Best Buy faces fight to survive industry decline Circuit City seems stronger of 2 firms

March 02, 1997|By Liz Bowie | Liz Bowie,SUN STAFF

Here lies Highland Superstores, Crazy Eddie, Silo and Fretter, the Incredible Universe and Luskin's.

The electronics industry graveyard is filled with companies that have ridden waves of profits on the backs of hot, new products, then crashed during a slowdown.

And so during the latest industry decline, analysts are watching carefully as the nation's two largest home appliance and electronics retailers -- Best Buy and Circuit City -- fight for scarce dollars.

Best Buy Co. Inc. and Circuit City Stores Inc. have a lot in common. Both run on thin margins and need high volumes to survive. Both have seen sales at stores open at least a year fall dramatically in the last year as the public's hunger for expensive computers waned. Last month, both companies posted

double-digit decreases in sales. And about 75 percent of Circuit City's stores compete in the same geographical market with a Best Buy store.

But the comparisons can end there.

Best Buy, debt-laden from a period of immense and quick growth, has been hurt most by the downturn in computer sales -- 41 percent of its sales are in computers compared with 25 percent of Circuit City's. The Minneapolis-based retailer has scaled back its jump into the Northeast market and has slim cash reserves.

The larger Circuit City has self-financed almost all of its growth. .. Now it is taking advantage of a period of decline to grow.

Analysts say both will survive, but the older, more diversified Circuit City is likely to emerge the stronger player, ready to take off during the next burst of growth in the industry.

"We have been saying all along that there will be two survivors," said Kenneth Gassman, an analyst with Davenport & Co. in Richmond. "We are far less sure than we were yesterday. We see cracks in the foundation of Best Buy's basic business, which not fixed could prove to be a major stumbling block. I am not predicting their demise. I am saying we have to watch carefully."

Terence McEvoy, an analyst at Janney Montgomery Scott, believes there is plenty of room for both companies to do well. "It is a huge market," he said, although he added that Circuit City appears to be winning the fight.

That's apparently how Wall Street sees it as well. Best Buy stock has fallen 64 percent from its 52-week high of $26 in June to $9.25 Friday, while Circuit City has shed about 18 percent, from its 52-week high of $38 in June to $31.25 Friday.

Best Buy's style

Best Buy, founded as the Sound of Music in 1966 by a 24-year-old entrepreneur, adopted its current name and format in 1983 and grew to 151 stores over the next decade. In 1993, it accelerated its growth, swelling to 272 stores this year.

Think of Best Buy as the hipper of the two chains with a much heavier emphasis on selling merchandise like recorded music -- each store has some 60,000 music titles -- and computers.

"We are noncommissioned and we have a grab-and-go environment," said Tim McGeehan, regional manager for Best Buy in the mid-Atlantic. That means the stores are a great place for a more electronics-savvy younger generation that grew up on computers.

"There is definitely different types of shopping. Best Buy capitalizes on people who like to be left alone to buy something," said Noah Herschman, vice president of marketing of Bryn Mawr Stereo and Video, a high-end electronics company based in Canton, Mass., with 13 stores, including several in Maryland.

Richmond-based Circuit City has a more staid image and sells a wider range of products. In addition, the company believes that most customers are willing to pay a little more for greater quality, said Jonathan Reckford, Circuit City's vice president of corporate planning. So if a trained salesperson can explain why a product is better, the customer is more apt to spend more, increasing Circuit City's margins. The company pays its sales staff on commission and, to guard against high-pressure sales tactics, fires them if too many of their customers return merchandise.

Wider product mix

But perhaps most important, analysts said, Circuit City, with its wider product mix, has been able to better weather cyclical downturns.

That served it well last year when sales plunged as consumers seemed to grow weary of buying fancy new computers and other electronics goods. With no hot electronics item to propel Christmas sales, consumers instead focused on soft goods like clothing.

The results for both companies have been painful, but considerably more so for Best Buy. Its heavy reliance on %J computer sales led to its posting an $11 million loss for its third quarter ended Nov. 30 -- its first since 1991 -- the result of a $9.2 million charge for a writedown of computer inventory and a $1.8 million loss from operations. And the pain continues. Since October, its same-store sales have decreased each month by at least 8 percent over the previous year. Sales at stores open at least a year, same-store sales, are considered a key indicator of a retailer's financial health.

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