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Circuit City NO LONGER ON COMMISSION

Old 02-06-03, 10:49 PM
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Circuit City NO LONGER ON COMMISSION

2003 /PRNewswire-FirstCall via COMTEX/ --

* Complete Conversion to Hourly Pay Structure for Sales Associates * Store Relocation and Remodeling Strategy Objective: Information-Rich, Easy-to-Browse and Shop Stores Objective: Information-Rich, Easy-to-Browse and Shop Stores Announcement Includes Anticipated Impacts on Workforce and Earnings, With Fourth Quarter Fiscal Year 2003 Earnings Expectation

Circuit City Stores, Inc. (NYSE: CC) today announced a number of initiatives designed to create a simpler more efficient company with a singular focus on meeting the shopping preferences of consumers in America's dynamic retail marketplace.
"Over the past three years, we have made significant changes in the way we market consumer electronics in our stores and we intend to continue testing new ways to address an ever-changing consumer," said W. Alan McCollough, chairman, chief executive officer and president of Circuit City Stores, Inc. "Our willingness to change has enabled us to introduce consumers to the new digital products that now dominate our retail segment, broaden our product offering and adapt to consumer use of the Internet for product information.

"These changes, along with a more creative and targeted marketing program, helped produce year-over-year increases in foot traffic for 12 consecutive months," said McCollough. "In December, with the softening economy, we saw traffic fall slightly below the prior year levels. But, we must do more, both for our customers and our shareholders.

"Our retail segment also continues its own evolution and we must participate," said McCollough. "Digital technology is allowing for faster product introductions and more rapid price declines, continued increases in consumer familiarity with products and a more diverse set of competitors. And so, we will undertake the following initiatives, some of which represent new and dramatic changes and others of which represent continuing refinements of the changes we've made over the past three years."

Change in Compensation. "Effective tomorrow, we are converting to a single hourly pay structure in all our stores," said McCollough. "By converting to a single pay structure, we believe that we can simplify store operations, better serve our customers with a store team unified around that single objective and reduce operating costs. As we have introduced more self- serve packaged-goods-type products in our stores, we have gradually moved to a mix of hourly and commissioned store associates. Our experience has proven that, with the comprehensive training now available through our state-of-the- art online training system, hourly associates can deliver the high level of product knowledge that Circuit City customers expect while also taking on a broader range of customer service responsibilities.

"When customers arrive at our store, they want low prices, the opportunity to browse and ask additional questions about more complex technologies or to purchase and sign up for services," said McCollough. "Many of them have already surfed the Internet, including circuitcity.com, before they come to the store. Our unique online, in-store training programs; an information-rich web site, industry-leading consumer policies and a lower cost structure will help us meet these consumer needs while also serving the interests of our shareholders."

Simplification of the operating model will result in a net reduction in sales staffing of approximately 1,800 positions in Circuit City's 626 stores across the country, or an average reduction of three associates per store. The company will convert the majority of its commission-based sales counselor positions to the position of product specialist. Approximately 3,900 sales counselor positions will not be converted, and the company expects to incur a one-time severance charge of approximately $16 million. The net reduction of 1,800 reflects the company's plans to hire additional hourly product specialists as necessary to ensure that customers receive the type of assistance they need, whether it is product information or simply help completing a transaction. In more than 400 stores, Circuit City will add a third sales manager, whose primary job is to ensure that customers receive exceptional customer service, particularly in the video and audio entertainment products.

For the fiscal year ending February 28, 2003, the company expects that the compensation change will reduce pretax earnings by approximately $40 million, including the impact of severance, sales disruption and other one-time costs. The company estimates pretax payroll savings of approximately $130 million in fiscal 2004. These savings will be reflected as a reduction in selling, general and administrative expenses.

Other Workforce Reductions. "Opportunities to maximize efficiency exist in other areas of our operations as well," said McCollough. "For example, decreases in average retail prices and the constant introduction of new features and products have reduced the volume for our product repair centers. Over the past four years, we have reduced the total number of repair centers from 37 to 17. That process will continue in the upcoming fiscal year with the closure of 10 additional locations. As a result, we expect to reduce the service center workforce by approximately 200 associates." Estimated lease termination costs related to these closures will be recorded in cost of goods sold at the time of closure. Severance charges will be recorded in cost of goods sold in fiscal 2003 and fiscal 2004, but are not expected to be material.

"Over the past two years, we have gradually reduced corporate overhead, and this effort will continue as we seek to simplify the organization and reduce costs," said McCollough. "Decisions related to workforce reductions are always difficult to make. However, for organizations to thrive, we must understand the external environment and adapt our internal structures to the given conditions." When alternative positions with the company are not available, impacted associates throughout the organization are offered separation packages including severance to assist them in their career transition.

New Store Designs. "Over the last several years, we have tested various remodel and relocation strategies and introduced new store designs," said McCollough. "Our design changes have allowed us to keep pace with evolving consumer preferences and new product introductions. We have moved products that have now become take-with items out of the warehouse onto the sales floor, where they are easily accessible to customers, and we have created exciting displays for new technology, particularly digital televisions. These changes enable us to continue offering a unique merchandise assortment that extends from entry-level televisions or DVD players up to the newest digital LCD and plasma technologies.

Remodels: "We have limited our analysis of remodel and relocation performance to stores that have not been impacted by cannibalization or competitive entries and to those stores with a suitable ramp-up period," said McCollough. "After an initial four-month ramp up period, our full-store Chicago-style remodels that were completed last fiscal year have produced an average sales lift that is approximately 14 percentage points higher than the remainder of the store base and an estimated internal rate of return in the mid teens. This fiscal year, we introduced a remodeled video department to 301 stores, including 79 stores that had been remodeled, relocated or constructed as new over the past three years. The video remodel was the first step in a plan to completely remodel a significant number of stores. Since completion, video sales growth in stores with the remodeled video department has averaged approximately 3 percentage points higher than in the rest of the chain. Based on the performance of our Chicago-style remodels and the early video results, we plan to complete the next phase of remodeling in approximately 200 stores in fiscal 2004."

"By continuing our remodeling program, we can adapt more locations to the changing buying patterns of today's consumer and support our new store operating model," said Kim D. Maguire, executive vice president of merchandising. "The fixtures added to these stores will not only put more product out on the sales floor, but also give us greater flexibility to move merchandise around the store as new products and technologies are introduced." The company expects to conduct the majority of this remodeling phase from June through September, with individual stores taking approximately three weeks to complete.

Relocations: "Although we have been pleased by the results from remodels, we have been especially pleased with the performance of our relocated stores," said McCollough. "The nine relocations that have been open at least one year have produced an average sales lift that is approximately 30 percentage points higher than the remainder of the store base and an estimated internal rate of return of approximately 20 percent. Given the stronger market share growth and returns, we now anticipate accelerating our relocation program."

"One hundred stores, or approximately 16 percent of our store base, have been completely remodeled, relocated or constructed as a new store entry over the past three years," said John W. Froman, executive vice president and chief operating officer. "In fiscal 2003, we have examined our remaining store base to identify the key characteristics of a successful location. This information is being used to help us determine which stores are most suitable for relocations and to select the best real estate for both new and relocating stores. As we seek new store sites, our focus will again be on the customer. We will move stores to more convenient shopping locations and incorporate store design features that give consumer electronics customers the most contemporary shopping experience available in the marketplace. We have continued testing more flexible fixtures and merchandise presentations that allow us to adapt our stores as consumer tastes evolve. Successful tests will be incorporated into new store designs.

"We anticipate relocating approximately 18 to 22 stores, fully remodeling approximately five stores, completing the next phase of remodeling in approximately 200 stores and opening approximately eight new stores in fiscal 2004," said Froman. "Beyond fiscal 2004, we expect to accelerate the relocation pace starting with a target of 50 relocations, depending upon real estate availability, in fiscal 2005." No stores are slated for closure in fiscal 2004.

Net cash expenditures and non-cash expenses related to remodeling and relocations are expected to total approximately $150 million in fiscal 2004. The company anticipates that approximately $80 million of the fiscal 2004 amount will be capitalized and approximately $70 million will be expensed, reducing fiscal 2004 earnings per share by an estimated 21 cents. The estimated expense amount includes approximately $50 million of non-cash expenses.

January Sales and Fourth Quarter Fiscal 2003 Outlook. In addition to the above initiatives, Circuit City announced today that comparable store sales for the month ended January 31, 2003, declined 2 percent from the same period last year. "Despite the overall sales softness, we continued to see strength in digital television as well as movie and video game software sales," said McCollough. "Sales trends in DirecTV and wireless phones remained weak.

"Assuming no change in trends in our retail business or our finance operations from the January month-end levels, we would anticipate fourth quarter earnings from continuing operations in the range of 21 cents per share to 26 cents per share," said McCollough. "The estimated earnings per share range assumes that the finance operation breaks even or produces a small pretax profit, reflecting reductions in net portfolio yield and a decrease in the fair value of the interest-only strips. Excluding estimated remodel and relocation expenses of 2 cents per share and the estimated one-time costs of 12 cents per share, including severance charges, related to the change in compensation structure, we would expect fourth quarter earnings from continuing operations in the range of 35 cents per share to 40 cents per share.

"We continue to finalize our fiscal 2004 budgets," said McCollough. "However, given the uncertain economic and consumer spending climate as well as our dependence on holiday 2004 sales volumes, we do not anticipate providing a fiscal 2004 earnings projection early in the year. Our focus as a management team is on the customer service initiatives that we believe will drive sales volumes and cost reduction initiatives that, in conjunction with leverage from sales volume, can help drive earnings growth.

"We expect in fiscal 2004 to add to the successes we have already achieved," said McCollough. "Beyond fiscal 2004, we expect to continue incurring costs, especially for relocations and remodels, but anticipate that some of these costs will be offset by the sales benefit of our customer service initiatives and ongoing cost savings, particularly from the change in compensation structure."

Stock Buyback. Circuit City announced in early January that the company's board of directors had authorized the repurchase of up to $200 million of the company's common stock. At that time, McCollough said that both the board and senior management believed that, given current market conditions, repurchasing the company's shares is a prudent use of available cash resources and an attractive means to enhance shareholder value. Today, McCollough added that the share repurchase reflects confidence in the new initiatives and strategies announced today. "We are fortunate that our financial strength positions us to make these changes, adapting to consumer demands and changing consumer directions even in a tough economic climate," said McCollough. As of today, the company has not repurchased any shares. All per share calculations in this release are based on shares outstanding prior to any share repurchases

Investor Conference Call Information. Circuit City will host a conference call for investors today, February 5, 2003, at 11:00 a.m. ET. Domestic investors may access the call at 1-800-553-0288 (passcode: Circuit City), and international investors may access the call at 1-612-332-0725 (passcode: Circuit City). A live Web cast of the conference call will be available on the company's investor information home page at http://investor.circuitcity.com or at http://www.streetevents.com .

A replay of the call will be available beginning at approximately 3:00 p.m. ET today and will run through midnight, February 16, 2003. Domestic investors may access the recording at 1-800-475-6701, and international investors at 1-320-365-3844. The access code for the replay is 673072. A replay of the call also will be available on the Circuit City investor information home page or at http://www.streetevents.com .

About Circuit City Stores, Inc. Circuit City is a leading national retailer of brand-name consumer electronics, personal computers and entertainment software. With headquarters in Richmond, Va., Circuit City Stores, Inc. operates 611 Circuit City Superstores and 15 mall-based Circuit City Express stores, giving it more locations in more markets than any other consumer electronics specialty retailer. For more information, access the company's Web site at http://www.circuitcity.com .

Forward-Looking Statements. This release contains forward-looking statements, which are subject to risks and uncertainties. Forward-looking statements made in this release assume the successful implementation of the customer service initiatives announced today by the company. Additional discussion of factors that could cause actual results to differ materially from management's projections, forecasts, estimates and expectations is contained in the Circuit City Stores, Inc. Securities and Exchange Commission filings.


SOURCE Circuit City Stores, Inc.

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