Circuit City ending its costly DVD venture

Retailer's earnings exceed estimates

stock split announced

Consumer electronics

June 17, 1999|By BLOOMBERG NEWS

RICHMOND, Va. -- Circuit City Group, the No. 2 U.S. consumer-electronics retailer, said yesterday that it will pull the plug on its unprofitable Divx digital videodisc venture, resulting in a $114 million fiscal first-quarter charge.

The retailer also said it will split its stock 2 for 1, and it reported better-than-expected first-quarter earnings before the Divx charge. Its shares yesterday rose $8.375 to $90.375.

Circuit City invested about $200 million in Divx, hoping to capitalize on the growth of digital videodiscs. Its machines play disposable, pre-recorded discs as well as regular DVD movies. The retailer, though, could not persuade other big electronics chains such as rival Best Buy Inc. to carry the discs and machines, or find a partner to help with the financing.

"It removes a lot of uncertainty," said analyst Mark Mandel at ABN Amro. "Clearly, they needed broader support and needed to expand distribution."

Circuit City's shares have almost tripled since October, lifted by demand for computers, large appliances and falling prices on newer digital products such as cameras, telephones and satellite-TV dish antennas.

Its CarMax Group auto retailer also made a profit in the recent quarter, its first since going public in February 1997. Without profit being hurt by Divx or CarMax, Circuit City stands to benefit from its thriving electronics business, analysts said.

"The industry is moving toward a duopoly, where Circuit City and Best Buy are going to dominate," Mandel said.

The stock split will be payable July 15 to shareholders as of June 30. The company last split its stock in 1993.

Divx, which rhymes with civics, targeted the video rental market by selling disposable discs for about $4.50. The discs will work for only a 48-hour period, unless renewed for a slightly reduced fee (with a pre-established credit-card account, and phone link between the Divx player and company).

The Divx venture was founded in 1995 by the California law firm of Ziffren, Brittenham, Branca & Fischer, which represents producers, directors and production companies that were looking for a way to exploit the public's desire for video-on-demand. It is still partly owned by the law firm.

Circuit City said existing Divx customers will be able to view discs during the next two years as it phases out the system. It plans to offer a $100 cash rebate to all consumers who purchased Divx-enhanced players before June 16.

Circuit City said its profit from continuing operations more than doubled to $42 million, or 41 cents a share, from $20.6 million, or 21 cents a share, a year earlier.

The charge for closing Divx and loss from the unit of $16.2 million resulted in a final loss of $88.2 million, or 87 cents a share. In the year-earlier quarter, a loss from discontinued operations of $8.1 million resulted in net income of $12.5 million, or 13 cents a share.

Revenue rose 19 percent to $2.69 billion from $2.27 billion. Sales at stores open at least a year rose 9 percent.

Pub Date: 6/17/99

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