TAKING STOCK

Circuit City shorting ou

by Malcolm Berko

Dear Mr. Berko: I have written you two letters and you have not answered, which I consider unprofessional. I decided to try this e-mail to see if I might have better luck. My question, for the third time, asks what the difference is between Best Buy and Circuit City of which I bought 1,000 shares last year at $21. Why is Best Buy selling in the mid-$40s and making money while Circuit City is under $4 a share and losing money? What is Circuit City's major problem? And please tell me what your thoughts are on Circuit City during the next two to three years. What do you see for that company? Should I sell the stock or do you think I should buy more shares?

B.R.,

Vancouver, Wash.

Dear B.R.: Thank you for your two letters and last week's e-mail. Please understand that I receive about 400 letters a week and last year it cost me more than $8,000 to mail those answers. Some readers enclose a stamped, self-addressed envelopes and my reply is zipped back quick as a bunny.

Circuit City Stores (CC-$4.03) a $12.5 billion retailer of consumer electronics, video and audio equipment and office electronics, is run by Phil Schoonover, chairman of the board, the big cheese, chief executive officer and president. This is the same one who, with board approval in May of last year, fired the top 3,800 sales personnel because they were earning too much money. Brian Dunn, the president of the enormously profitable Best Buy Co. Inc. (BBY-$42.21) quietly commented that Schoonover "should have fired 3,800 of his lowest-earning salespeople."

CC and BBY are in the same business; they retail identical products in many of the same cities at similar prices through nearly the same number of outlets. Last year, BBY had $39 billion in revenues from 1,100 locations and earned about $3 a share with net profit margins of 3.7 percent. Best Buy is going to be around for a long, long time. CC lost money last year on $12.5 billion in revenues from 800 locations and the suits on the Street tell us that CC will lose money again this year. But considering the questionable quality of CC's management team and board of directors, I'm not sanguine about CC's long-term staying power.

The real difference between CC and BBY is management; Schoonover and his team of slobbering sycophants couldn't make a dime selling cold, $10 Cokes to thirsty trekkers in the Sahara. Certainly proof of the pudding is in the income statement numbers. CC's net profit margins since 2002 have averaged less than 0.5 percent while BBY's margins exceed 3.5 percent. In other words BBY, with $1.2 billion in debt earns seven times more per $1 of revenue than CC that has almost zero debt.

Last year, BBY increased its quarterly dividend and announced a $5.5 billion share-repurchase program. And last year, CC's dissolute, effete management team pink-slipped 3,800 of its best sales associates and began a nationwide cost-cutting program, all of which makes as much sense as putting perfume on a hog.

CC's business model - according to Value Line, Goldman Sachs, CIBC World Markets as well as Standard & Poor's - is seriously flawed and so out of touch with the market that the company is in danger of slow-motion implosion. And the survival of Circuit City is at stake because of Schoonover's mulish attitude and his board's refusal to admit that their business model is a catastrophe. Even the analysts at Goldman Sachs (owns 14.4 percent) and Fidelity (owns 12 percent) can't overcome Schoonover's stubbornness or CC's wrong-headed and over-prideful board of directors.

Here are some possible scenarios for this company.

1. A possible stockholder's revolt to remove the mold and rot from the executive suite and boardroom.

2. Circuit City might just muddle along, molt, wither and shrivel like Cost Plus Inc. (CPWM-$3.53) and eventually fade away into the ethers.

3. A gallant white knight could canter to the rescue, shovel the stink and stench from the boardroom and executive suite then install a new management team.

4. The company can dissolve itself, sell various locations to competitors, pay off its lease obligations, its accounts payable and share the remaining cash with stockholders - which could be between $7 and $10 a share!

Because I think management has left its pancakes on the griddle too long, option No. 4 may be the most likely scenario. I suggest that you purchase another 1,000 shares at the current price and 31 days later sell the 1,000 you bought at $21 for a tax loss. The 1,000 shares at today's price are backed by a book value between $8 and $11, which could accrue to you in the next two years if the white knight has courage, a sharp sword and a good shield.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net.
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