Adding to uncertainty created by the slowing economy is the possibility of a buyout for the Richmond-based retailer, which has seen only one profitable quarter since mid-2007.
The company says many of its recent financial problems result from actions intended to improve its long-term stability. But analysts say a lot remains to be done if Circuit City is to endure slowing consumer spending and challenge industry-leading Best Buy Co. Inc.
"They're in a tough position because it is going to take them several quarters to kind of work through some of the changes that they've been making," BMO Capital Markets analyst Rick Weinhart said in an interview with The Associated Press. "You've got to be looking at this company and trying to see something that's not there today in order to be buying it."
Chief Executive Philip J. Schoonover agrees.
"Fiscal year 2009 will be a year of very hard work and focus on execution," he told investors last week. "We expect to improve our financial performance, compared with fiscal year 2008, and set the stage to return to sustainable profitability in the future."
While the company is confident the multiyear plan will work, Weinhart said the management team was guilty of trying to do too much too fast.
"You're walking a fine line between doing too much and not doing enough and falling behind Best Buy," Weinhart said.
Last week, Circuit City said its loss widened in the first quarter because sales fell more than 11 percent at established stores. It reported a loss of $164.8 million in the three months ended May 31 compared with a loss of $54.6 million a year earlier.
Rival Minnesota-based Best Buy reported a 7 percent drop first-quarter profits last week, saying net income dipped to $179 million from $192 million.
Circuit City also expects a bigger loss in the second quarter than analysts are predicting.
But Schoonover said he is encouraged by improvements Circuit City is seeing in many of its operating performance measures. The company is also suspending its dividend to keep capital available for its turnaround.
"We're on the right track, with the right strategies, the right talent and improved processes to execute a successful turnaround," Schoonover said.
Last month, Circuit City gave in to pressure from activist shareholders, essentially putting itself up for sale and agreeing to nominate dissident directors to its board.
The company hired Goldman Sachs & Co. to explore strategic alternatives — including a sale — to boost shareholder value. But Schoonover said the board has not yet determined a plan.
The company also announced it would open its books to Blockbuster Inc. after Blockbuster's largest shareholder, Carl Icahn, eased concerns over whether the video-rental chain could finance a purchase of Circuit City by saying he was prepared to buy the company if all else fails.
Dallas-based Blockbuster is in the process of conducting due diligence in its takeover bid of just over $1 billion; it plans to create a chain that would sell electronic gadgets and rent movies and games.
"It's our hope that the due diligence will validate the strengths we see in the possible combination," Blockbuster spokeswoman Karen Raskopf said. "But if it doesn't we'll move on and focus on our core business."
Circuit City filed papers last week with the Securities and Exchange Commission indicating it may issue stock or debt to gain "greater flexibility to respond to strategic opportunities as they arise."
Soleil Securities Group analyst Scott Tilghman said in a recent note to investors that Circuit City has several alternatives to choose from besides simply "staying the course."
"The company could be sold outright, it could enter into some strategic relationships, it could pare off noncore assets, and it can become more aggressive in rationalizing its store base," he wrote. "In each case, we believe these opportunities would benefit both Circuit City fundamentals and shareholders."
Investors like Wattles Capital Management, which holds a 6.5 percent stake in Circuit City had pressured the company.
Circuit City defused a proxy battle with Wattles by agreeing to put three of its nominees up for election at the annual meeting. The company is asking shareholders to expand its 12-member board by three seats to accommodate the Wattles nominees.
Mark J. Wattles, owner of the 32-store Ultimate Electronics chain, had criticized the company's turnaround effort and demanded the ouster of Schoonover and the entire board. The new directors may exert some of the same pressure, Weinhart said.
"It's going to put a lot of pressure on them to show a strategy and if the strategy is not working, again there's going to be a lot of pressure to change that strategy," Weinhart said. "They may actually bring some insight or some ideas that might bare some fruit over time."
On the Net:
Though Wall Street's inflation concerns have not abated — crude oil remains above $134 a barrel — worries about the health of the U.S. financial system and broader economy have returned in force.
Last week, Citigroup Inc. warned that it expects substantial debt losses in the second quarter; two bond insurers lost their Moody's "AAA" rating; Fifth Third Bancorp said it needs to raise $2 billion in capital; the broker MF Global said widening credit spreads will dampen its profit.
This means the market is going to have a hard time stomaching any hint from policymakers that an interest rate hike is on the way. When borrowing gets more expensive, the economy tends to get even more anemic.
"I don't know that there's anything they can say in their policy statement that would cause the market to breathe a sigh of relief, or cause a big updraft in the market," said Richard Sparks, a senior equity analyst at Schaeffer's Investment Research in Cincinnati. "The best they could do is remain neutral. ... But I agree with most people that they're more likely to emphasize price pressures rather than the potentially weakening economy."
Few investors expect the Fed to increase the key interest rate at its meeting Tuesday and Wednesday, after lowering it incrementally over the past year. Many don't expect a rate hike until the fall, or until early next year. But nearly all believe, after speeches by Fed officials over the past few weeks, that policymakers are finished with lowering rates due to the plunging dollar and soaring energy costs.
"There's no question the Fed is walking on a tightrope here. They're in a box," said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc. He pointed to the sluggish economy, the threat of rising inflation, and flooding in the Midwest that is destroying crops.
"If they were to raise (rates), that could put further weakness in economic activity. But by the same token, by raising, that could help stabilize the dollar and help reverse inflation," Cardillo said.
Wall Street's trifecta of troubles — the economy, inflation and financials — drove the Dow Jones industrial average down by 3.78 percent last week. It closed below 12,000 for the first time since mid-March. The Standard & Poor's 500 index ended the week down 3.10 percent, and the Nasdaq composite index closed 1.97 percent lower.
"Right now, I think we're kind of moving lower because there's nothing positive on any front," Sparks said.
In addition to the Fed meeting, this week brings data from S&P/Case Shiller on April home prices, May orders for durable goods, May sales of new and existing homes, and — in perhaps the most revealing report for the market — personal income and spending in May.
The Commerce Department's personal spending reading is expected to show a 0.6 percent increase, according to the median estimate of economists surveyed by Thomson Financial. Income is anticipated to have increased by 0.4 percent, while inflation at the personal spending level — as measured by the Core Personal Consumption Expenditures Deflator — is predicted to have ticked up by 0.2 percent.
Another important piece of data is the Commerce Department's final reading on first-quarter gross domestic product. The estimate was revised up last month to 0.9 percent, and economists, on average, expect the government to ratchet it up again to 1.0 percent.
The earnings calendar, meanwhile, is light this week, with most companies readying to report in July. But results from food companies — Kroger Co., General Mills Inc., Monsanto Co. and ConAgra Foods — will likely be in focus as Wall Street assesses how agricultural commodities costs are affecting businesses and consumers.
Other key earnings releases this week include Nike Inc., Oracle Corp., Research In Motion Ltd., Discover Financial Services LLC, Lennar Corp., Palm Inc. and Rite Aid Corp.
The U.S. Federal Reserve is expected
to hold interest rates steady at a meeting this week and
suggest it is in no rush to raise them, even as it acknowledges
some troubling signs on the inflation front.
Surging oil prices and lingering financial-sector weakness
are clouding some hopeful signs that the U.S. economy has
weathered the worst of a credit crisis and is poised to work
its way through a period of sluggishness with the help of low
interest rates and the government's fiscal stimulus handouts.
While record-high oil and gasoline costs risk upsetting the
Fed's forecast for slowing inflation, officials also remain
concerned that the economy has yet to find solid footing.
When they announce their rate decision at the end of a
two-day meeting on Wednesday, Fed policy-makers are expected to
voice discomfort on the inflation front, but stop short of
signaling a near-term rate increase was imminent.
"While downside risks to growth undoubtedly remain, upside
risks to inflation have intensified," Global Insight economists
Brian Bethune and Nigel Gault wrote in a note to clients.
TOUGHER TONE ON INFLATION
After its last meeting April 29-30, the U.S. central bank
said the combined 3.25 percentage points in rate cuts put in
place since mid-September, in conjunction with extraordinary
measures to provide emergency liquidity to struggling financial
markets, should steer the economy back to steady growth.
Top Fed officials speaking in recent weeks have portrayed
an economy that looked to have skirted a deep recession even
though the unemployment rate spiked to 5.5 percent in May, the
highest in more than 3-1/2 years.
At the same time, the Fed's top two policy-makers, nodding
to oil prices that climbed to a record above $139 a barrel in
early June, took a decidedly tougher tone on inflation risks.
Higher raw materials costs have so far not pushed up the
prices of other goods or wages, Fed Chairman Ben Bernanke said
on June 9, but he warned that could change.
Bernanke further promised to "strongly resist" any trend of
public expectations of higher inflation, while Fed Vice
Chairman Donald Kohn cautioned that any rise in longer-term
inflation expectations would have "troublesome" implications.
The Fed believes "core" prices that strip out volatile
energy and food costs are the best measure of inflation trends,
and those costs were relatively tame in May. But the central
bank places great emphasis on making sure expectations of
future inflation do not rise in a way that could trigger a
self-perpetuating upward spiral of wages and prices.
Even so, the Fed let it be known that market assumptions
that those remarks presaged a series a rate rises before
year-end were premature and that at least some policy-makers
continued to harbor serious worries about risks to growth.
Markets scaled back expectations of higher rates and
chances that the first increase in borrowing costs could come
in August, which had been priced in as a near certainty,
slipped to as low as 43 percent as implied by short-term
interest rate futures.
Some Fed officials, such as Dallas Federal Reserve Bank
President Richard Fisher and Philadelphia Fed chief Charles
Plosser, have for months expressed concern that the Fed's sharp
lowering of rates risked igniting inflation.
The Fed's statement this week, and whether there are any
dissents against holding rates steady in preference of raising
them, will provide a clue as to how much pressure is building
within the central bank to begin raising rates.
"The Fed would like to arrest the tilt higher in inflation
expectations, and officials probably will continue to emphasize
their commitment to price stability," Citigroup economist Lewis
Alexander wrote in a note to clients.
"On balance, the timetable for tightening likely has moved
forward, perhaps to the beginning of 2009, although an initial
step later this autumn cannot be ruled out," he said.
(Editing by Maureen Bavdek)