Revamp Plan Lights Up Circuit City

Shares jump after the retailer says it will close stores and change its merchandising structure.
Author:
Publish date:

Circuit City

(CC) - Get Report

said Thursday that it plans to close stores and revamp its merchandising management structure in response to recent margin pressures tied to flat-screen TVs.

Shares of the electronics retailer were climbing $1.33, or 6.4%, to $21.93 on the news.

The Richmond, Va.-based company said it will close seven stores in the U.S., a distribution plant in Louisville, Ken., and 62 underperforming stores in Canada.

"Because of the intensified gross margin pressures that we saw in the third quarter within the flat panel television category, we launched efforts to accelerate the timing of planned initiatives to improve sales and gross margin, as well as improve the efficiency of our expense structure," said Philip Schoonover, chairman, president and CEO, in a statement.

Circuit City said the plan will cost roughly $85 million to $105 million, with most of the expenses being incurred in the fourth quarter, ending this month.

"This is really good news," says Richard Hastings, senior retail sector analyst with Smyth-Bernard Sands. "It's very responsible and a really positive indication for future earnings. When you have severe product deflation, it doesn't take long before you have too many stores. You can only cut inventory so much. They don't have any appliances so there's no place else to turn."

Flat-screen TVs have become a huge driver of sales for Circuit City and its larger rival,

Best Buy

(BBY) - Get Report

, but price competition from discounters such as

Wal-Mart

(WMT) - Get Report

have forced them to sell the TVs for less than planned. In December, both Circuit City and Best Buy reported weaker-than-expected fiscal third-quarter results, citing the margin pressure.

Hastings also said more retailers are closing stores in response to consumers who preview and buy products online.

"It's the changing nature of shopping behavior," he says.

Circuit City also said that Chief Merchandising Officer Douglas Moore has left the company. The retailer said David L. Matthews, who had been in charge of Circuit City's direct marketing, will lead merchandising, marketing, services and supply chain operations.

The company said the management moves will help improve execution and accountability, better align all retail channels and improve the coordination between merchandising and marketing.

"To increase speed and limit bureaucracy, we have restructured key business teams and cross-functional structures that are responsible for the day-to-day operations of the company as well as support our longer-term strategic direction," Schoonover said.