Circuit City: Price Check, Please

Sloppy execution and sloppy merchandising won't kill you -- until the competition shows with something better (as we saw with Home Depot (HD Quote)and Lowe's (LOW Quote). But Circuit City is in a huge competitive tug of war. Worse than that it sits in no-man's land between the well-stocked and -serviced Best Buy and price-competitive Wal-Mart (WMT Quote) and convenience-competitive Radio Shack (RSH Quote). This is the bigger strategic problem, and poor execution makes it worse.

• Management decisions. I spent a lot of time on the last, so I'll make this short. Circuit City's plan to drop pay levels for 3,400 employees back in March was a ridiculous idea. When you're selling a commodity, employees and the service they provide is a big differentiator. It's your customer interface. To cut pay to save a few bucks sends a horrible message -- even to those who didn't take the pay cut.
• Deteriorating financial performances. Resulting from all of the above, financials, and especially income statement performance are suffering. Gross and net margins are down and poor compared to competitors. Outside of Firedog (more below), there isn't much else on the horizon to improve margins.

One must also consider the positives:

• Balance sheet strength.While the income statement isn't so great, the company does have a strong balance sheet and especially a strong cash equivalent position of some $650 million with almost no long-term debt. This leads to:
• Stock buyback program.Circuit City announced a $1.2 billion buyback -- huge for a company with a $2.6 billion market capitalization overall. They've completed some 60 million shares at $966 million -- about 30% of outstanding shares. So they're retiring shares "cheap" and executing their buyback according to plan, which is good for remaining shareholders.
• Firedog. The 2006 "Firedog" implementation is a late but strategically on-target effort to try to add some service value in line with Best Buy's "Geek Squad."

At the end of the day, it seems like Circuit City's best prospects lie in some form of takeover. It could be a private-equity firm looking for cheap in-place assets and a hoard of cash to work with -- and extra time since they won't be in shareholders' sights.

Or it could be a larger outside player like Mexico's Carlos Slim, who bought CompUSA in 2000 and reportedly already made an offer for Circuit City in 2003. But Mr. Slim has had slim success with CompUSA, with a recent initiative to close more than half of its U.S. stores, for reasons not unrelated to Circuit City's maladies -- they sell commodity products with pretty lousy store execution that consumers can easily buy somewhere else. For my summer bargains, I think I'll look elsewhere.