okay. You were not asking why CC's SSS weren't as good as they could've been. To be frank, looking at CC's accounts (balance sheet and P&L) I am still confused as to why it went into administration. It looks like they just threw in the towel.
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