The company's decision to lay off more than 3,000 employees earlier this year has given the electronics seller a less-experienced staff still learning how to move product off the floor. As a result, customers have walked away from the stores empty-handed, causing sales and profits to plunge.
At the same time, Circuit City's main rival,
, continues to steal away market share.
Shares of Circuit City were tumbling 17% Thursday after the company posted a second-quarter loss that was much worse than Wall Street's expectation amid these issues. In addition, the company projected that it will be in the red for the entire year.
For the second quarter ended Aug. 31, Circuit City swung to a loss of $62.8 million, or 38 cents a share, from a year-earlier profit of $10 million, or 6 cents a share.
Sales fell to $2.64 billion from $2.82 billion. Same-store sales, or sales at stores open at least a year, tumbled 7.9%.
Analysts polled by Thomson Financial anticipated a loss of 12 cents a share and sales of $2.78 billion.
In contrast, Best Buy, which reported its
second-quarter results on Tuesday, posted a 9% increase in profit and a 15% spike in sales.
"It wasn't a particular category where Circuit City underperformed," says Richard Weinhart, an analyst for BMO Capital Markets. "It looks like it's across the board."
Indeed, same-store sales in categories like video and audio declined by double-digit percentages, including a fall-off in sales of projection and tube televisions, home audio and digital satellite-radio products and music software.
In addition to the sales drop, the bottom line was hit by a 313-basis-point decline in gross margins. Circuit City attributed the drop to a decrease in sales of extended warranty products, a greater mix of PC hardware sales and lower margins for hardware and televisions.
Sales of extended warranties in the domestic segment slipped to $67 million from $107.7 million a year earlier. On a conference call, Circuit City said that store-level employees were distracted from pushing the warranties on customers because they were too busy going through training.
In March, Circuit City announced that it would lay off 3,400 employees and replace them with lower-paid workers. That meant letting go of the company's most experienced workers, some of whom had worked at stores for more than 10 years.
Danny Clark, Circuit City's president of retail stores, pointed out that the company has been going through a complete restructuring of its management and labor model, resulting in 40,000 employees trying to learn a new job.
He added that the impact was particularly felt in June and July, with August showing better results in store sales. He said it usually takes about four to eight weeks for the changes to settle in at each store.
The company acknowledged on Thursday that its real estate portfolio has also hurt performance, with many of its stores having aged considerably. Philip Schoonover, chairman, president and chief executive, said the company has identified more than 400 stores considered to be inefficient and in the wrong parts of town.
Chief Financial Officer Bruce Besanko, who joined the company in July, said that Circuit City is now focusing its efforts on relocating stores into more heavily trafficked locations.
For the year, the company expects a full-year loss from continuing operations. Analysts, on average, had expected Circuit City to report a profit of 37 cents a share for the year, according to Thomson Financial.
Schoonover said the changes that Circuit City started implementing in the first half of the year may have hurt it in the short term, but he expects to see positive results in the long term.
"We'll take our lumps in the first half and be ready for the all-important holiday season," he said.
The question remains whether the changes will actually lead to improvement. Weinhart says that although the company has made some necessary fixes, like upgrading its operating and IT systems, it is unclear what impact they will ultimately have, especially with Best Buy also making system improvements.
Circuit City would be lucky to stave off market share gains from Best Buy, but I don't see them dominating any specific category," Weinhart says.
Shares of Circuit City recently were down $1.83 to $8.75, sliding well past the 52-week low of $9.43 set Sept. 10. The shares traded at a 52-week high of $29.31 last October.