Circuit City Discloses Bank Results on Its Bottom Line

The company faces increasing pressure to break out its financing unit's results.

Author:: Rebecca Byrne
Publish date:: Apr 2, 2002 3:46 PM EST

Updated from 2:30 p.m. EST

Circuit City

is coming under increased pressure to disclose the results of its finance operations, particularly after the electronics retailer said its first-quarter loss would reflect a reduced contribution from the unit.

"This is something that is happening a lot with retailers; they're becoming more of a financing operation than a retailer, and it should change the way investors think about these companies," noted Mike Porter, an analyst at Morningstar.

Richmond, Va.-based Circuit City said first-quarter losses would be in the mid- to high-single digit range, reflecting an estimated reduction in the contribution from its First North American Bank operation. The company cited increases in funding costs and expenses associated with a planned new securitization agreement. Circuit City bundles and sells receivables generated by its credit card business.

According to a spokeswoman, two of the firm's asset-backed securities have matured and have been paid off and the company is now looking to replace them. As of the end of November, the principle balance of securitized assets stood at $2.57 billion, she noted.

Circuit City does not disclose how much the bank's finance operations contribute to earnings; instead, the results are netted against selling, general and administrative costs.

"It makes people inclined to think that maybe their legitimate retail operations are not as profitable as the retailer suggests," noted Marie Driscoll, an analyst at Argus Research.

CEO Alan McCollough said while the results of the finance operations have not been broken out, they are "material enough that we made note of it." He said he anticipates "a relatively stable contribution" from the unit for the full year, adding that it should be roughly equivalent to the contribution made last year.

Analysts believe Circuit City was helped by 11

Federal Reserve

rate cuts last year, which generated more favorable yield spreads. But some say that in a rising interest rate environment, it may be difficult for the firm to maintain those spreads. "It's hard to quantify though," noted Scott Ciccarelli, an analyst at Gerard Klauer & Mattison.

"I think they should disclose more and this is a question that is going to continue to dog them until they do," he said. "But I also think they have their hands full with the remodeling and Car Max."

Circuit City is currently in the process of remodeling its stores, which McCollough said would eat into earnings by about 18 cents this year. On a conference call, he projected a profit of 75 cents to 85 cents a share in 2002 before the remodeling costs. Including those costs, he expects to see earnings of 57 to 67 cents a share.

"It's too early to say what the results are but while this remodeling process is going on there is some degree of execution risk so I'm still cautious," noted David Campbell, an analyst at Davenport & Co.

Aside from the remodeling effort, the company is also attempting to spin off its used-car subsidiary Car Max by the end of summer.

Circuit City Stores, the parent of Circuit City Group and Car Max, consolidates 64% of CarMax's earnings and revenues into Circuit City Group's income statement. Car Max added 6 cents a share to Circuit City Group's bottom line in the fourth quarter.

Circuit City said fourth quarter earnings per share rose 49% to 73 cents a share on $3.39 billion in sales and a 6% increase in same-store sales. The company had forecast earnings of 71 cents to 74 cents a share while analysts' polled by Thomson Financial/First Call estimated a 73-cent profit.

The results were aided by strong demand for fast-selling items like big-screen televisions and DVD players although costs associated with the exit from the appliance business, remodels and relocations reduced earnings by 3 cents.

Although the firm predicted a first quarter loss, analysts were not surprised by the news and noted that the projection excludes the effects of Car Max. Thomson Financial/First Call estimates a 3-cent profit for the quarter including Car Max.

The company also said it expects same-store sales to rise in the high-single digits in the first and second quarters and to rise in the mid-single digits in the second half. That news sent shares of Circuit City, which have fallen 27% this year, were up 4% to 18.95 Tuesday.