Circuit City unplugging the fridge

Retailer abandoning home appliances for consumer electronics

To focus on digital boom

Shares fall 20% amid disappointing earnings projection

Retailing

July 26, 2000|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

The refrigerators and washing machines at Circuit City will soon make way for more digital cameras and DVD players as the retailer departs the cutthroat home appliance business to focus on booming digital entertainment.

Under a three-year strategy announced yesterday, Circuit City Stores Inc. hopes to transform itself into an exclusive retailer of consumer electronics, with plans to partially remodel its 573 superstores, close eight distribution centers and eliminate 1,000 jobs.

The chain decided to get out of the appliance category altogether after sales weakened and competition intensified during the past few months, the company said.

Shares of Circuit City fell 20 percent yesterday to $26.

The company said it expects earnings of 32 cents per share for the second quarter, which ends next month, well below analysts' average estimate of 43 cents per share. The chain will take a charge of $30 million, or 9 cents per share, for distribution center lease terminations and employee severance.

It expects earnings of 16 cents per share in the third quarter, including a $55 million charge for store remodeling, appliance markdowns and lost sales from appliance business.

Sales of consumer electronics and home office products have shot up at stores open at least a year, while sales of major appliances - representing 14 percent of total sales - have dipped from last year, said W. Alan McCollough, president and chief executive officer of Circuit City Stores Inc.

Circuit City, the second-largest U.S. retailer of both appliances and electronics, also is facing pressure from old and new rivals in the appliance category. Competitors include industry leader Sears, Roebuck and Co.; No. 3 chain Lowe's Cos. Inc. and, more recently, Home Depot, which last year began adding full lines of home appliances.

"Whether you're buying a refrigerator at Circuit City or at Best Buy or at Sears, it's the same unit," said Kurt Barnard, president of Barnard's Retail Trend Report. "Everything becomes intensely price-sensitive, and it is not easy to make money in that kind of environment. They've said `Let's bite the bullet and concentrate on those things we know best.'"

Home Depot's entry into the appliance market may have weighed heavily in Circuit City's plans, said Howard Davidowitz, chairman of Davidowitz & Associates, a New York retail consultant and investment banking firm.

"Home Depot is going to affect everyone," he said. "When they get into something, get out of the way."

It's still unclear whether tougher competition will prompt other multicategory retailers - such as Circuit City's chief rival, Best Buy - to give up on appliance sales as well.

Some retailers might not be able to make money on dishwashers or dryers, but might decide to carry them as a way to win consumer loyalty, Barnard said.

Circuit City opened as a television store in 1949, evolved into a TV and home appliance store by 1959 and has sold appliances ever since, said Bill Cimino, a spokesman.

Without appliances and with remodeled space, at a cost of $2.5 million per store, the stores will have more room for products such as digital cameras and camcorders, imaging products, personal computers, electronic games, software and compact discs, he said.

"Obviously, when Circuit City started all those years ago, there wasn't as much competition for appliances," Cimino said. "Obviously, the competition has increased.

"We felt we wanted to concentrate on digital entertainment and becoming the digital entertainment superstore."

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