Circuit City Plans New Cost Cuts

The retailer expects to slash 3,400 jobs. Shares climb.
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Updated from 11:02 a.m. EDT

Circuit City

(CC) - Get Report

announced a broad swath of cost-cutting measures Wednesday, including slashing 3,400 jobs and exploring the sale of its Canadian unit.

The electronics retailer also lowered its sales forecast for the year. Still, shares of the company were up 40 cents, or 2.1%, to $19.28.

"We are taking a number of aggressive actions to improve our cost and expense structure, which will better position us for improved and sustainable returns in today's marketplace," Philip Schoonover, chairman, president and CEO, said in a statement.

The moves comes in an increasingly tough competitive environment for electronics retailers, which has already led to drastic cutbacks at Circuit City rivals CompUSA and

RadioShack

(RSH)

.

Circuit City's 3,400 job cuts are focused on workers who were paid "well above the market-based salary range for their role," the company said. The retailer plans to hire new workers in the positions and pay them at lower wages.

In addition, Circuit City will cut about 130 corporate jobs as a result of a deal with

IBM

(IBM) - Get Report

to outsource its information technology infrastructure. The seven-year, $775 million contract with IBM is expected to reduce Circuit City's IT infrastructure costs by more than 16%.

The company said about 50 corporate associates will move over to jobs with IBM and remain onsite.

Circuit City also said it is exploring strategic alternatives for its InterTAN Canadian retailing business, including the potential sale of the operation. It has hired Goldman Sachs to act as an adviser.

Last month, Circuit City said it will close seven stores in the U.S., a distribution plant in Louisville, Ky., and 62 underperforming stores in Canada. Circuit City said Wednesday that its international segment closed 55 stores in February and it expects to close about 10 additional stores in the first half of fiscal 2008.

For the fourth quarter, which the company will report on April 4, Circuit City plans to record pretax charges of $92 million in goodwill impairment, $31 million related to store and other facility closings, and $21 million tied to other restructuring activities.

Circuit City now expects domestic same-store sales for fiscal 2007 to increase 6%, down from a prior projection 7% to 8%. The company expects consolidated net sales growth of 8%, down from a range of 9% to 10%.

Circuit City's profits over the past year have been hurt by price wars with rival

Best Buy

(BBY) - Get Report

and discounters like

Wal-Mart

(WMT) - Get Report

and

Costco

(COST) - Get Report

.

"

Circuit City was a big leader in the segment," Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates. "Then they took their eye off the ball."

Davidowitz notes that industry leader Best Buy is accentuating service, with such offerings as its Geek Squad, to win over customers.

"They're clearly the second banana to Best Buy," says Scott Rothbort, founder of LakeView Asset Management and a contributor to

StreetInsight

. "Best Buy has a much bigger assortment and probably has a much better educated sales staff."

As well, the analysts say

Apple

(AAPL) - Get Report

is coming on strong with its retail stores. The Mac and iPod giant has roughly 175 retail stores across the country.

"Yes, the sector is in trouble," Davidowitz said, "but there is a powerhouse company that isn't much talked about and it's called Apple. They're one of the exciting retailers in the U.S. right now."

Going forward, Rothbort says the retail sector will have fewer players solely devoted to electronics, while Wal-Mart and Costco create more space for these products.

"We're in for big changes," Davidowitz said. "It's harder to play in this

electronics market, even though it's one of the fastest-growing categories."