Updated from 9:19 a.m.
customers keep bingeing on flat-screen televisions and iPods, but the company's unwillingness to improve its full-year outlook after a strong first quarter reflected a cautious approach to the current economic environment.
The No. 2 U.S. electronics chain reported earnings of $6.4 million, or 4 cents a share, for the quarter ended May 31. That marks a reversal from the loss of $13.1 million, or 7 cents a share, it logged in the same quarter last year, and the company's first profitable first quarter in three years.
The results beat analysts' average forecast for earnings of a penny a share, according to Thomson First Call. Still, Circuit City stuck with its previous profit targets for the year, which may account for why shares were recently trading down 28 cents to $29.20.
The company's conservatism meshed with a similar tone last week from rival
, which also reported stellar first-quarter numbers but
kept its guidance for the year intact amid concerns about the economy.
On a conference call with analysts Monday, Circuit City's president and chief executive, Phillip Schoonover, expressed concern about the effects of higher energy costs, rising interest rates and the slowing housing market on consumer spending. He said the company is monitoring macroeconomic trends so it could adjust to any changes that might be in store.
"At this time, our results show that we have not seen a material impact from any of these macro trends," Schoonover said.
Circuit City posted a 15.3% increase in first-quarter U.S. same-store sales, or sales at stores open at least a year. The retailer reported that both customer traffic and the monetary amount of its average sales ticket increased in the quarter over last year. Its same-store sales, or comps, also beat the first-quarter numbers posted by Best Buy, which logged a 4.6% increase.
Both companies fared well for the quarter and allayed concerns about whether consumers will continue to spend on discretionary items, like electronics, as the economic headwinds mount. They each benefited from what analysts call a "consumer conversion cycle" to digital flat-panel televisions. Circuit City said the category posted a triple-digit increase in sales comps, while digital cameras, PC hardware and portable music players, like
iPods, contributed double-digit gains.
"We believe that an improved in-store customer experience contributed to increases in average ticket and conversion rate," Circuit City said. "Our multi-channel marketing efforts drove improved traffic trends in all channels, and we saw an increase in Web-originated sales picked up in our stores. The merchandising and supply chain teams delivered domestic merchandise margin stability and improved customer encountered in-stock inventory levels. The work to improve results from our international segment is now underway."
Circuit City continues to be vindicated after it turned down buyout offers from several investment firms in recent years in order to pursue its turnaround plan. Last year, its shares rocketed 62%, and they're up 17% this year so far.
"We're making progress towards sustainable growth," said Schoonover.
Despite its strong sales and earnings growth, the retailer fell short on gross margins, which declined by 50 basis points due to increased financing costs that were partly related to higher interest rates. Still, selling expenses as a percentage of sales fell by 174 basis points.
"Investors will likely focus on the drop in gross margin, but cutting through the number, merchandise margins were flat and high-margin warranty sales declined as a percent of sales," wrote Credit Suisse First Boston analyst Gary Balter in a research note. "Adjusting for warranties would point to flat
gross margins in domestic results."
Balter's firm has an investment banking relationship with Circuit City.
For the year, Circuit City still expects to post top-line growth of 7% to 11%, off a same-store sales gain of 5% to 7%. The company targets operating margins of 2% to 2.4%. Analysts expect the company to earn $1.08 a share on $12.56 billion in sales this year.
Balter said Circuit City's conservatism is appropriate.
The first quarter is the lowest sales and earnings quarter
for Circuit City and represents less than 3% of
its projected bottom line," Balter said. "The more important data from this release are the trends, and between better sales, consistent gross margin and very good expenses leverage, those looked promising."