| Warming Up |
Electronics stocks' yearlong rise
The strong holiday season that sparked a rally in the electronics retailers seems like eons ago now. A Friday morning earnings warning from lagging stereo seller Circuit City ( CC) punished its stock, sending it down 28% in heavy trading, and spurred a 6% selloff in rival Best Buy ( BBY) as well. Circuit City's plunge came a little more than a month after the company reported a solid holiday season and raised its earnings guidance.
Despite Best Buy's slide, analysts were hesitant to say that Circuit City's woes would extend to the industry as a whole, noting that Best Buy has dependably outperformed Circuit City in recent years. "I think it's probably worse at Circuit City than at other places," says Peter Benedict, an analyst at CIBC World Markets. (He has a neutral rating on the stock, and his firm doesn't have an investment banking relationship with the company.) Still, Best Buy, which is widely considered the strongest franchise in the industry, slid $3.91, or 5.5%, to $66.74 around midday. The fall came despite the fact that the company hasn't backed off its guidance, which it raised in early January. "Best Buy has not updated its guidance, and we cannot say anything until we release our earnings March 7th," said Jim McManus, Best Buy's spokesman. RadioShack ( RSH), a lesser player in the sector, fell 21 cents to $26.79 a day after it cut its own 2002 guidance.
Circuit City has been in turnaround mode for some time, and its sales have been dampened by ongoing remodeling efforts that have resulted in inventory shortages, analysts say. Offering the final word on a
debate that has recently rocked the stock , Circuit City confirmed Friday that store-remodeling costs would weigh on earnings in coming years. Notably, the company said it would count those costs against operating earnings, rather than taking a one-time charge, as some observers had expected. Remodeling costs could reduce annual earnings by as much as 18 cents to 20 cents a share through 2005, say analysts. "That's obviously something that no one modeled," says Todd Kuhrt, who covers the company for Midwest Research. "It's not a one-time thing that you can exclude." (Kuhrt has a neutral rating on the stock, and his firm doesn't have an investment banking business.) Circuit City shares were off $6.52, or 28%, at $17.07 about midday Friday. Circuit City stock has lost more than 40% of its value in the past week as the remodeling argument has consumed analysts and investors. The company's core consumer electronics business will be weaker than many analysts expected, Circuit City said in a Friday morning press release. Circuit City expects its electronics operations to earn 68 cents to 71 cents a share in the fourth quarter; the company's CarMax ( KMX) operation will contribute 5 cents to 6 cents, bringing overall fourth-quarter earnings to 70 cents to 74 cents, including $10 million in lease termination costs. Analysts, on average, had expected earnings of 75 cents a share in the fourth quarter, according to Thomson Financial/First Call. Comparable-store sales, which measure activity in shops open at least a year, will grow in the mid-single-digits percentagewise for the quarter. "We had anticipated that comparable-store sales growth would moderate from December levels, especially given inventory shortages in key areas as we exited the holiday period and the expected seasonal shift in product category volumes," CEO W. Alan McCollough said in a statement. For the full year, the company projected earnings of 89 cents to 93 cents a share, compared with a consensus estimate of 93 cents. "The core consumer electronics business, exclusive of remodeling, will be much lower than expected," says Benedict, the analyst at CIBC World Markets. Stripping out the contribution from CarMax -- which the company said Friday it was spinning off into a separate publicly traded company -- Benedict had expected the electronics business to earn 73 cents a share next year. Now he is modeling 57 cents to 67 cents a share. Shares in the company have sold off in recent trading sessions on speculation the company would announce rising remodeling costs. When Circuit City exited the appliance business in 2000, it announced a three-year plan to remodel all its stores. But Friday it said that the remodeling job would last through 2005. Sales of the Richmond, Va.-based company have been hampered by shortages in key products, such as big screen televisions and wireless phones, and the remodeling will focus on making more space available for those items, the company said.