Updated from 2:08 p.m. EDT
Circuit City Group
explained last summer that it intended to focus on selling electronics and office supplies, abandoning appliances, the retailer promised that the new strategy ultimately would be more profitable.
Yet Friday, Circuit City acknowledged that even sales from products such as televisions, computers and cameras have weakened recently, prompting the company to warn of lower-than-expected results in the third quarter and raising doubts about future profits. Initially, Circuit City had estimated that sales of electronics and office goods would remain steady for the rest of the year.
Wall Street was unforgiving of the sales slowdown. Shares of Circuit City finished down $7.63, or 36%, at $13.81 after hitting a 52-week low of $12.25. At the same time, the company's rival,
, plunged $8.44, or 17%, at $40.13.
Costs related to Circuit City's departure from the appliance business were expected. The company in the third quarter, for instance, is likely taking charges of 14 cents a share for store remodeling, 6 cents a share for appliance markdowns and another 3 cents a share for sales disruption -- all of which will lead to a net loss.
Until now, however, the Richmond, Va.-based company had not given Wall Street much reason to be worried about a slowdown in the goods it chose to concentrate on. But the recent pace of sales in virtually every store category has slowed, according to the company, although high-technology gadgets, like digital televisions and camcorders, remain its strongest sellers.
"Our initial expectations for the third and fourth quarters assumed that comparable store sales growth in consumer electronics and home office products not affected by remodeling would remain at levels experienced in early summer," said Alan McCollough, Circuit City's chief executive.
Instead, the Circuit City business is now bracing for a loss of 5 cents to 10 cents a share in the third quarter, including the 23 cents of expenses incurred because of the appliance business exit. Before the costs, the business expects earnings of 13 cents to 18 cents a share, compared with a profit of 27 cents a share in its fiscal third quarter last year. The results are scheduled to be reported in mid-December.
Analysts had predicted a profit of 16 cents a share for the
Circuit City Group
, according to
First Call/Thomson Financial
. The Circuit City Group includes the
business as well as an interest in the
Broader economic issues, like higher oil prices and interest rates, are dampening consumer spending, hurting retailers in the process. But in a conference call with analysts Friday, McCollough would not simply blame the hostile climate.
"There's lots of supposition as to what's driving what," he said. "Lots of folks are making guesses, but all we know for sure is that over the last four weeks, we've seen a broad-based change.
"I wish we could predict what's going to happen," he added, "but we don't have an educated guess." Circuit City experienced strong growth in March and April, only to be followed by softening sales in May. Similarly, good numbers in June and July was offset by a weaker August.
Casualty of a Slowing Economy
John Glass, who tracks Circuit City for
Deutsche Banc Alex Brown
, said the company is suffering the same fate others face because of the slowing economy. But he added that at least part of its problem may be linked to the remodeling.
The disruption in the company's stores, he said, could discourage shoppers. "The question they cannot answer," he said, "is how much of sales is affected by lost foot traffic. They cannot quantify that."
In contrast to Friday's announcement, disappointing news delivered about a month ago came as no surprise. After warning Wall Street about lower-than-anticipated earnings, the company said second-quarter profits for its Circuit City business fell to 21 cents a share from 35 cents a share a year earlier.
"They are doing the right thing," in moving attention to electronics and office supplies, said Glass, whose firm rates the stock a market perform and has not done any underwriting for the company.
"But it's going to be a rough year and a half," he said, "and the question is whether investors will want to stay in it and be a part of the company while it's happening."
Despite the gloomy third-quarter forecast, the Circuit City business said it anticipates earnings of 79 cents a share in the fourth quarter, equal to last year's fourth-quarter results. However, one analyst in the call Friday questioned whether that would be possible.