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Circuit City Plans Overhaul, Job Cuts

The moves are part of the company's drive to boost sales and profitability.

Updated from 11:08 a.m. EST

Circuit City is trying to jumpstart its business, but the effort will be costly.

The struggling electronics retailer on Wednesday announced that it will cease paying commissions to its sales associates and lay off 3,900commissioned employees. The company plans to take a charge of $40 million, or 12 cents per share, in the fourth quarter, which ends next month, to cover the cost of severance and lost sales due to the changes.

But that's not all that the company is doing. Circuit City also plans to cut corporate staff, close 10 repair centers and step up a program ofremodeling and relocating its stores. The store renovation program alone will knock another 2 cents per share off the company's fourth-quarterearnings and will cost some $150 million in its fiscal 2004, reducing itsannual earnings by about 21 cents per share, the company said.

Circuit City expects the changes to boost sales while controlling costs,said Alan McCollough, the company's chief executive officer, during aconference call with analysts.

"We think these are the right changes for our stores, for our companyand for you, our shareholders," McCollough said.

The company obviously felt a need to do something to improve itsresults. As part of the announcement, the company warned that itsfourth-quarter results would not meet Wall Street expectations.

The company expects that its fourth-quarter profit from continuingoperations will be between 21 cents and 26 cents per share. Excluding therestructuring and renovating charges, the company expects to postfourth-quarter earnings from continuing operations of between 35 cents to 40cents per share.

Wall Street analysts surveyed by First Call/Thompson Financial wereexpecting the company to post earnings of 47 cents a share.

Meanwhile, in a possibly troubling sign, the company declined to projectits full-year 2004 results. Until Wednesday, the company had declined toproject its fourth-quarter results.

The disappointing bottom line reflects top line problems for CircuitCity. The company's same-store sales last month fell 2% compared withlast January. Meanwhile, in December, the company's same-store sales fell 6%and its overall sales dropped 4% compared with December 2001.

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Although Circuit City beat Wall Street expectations with itsthird-quarter results, the company posted a 10-cent per share loss afterposting a 4-cent per share profit in the third-quarter of 2001. Hurting thebottom line was a slump in its gross margins and a fall off in its financingbusiness.

The financing business is likely to worsen, management warned Wednesday.The company's earnings projections assume that the financing business willbreak even or post a small profit.

In contrast, Circuit City earned $8.3 million before taxes from itsfinancing operations in the third quarter last year. And even that was downfrom the $17.8 million it earned from its financing business in the sameperiod in 2001.

While the renovations and restructuring may not help the financingbusiness, Circuit City does expect them to shore up its retail operations.The elimination of commissions and commissioned employees will result inpretax savings of $130 million, the company said. The company plans tolay off another 200 employees as a result of the repair center closures.

And the company said its already completed renovations have alreadyboosted sales. Stores that Circuit City has completely renovated have seensales grow 14 percentage points faster than its other stores, the companysaid. Meanwhile, an effort to remodel the video departments in more than 300of its stores, boosted video sales in those stores 3 percentage pointshigher than non-remodeled stores, Circuit City said.

Based on those results, the company will expand its renovation program.The Richmond, Virg.-based retailer plans to relocate 18 to 22 stores in its2004 fiscal year and about 50 in its 2005 fiscal year. The company plans toremodel some 200 stores in fiscal 2004.

The next phase of the remodeling will involve installing new fixtures inthe Circuit City stores to put more products out on the storeroom floors,McCollough said. Although the stores that have been completely rebuilt orrelocated have performed better than those that have only had somedepartments remodeled, Circuit City is trying to keep a lid on costs, hesaid.

Although the company plans to cut many of its commissioned staff, itplans to convert most of them into hourly employees, Circuit City said.Meanwhile, the company plans to hire 2,100 new hourly workers to replace thecommissioned employees that are being laid off. The company also plans toadd a third sales manager at more than 400 of its 626 stores.

Despite the reduction in staff and the elimination of commissions,McCollough said the company doesn't forsee having increased turnover anddoesn't expect to have any problems hiring replacement workers.

"This should not be lengthy process," he said. "There are a lot of highquality folks available."

In recent trading, Circuit City shares fell 75.1 cents, or 11.4%, to$5.84.