UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended May 31, 2007
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____to_____
Commission file number: 1-5767
CIRCUIT CITY STORES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-0493875
(State of Incorporation) (I.R.S. Employer Identification No.)
9950 Mayland Drive
Richmond, Virginia 23233
(Address of principal executive offices) (Zip Code)
(804) 486 - 4000
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No __
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |X| Accelerated filer __ Non-accelerated filer __
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes___ No |X|
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 31, 2007
Common Stock, par value $0.50 168,521,667
A Table of Contents is included on Page 2 and an Exhibit Index is included on
Page 29.
CIRCUIT CITY STORES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations -
Three Months Ended May 31, 2007 and 2006 3
Consolidated Balance Sheets -
May 31, 2007, and February 28, 2007 4
Consolidated Statements of Cash Flows -
Three Months Ended May 31, 2007 and 2006 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 6. Exhibits 26
SIGNATURES 28
EXHIBIT INDEX 29
Page 2 of 29
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Circuit City Stores, Inc.
Consolidated Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended
May 31
2007 2006
-------------- -------------
Net sales $ 2,485,537 $ 2,596,615
Cost of sales, buying and warehousing 1,925,352 1,960,851
-------------- -------------
Gross profit 560,185 635,764
Selling, general and administrative expenses 648,354 634,292
-------------- -------------
Operating (loss) income (88,169) 1,472
Interest income 5,737 7,046
Interest expense 43 212
-------------- -------------
(Loss) earnings from continuing operations before income taxes (82,475) 8,306
Income tax (benefit) expense (27,663) 2,999
-------------- -------------
Net (loss) earnings from continuing operations (54,812) 5,307
Earnings (loss) from discontinued operations, net of tax 246 (708)
Cumulative effect of change in accounting principle, net of tax - 1,773
--------------- -------------
Net (loss) earnings $ (54,566) $ 6,372
============== =============
Weighted average common shares:
Basic 165,842 171,054
Diluted 165,842 176,256
(Loss) earnings per share:
Basic:
Continuing operations $ (0.33) $ 0.03
Discontinued operations $ - $ -
Cumulative effect of change in accounting principle $ - $ 0.01
Basic (loss) earnings per share $ (0.33) $ 0.04
Diluted:
Continuing operations $ (0.33) $ 0.03
Discontinued operations $ - $ -
Cumulative effect of change in accounting principle $ - $ 0.01
Diluted (loss) earnings per share $ (0.33) $ 0.04
Cash dividends paid per share $ 0.04 $ 0.0175
See accompanying notes to consolidated financial statements.
Page 3 of 29
Circuit City Stores, Inc.
Consolidated Balance Sheets
(Amounts in thousands except share data)
May 31, 2007 Feb. 28, 2007
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 112,309 $ 141,141
Short-term investments 251,789 598,341
Accounts receivable, net of allowance for doubtful accounts 342,243 382,555
Merchandise inventory 1,745,934 1,636,507
Deferred income taxes 28,210 34,868
Income tax receivable 107,179 42,722
Prepaid expenses and other current assets 80,619 47,378
-------------- -------------
Total current assets 2,668,283 2,883,512
Property and equipment, net of accumulated depreciation of
$1,351,374 and $1,300,267 941,662 921,027
Deferred income taxes 27,345 31,910
Goodwill 133,299 121,774
Other intangible assets, net of accumulated amortization of
$16,733 and $14,179 19,839 19,285
Other assets 37,486 29,775
-------------- -------------
TOTAL ASSETS $ 3,827,914 $ 4,007,283
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Merchandise payable $ 923,032 $ 922,205
Expenses payable 242,810 281,709
Accrued expenses and other current liabilities 358,292 404,444
Accrued compensation 52,007 98,509
Accrued income taxes 10,782 -
Short-term debt 4,675 -
Current installments of long-term debt 6,905 7,162
-------------- -------------
Total current liabilities 1,598,503 1,714,029
Long-term debt, excluding current installments 48,961 50,487
Accrued straight-line rent and deferred rent credits 277,742 277,636
Accrued lease termination costs 71,694 76,326
Other liabilities 130,825 97,561
-------------- -------------
TOTAL LIABILITIES 2,127,725 2,216,039
-------------- -------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, $0.50 par value;
525,000,000 shares authorized; 168,521,667 shares
issued and outstanding at May 31, 2007
(170,689,406 at February 28, 2007) 84,261 85,345
Additional paid-in capital 307,335 344,144
Retained earnings 1,266,534 1,336,317
Accumulated other comprehensive income 42,059 25,438
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,700,189 1,791,244
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,827,914 $ 4,007,283
============= =============
See accompanying notes to consolidated financial statements.
Page 4 of 29
Circuit City Stores, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Three Months Ended
May 31
2007 2006
------------- ------------
Operating Activities:
Net (loss) earnings $ (54,566) $ 6,372
Adjustments to reconcile net (loss) earnings to net cash
used in operating activities of continuing operations:
Net (earnings) loss from discontinued operations (246) 708
Depreciation expense 48,981 41,943
Amortization expense 1,162 909
Stock-based compensation expense 4,942 8,662
Loss on dispositions of property and equipment 245 250
Provision for deferred income taxes 6,964 (564)
Cumulative effect of change in accounting principle - (1,773)
Other (376) (773)
Changes in operating assets and liabilities:
Accounts receivable, net 19,140 14,747
Merchandise inventory (99,455) (229,114)
Prepaid expenses and other current assets (33,018) (22,521)
Other assets (497) 152
Merchandise payable (2,571) 145,888
Expenses payable (10,440) 13,812
Accrued expenses, other current liabilities and income taxes (159,708) (124,537)
Other long-term liabilities 24,835 (5,395)
------------ ------------
Net cash used in operating activities of continuing operations (254,608) (151,234)
------------ ------------
Investing Activities:
Purchases of property and equipment (65,661) (40,756)
Proceeds from sales of property and equipment 10,992 4,074
Purchases of investment securities (238,675) (117,220)
Sales and maturities of investment securities 585,260 398,260
Other investing activities (1,823) -
------------ ------------
Net cash provided by investing activities of continuing operations 290,093 244,358
------------ ------------
Financing Activities:
Proceeds from short-term borrowings 4,515 17,833
Principal payments on short-term borrowings - (17,774)
Principal payments on long-term debt (2,090) (2,413)
Change in overdraft balances (28,709) 15,558
Excess tax benefit from stock-based payments 470 7,209
Repurchases of common stock (46,757) (50,050)
Issuances of common stock 3,237 17,454
Dividends paid (6,782) (3,086)
Other financing activities (25) -
------------ ------------
Net cash used in financing activities of continuing operations (76,141) (15,269)
------------ ------------
Discontinued Operations:
Operating cash flows 11,240 (1,572)
Investing cash flows - (16)
Financing cash flows (57) -
------------ ------------
Net cash provided by (used in) discontinued operations 11,183 (1,588)
------------ ------------
Effect of exchange rate changes on cash 641 185
------------ ------------
(Decrease) increase in cash and cash equivalents (28,832) 76,452
Cash and cash equivalents at beginning of year 141,141 315,970
------------- ------------
Cash and cash equivalents at end of period $ 112,309 $ 392,422
============= ============
See accompanying notes to consolidated financial statements.
Page 5 of 29
CIRCUIT CITY STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Description of Business: Circuit City Stores, Inc. is a leading specialty
retailer of consumer electronics, home office products, entertainment
software, and related services. The company has two reportable segments:
its domestic segment and its international segment.
The domestic segment is engaged in the business of selling brand-name
consumer electronics, personal computers, entertainment software, and
related services in Circuit City stores in the United States and via the
Web at www.circuitcity.com and www.firedog.com. At May 31, 2007, the
company's domestic segment operated 643 Superstores and 13 other stores in
158 U.S. media markets.
The international segment, which is comprised of the operations of
InterTAN, Inc., is engaged in the business of selling private-label and
brand-name consumer electronics in Canada. The international segment's
headquarters are located in Barrie, Ontario, Canada, and it operates
through retail stores and dealer outlets in Canada primarily under the
trade name The Source By Circuit CitySM. At May 31, 2007, the international
segment conducted business through 800 retail stores and dealer outlets,
which consisted of 505 company-owned stores, 294 dealer outlets, and 1
Battery Plus(R) store. The international segment also operates a Web site
at www.thesource.ca.
Effective January 28, 2007, the company returned the management of 92
Rogers Plus(R) stores to Rogers Wireless Inc. in accordance with the
Amending Agreement dated March 27, 2004, between Rogers Wireless Inc. and
InterTAN Canada Ltd. Results from the Rogers Plus(R) stores are presented
as results from discontinued operations in all periods presented.
In February 2007, the board of directors authorized management to explore
strategic alternatives for InterTAN, Inc., which could include the sale of
the operation.
The company closed a domestic segment operation in fiscal 2007 that
previously had been held for sale. Results from this operation are
presented as results from discontinued operations in all periods presented.
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and
liabilities. Actual results may differ from those estimates. The
accompanying unaudited financial statements contain all adjustments of a
normal, recurring nature, except as otherwise disclosed herein, which are,
in the opinion of management, necessary for a fair presentation. Due to the
seasonal nature of the company's business, interim results are not
necessarily indicative of results for the entire fiscal year. The company's
consolidated financial statements included in this report should be read in
conjunction with the notes to the audited financial statements in the
company's fiscal 2007 Annual Report on Form 10-K.
2. Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. The company adopted FIN 48 on
March 1, 2007.
Page 6 of 29
Additional discussion and the impact of adopting this Interpretation are
included in Note 4, Income Taxes.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value and requires additional disclosures about fair value measurements.
The provisions of SFAS No. 157 are effective for the company beginning with
the first quarter of fiscal 2009. The company has not yet determined the
impact of adopting this standard.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 permits entities
to choose to measure many financial instruments and certain assets and
liabilities at fair value. SFAS No. 159 will be effective for the company
beginning with the first quarter of 2009. The company has not yet
determined the impact of adopting this standard.
3. (Loss) Earnings Per Share
The following table presents a reconciliation of the denominators used in
the (loss) earnings per share calculations.
Three Months Ended
May 31
(Shares in millions) 2007 2006
------------------------------------------------------------------------------------------
Weighted average common shares............................... 165.8 171.1
Potentially dilutive common equivalent shares:
Options.................................................. - 3.8
Nonvested stock.......................................... - 1.4
-------------------------
Weighted average common shares and potentially
dilutive common equivalent shares........................ 165.8 176.3
=========================
For the three months ended May 31, 2007, no options or nonvested stock were
included in the computation of diluted loss per share because the company
reported a net loss from continuing operations. For the three months ended
May 31, 2006, the computation of potentially dilutive common equivalent
shares excluded certain options to purchase shares of common stock because
the exercise prices were greater than the average market price of the
common shares and, therefore, the effect would be anti-dilutive. Shares
excluded were as follows:
Three Months Ended
May 31
(Shares in millions) 2007 2006
------------------------------------------------------------------------------------------
Options...................................................... 8.6 1.1
Nonvested stock.............................................. 4.0 -
4. Income Taxes
On March 1, 2007, the company adopted the provisions of FIN 48. As a
result, the company decreased retained earnings by $8.4 million. At March
1, 2007, the company had unrecognized tax benefits of $38.4 million, of
which $17.6 million would reduce the effective tax rate if recognized in
future periods. At March 1, 2007, the company anticipated that total
unrecognized tax benefits would decrease by approximately $6 million by
February 29, 2008, as a result of the settlement of state tax uncertainties
and the expiration of the statute of limitations in several jurisdictions.
In conjunction with the adoption of FIN 48, the company has classified
unrecognized tax benefits not expected to be settled in one year as other
liabilities on the consolidated balance sheet. It is the company's policy
to account for interest and penalties as a component of income tax expense.
The total amount of accrued interest at March 1, 2007, was $15.3 million.
There were no accrued penalties.
Page 7 of 29
The Internal Revenue Service ("IRS") is completing its examination of the
company's federal income tax returns for fiscal years 2001, 2002 and 2003.
All issues relating to these years have been resolved, but the statute of
limitations remains open for these years as a result of waivers. The IRS is
currently examining the company's fiscal 2004, 2005 and 2006 income tax
returns. With limited exceptions, the company is no longer subject to
federal, state, or local income tax examinations for fiscal years before
2001. The statute of limitations for the Canadian tax returns is open for
fiscal 2002 to the present.
During the three months ended May 31, 2007, the company decreased its
unrecognized tax benefits by $2.1 million as a result of the resolution of
the IRS audit of fiscal year 2003. In addition, the company accrued
interest of $0.1 million associated with its uncertain tax positions.
5. Exit and Other Activities
At a location's cease-use date, estimated lease termination costs to close
a store, distribution center or repair center are recorded in selling,
general and administrative expenses on the consolidated statements of
operations. The calculation of accrued lease termination costs includes
future minimum lease payments, taxes, insurance and maintenance costs from
the date of closure to the end of the remaining lease term. The calculation
also includes estimated sublease income, net of tenant improvement
allowances and broker fees. The liability for lease termination costs is
discounted using a credit-adjusted risk-free rate of interest. The company
evaluates these assumptions each quarter and adjusts the liability
accordingly.
The accrual for lease termination costs for the domestic segment includes
the following activity:
Three Months Ended
May 31
(Amounts in millions) 2007 2006
----------------------------------------------------------------------------------------------------------
Accrued lease termination costs at beginning of period...................... $ 105.6 $110.0
Provisions for closed locations............................................. - 1.2
Changes in assumptions about future sublease income and
terminations............................................................ 2.4 2.2
Interest accretion.......................................................... 2.0 2.8
Cash payments, net of cash received on subleased locations.................. (8.6) (8.8)
--------------------------
Accrued lease termination costs at end of period............................ 101.4 107.4
Less current portion of accrued lease termination costs..................... 29.7 30.5
--------------------------
Non-current portion of accrued lease termination costs...................... $ 71.7 $ 76.9
==========================
The current portion of accrued lease termination costs is included in
accrued expenses and other current liabilities, and the non-current portion
is presented separately on the consolidated balance sheets.
During the first quarter of fiscal 2008, the company made cash payments of
$14.0 million and recorded an additional accrual of $5.2 million related to
severance arrangements. At May 31, 2007, accrued severance totaled $14.7
million and is included in accrued compensation on the consolidated balance
sheet.
6. Stock-Based Compensation
Under the company's stock-based incentive plans, nonqualified stock
options, nonvested stock, nonvested stock units and other equity-based
awards may be granted to management, key employees and non-employee
directors. At May 31, 2007, 4.5 million shares of common stock were
available for future grants of options, nonvested stock or nonvested stock
units. Upon the exercise of stock options, the grant of nonvested stock, or
the vesting of or lapse of deferral restrictions on nonvested stock units,
common shares are issued from authorized and unissued shares.
Page 8 of 29
Compensation expense for stock-based incentive plans is summarized in the
table below.
Three Months Ended
May 31
(Amounts in millions) 2007 2006
-----------------------------------------------------------------------------------------
Compensation expense recognized:
Stock options........................................... $ 2.6 $ 4.4
Nonvested stock and nonvested stock units............... 2.3 4.2
Phantom stock units..................................... (0.1) 1.1
Employee stock purchase plan............................ 0.2 0.2
Other................................................... 0.1 0.1
----------------------------
Total compensation expense recognized.............. $ 5.1 $10.0
============================
Tax benefit recognized..................................... $ 1.8 $ 3.3
Stock-based compensation expense is recorded in cost of sales, buying and
warehousing or in selling, general and administrative expenses depending on
the classification of the related employee's payroll cost. Of the $5.1
million of stock-based compensation expense recorded in the three months
ended May 31, 2007, $0.6 million was recorded in cost of sales, buying and
warehousing and $4.5 million was recorded in selling, general and
administrative expenses. Of the $10.0 million of stock-based compensation
expense recorded in the three months ended May 31, 2006, $1.3 million was
recorded in cost of sales, buying and warehousing and $8.7 million was
recorded in selling, general and administrative expenses.
The company recognizes stock-based compensation expense net of an estimated
forfeiture rate based on historical forfeiture activity. During the three
months ended May 31, 2007, the company increased the estimated forfeiture
rate on certain nonvested stock awards to reflect changes in expectations
regarding the number of instruments that will vest. These changes were the
result of higher than anticipated actual forfeitures, due in part to
restructuring activities.
The value of each phantom stock unit is based on the market value of one
share of common stock on the vesting date. The units, which will be settled
in cash upon vesting, are remeasured at each reporting date. Due to the
decrease in the market value of the company's common stock, the company
recorded a benefit of $0.1 million related to phantom stock units in the
three months ended May 31, 2007.
7. Comprehensive (Loss) Income
The components of the company's comprehensive (loss) income consist of net
(loss) earnings and other comprehensive income. Other comprehensive income
is comprised primarily of foreign currency translation adjustments related
to the international segment but also includes unrealized gains and losses
on available-for-sale securities and pension adjustments. Other
comprehensive income is recorded net of deferred income taxes directly as a
component of stockholders' equity.
The components of comprehensive (loss) income, net of taxes, were as
follows:
Three Months Ended
May 31
(Amounts in millions) 2007 2006
-----------------------------------------------------------------------------------------
Net (loss) earnings........................................ $(54.6) $ 6.4
Foreign currency translation............................... 16.6 7.7
Other...................................................... 0.1 -
---------------------------
Comprehensive (loss) income................................ $(37.9) $14.1
=========================
Page 9 of 29
8. Common Stock Repurchased
The company's board of directors has authorized the repurchase of up to
$1.2 billion of common stock, of which $233.7 million remained available at
May 31, 2007. As of May 31, 2007, the company had repurchased 60.4 million
shares of common stock at a cost of $966.3 million, excluding commission
fees, cumulatively since inception of the stock repurchase program.
The company's stock repurchase activity for the three months ended May 31,
2007, was as follows:
Three Months Ended
(Amounts in millions) May 31, 2007
-----------------------------------------------------------------------------------------
Total number of shares repurchased........................... 2.5
Cost, excluding commission fees.............................. $46.7
9. Pension Plans
The company's domestic segment has a noncontributory defined benefit
pension plan that was frozen as of February 28, 2005, except for employees
who (i) were within three years of their early retirement date or normal
retirement date; (ii) had reached their early or normal retirement date; or
(iii) were permanently disabled before March 1, 2005. As a result, all
employees affected by the plan freeze retain any benefits accumulated to
the effective date, but are no longer eligible to increase their benefit.
The company also has an unfunded nonqualified benefit restoration plan that
restored retirement benefits for domestic segment senior executives who
were affected by Internal Revenue Code limitations on benefits provided
under the company's pension plan. The benefit restoration plan was frozen
as of February 28, 2005, and will provide benefits for participants who, as
of that date, were within 10 years of attaining their early retirement date
or normal retirement date.
On December 22, 2005, the benefit restoration plan was amended to permit W.
Alan McCollough to elect to receive a lump-sum payment following his
retirement, allowing him to receive the maximum benefit payable under the
plan. This lump-sum payment resulted in a loss due to settlement of $0.2
million for the first quarter of fiscal 2007.
The components of the net pension (income) expense for the plans were as
follows:
Three Months Ended
May 31
(Amounts in thousands) 2007 2006
-----------------------------------------------------------------------------------
Service cost.......................................... $ 589 $ 778
Interest cost......................................... 4,020 3,794
Expected return on plan assets........................ (5,182) (4,782)
Recognized prior service cost......................... 53 54
Recognized actuarial loss............................. 372 609
Loss due to settlement................................ - 191
-------------------------
Net pension (income) expense.......................... $ (148) $ 644
=========================
The company did not make a contribution to the defined benefit pension plan
during the three months ended May 31, 2007. No contributions are required
during fiscal 2008 under applicable law for this pension plan. The company
intends to make any contributions necessary to meet ERISA minimum funding
standards and intends to make additional contributions as needed to ensure
that the fair value of plan assets at February 29, 2008 exceeds the
accumulated benefit obligation.
A contribution of $0.7 million, which is equal to the expected benefit
payments for fiscal 2008, is expected to be made to the restoration plan
during fiscal 2008. Benefit payments during the three months ended May 31,
2007, were $0.2 million.
Page 10 of 29
10. Discontinued Operations
For the quarter ended May 31, 2007, earnings from discontinued operations
totaled $0.2 million, which is net of $0.2 million of income taxes, and
primarily related to the operations of the Rogers Plus(R) stores, of which
the management was returned to Rogers Wireless Inc. in January 2007.
For the quarter ended May 31, 2006, the loss from discontinued operations
totaled $0.7 million, which is net of $0.4 million of income taxes, and
related to the operations of the Rogers Plus(R) stores and a domestic
segment operation that was closed in fiscal 2007.
11. Segment Information
The company has two reportable segments: its domestic segment and its
international segment. The company identified these segments based on its
management reporting structure and the nature of the products and services
offered by each segment. The domestic segment is engaged in the business of
selling brand-name consumer electronics, personal computers, entertainment
software, and related services in the United States. The international
segment is engaged in the business of selling private-label and brand-name
consumer electronics in Canada.
Net sales by reportable segment were as follows:
Three Months Ended
May 31
(Amounts in millions) 2007 2006
----------------------------------------------------------------------------------------
Domestic segment.......................................... $2,376.9 $2,485.5
International segment..................................... 108.6 111.1
---------------------------
Net sales................................................. $2,485.5 $2,596.6
===========================
Net (loss) earnings from continuing operations by reportable segment were
as follows:
Three Months Ended
May 31
(Amounts in millions) 2007 2006
----------------------------------------------------------------------------------------
Domestic segment.......................................... $(57.4) $ 9.3
International segment..................................... 2.6 (4.0)
---------------------------
Net (loss) earnings from continuing operations............ $(54.8) $ 5.3
===========================
The international segment's net earnings from continuing operations for the
first quarter of fiscal 2008 include $5.0 million, after-tax, of additional
sales proceeds related to a former subsidiary.
Total assets by reportable segment were as follows:
At May 31 At February 28
(Amounts in millions) 2007 2007
------------------------------------------------------------------------------------------------
Domestic segment......................................... $3,483.1 $3,657.5
International segment.................................... 344.8 349.8
----------------------------------
Total assets............................................. $3,827.9 $4,007.3
==================================
Page 11 of 29
The domestic segment net sales by category were as follows:
Three Months Ended May 31
2007 2006(a)
% of % of
(Dollar amounts in millions) $ Sales $ Sales
--------------------------------------------------------------------------------------
Video................................ $ 934.0 39.3% $1,031.9 41.5%
Information technology............... 628.6 26.4 618.8 24.9
Audio................................ 334.9 14.1 380.6 15.3
Entertainment........................ 272.5 11.5 258.8 10.4
Warranty, services and other(b)...... 206.9 8.7 195.5 7.9
------------------------------------------------
Net sales............................ $2,376.9 100.0% $2,485.5 100.0%
===============================================
(a) Reclassifications have been made to conform with the current year
presentation. These include reclassifying sales from video and information
technology to warranty, services and other.
(b) Warranty, services and other includes extended warranty net sales;
revenues from computer-related services, mobile installations, home theater
installations and product repairs; net financing; and revenues from third
parties for services subscriptions.
The international segment net sales by category were as follows:
Three Months Ended May 31
2007 2006
% of % of
(Dollar amounts in millions) $ Sales $ Sales
----------------------------------------------------------------------------------------
Video................................ $ 20.0 18.5% $ 20.5 18.5%
Information technology............... 39.8 36.6 44.6 40.1
Audio................................ 36.5 33.6 35.8 32.2
Entertainment........................ 5.0 4.6 3.2 2.9
Warranty, services and other(a)...... 7.3 6.7 7.0 6.3
-------------------------------------------------
Net sales............................ $108.6 100.0% $111.1 100.0%
===============================================
(a) Warranty, services and other includes extended warranty sales and
product repair revenue.
12. Supplemental Consolidated Statements of Cash Flows Information
The following table summarizes supplemental cash flow information.
Three Months Ended
May 31
(Amounts in millions) 2007 2006
----------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities:
Increase in capital expenditure accrual........................................... $ 0.5 $ 2.9
Capital lease obligation.......................................................... $ 0.3 $ -
(Decrease) increase in sale-leaseback receivables................................. $ (8.4) $ 5.9
Page 12 of 29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are a leading specialty retailer of consumer electronics, home office
products, entertainment software, and related services. We have two reportable
segments: our domestic segment and our international segment.
Our domestic segment is engaged in the business of selling brand-name consumer
electronics, personal computers, entertainment software, and related services in
our stores in the United States and via the Web at www.circuitcity.com and
www.firedog.com. At May 31, 2007, the domestic segment operated 643 Superstores
and 13 other stores in 158 U.S. media markets.
Our international segment, which is comprised of the operations of InterTAN,
Inc., is engaged in the business of selling private-label and brand-name
consumer electronics in Canada. The international segment's headquarters are
located in Barrie, Ontario, Canada, and it operates through retail stores and
dealer outlets in Canada primarily under the trade name The Source By Circuit
CitySM. At May 31, 2007, the international segment conducted business through
800 retail stores and dealer outlets, which consisted of 505 company-owned
stores, 294 dealer outlets and 1 Battery Plus(R) store. The international
segment also operates a Web site at www.thesource.ca.
Effective January 28, 2007, we returned the management of 92 Rogers Plus(R)
stores to Rogers Wireless Inc. in accordance with the Amending Agreement dated
March 27, 2004, between Rogers Wireless Inc. and InterTAN Canada Ltd. Results
from the Rogers Plus(R) stores are presented as results from discontinued
operations in all periods presented.
In February 2007, the board of directors authorized management to explore
strategic alternatives for InterTAN, Inc., which could include the sale of the
operation.
We closed a domestic segment operation in fiscal 2007 that previously had been
held for sale. Results from this operation are presented as results from
discontinued operations in all periods presented.
Management's Discussion and Analysis (MD&A) is designed to provide the reader of
financial statements with a narrative discussion of our results of operations;
financial position, liquidity and capital resources; critical accounting
policies and significant estimates; and the impact of recently issued accounting
standards. Our MD&A is presented in seven sections:
o Executive Summary
o Critical Accounting Policies
o Results of Operations
o Recent Accounting Pronouncements
o Financial Condition
o Financial Outlook
o Forward-Looking Statements
This discussion should be read in conjunction with our Consolidated Financial
Statements and accompanying Notes included in this report, the Annual Report on
Form 10-K for the fiscal year ended February 28, 2007, as well as our reports on
Form 8-K and other SEC filings. All per share amounts are presented on a fully
diluted basis.
EXECUTIVE SUMMARY
Fiscal 2008 First Quarter Performance
o Net sales declined 4.3 percent, driven by a comparable store sales decline
of 5.6 percent. In the same period last fiscal year, we posted total sales
growth of 17.4 percent and comparable store sales growth of 14.6 percent.
Page 13 of 29
o In the domestic segment, direct channel sales, which include Web- and call
center-originated sales, grew 21 percent and services revenues grew 70
percent over the same period last year.
o Gross profit margin declined 195 basis points compared with the gross
profit margin for the first quarter of the prior year due to a decrease in
domestic segment extended warranty net sales as well as lower merchandise
margins that were driven by a greater mix of lower-margin PC hardware
sales.
o SG&A expenses as a percentage of net sales increased from the prior year by
166 basis points, which primarily reflects approximately 90 basis points in
net incremental expenses, related to investments in the domestic segment
for information technology, multi-channel capabilities and innovation
activities, as a percentage of consolidated net sales, and the
de-leveraging impact of lower sales.
o The loss from continuing operations before income taxes was 3.3 percent of
net sales compared with earnings from continuing operations before income
taxes of 0.3 percent of net sales in the same period last year.
o We reported a net loss from continuing operations of $54.8 million, or 33
cents per share, for the first quarter of fiscal 2008, compared with net
earnings of $5.3 million, or 3 cents per share, in the same period last
year.
CRITICAL ACCOUNTING POLICIES
See the discussion of critical accounting policies under Management's Discussion
and Analysis of Financial Condition and Results of Operations in our fiscal 2007
Annual Report on Form 10-K. These policies relate to inventory valuation,
goodwill, accrued lease termination costs, stock-based compensation and pension
plans. We have updated our critical accounting policy for income taxes due to
our adoption of FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109" (FIN 48).
Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes," which requires that deferred tax assets and liabilities be
recognized using enacted tax rates for the effect of the temporary differences
between the book and tax basis of recorded assets and liabilities. We make
estimates and judgments with regard to the calculation of certain tax assets and
liabilities. SFAS No. 109 requires that deferred tax assets be reduced by
valuation allowances if it is more likely than not that some portion of the
deferred tax asset will not be realized. Quarterly, we assess the likelihood
that the benefits of a deferred tax asset will be realized by considering
historical and projected taxable income and tax planning strategies. Should a
change in circumstances lead to a change in our judgment regarding the
realization of deferred tax assets in future years, we adjust the valuation
allowances in the period that the change in circumstances occurs, along with a
current charge or credit to net earnings. Significant changes to our estimates
and assumptions may result in an increase or decrease to our tax expense in a
subsequent period.
On March 1, 2007, we adopted FIN 48. FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Positions taken by an entity in its income tax returns must satisfy a
more-likely-than-not recognition threshold, assuming that the positions will be
examined by taxing authorities with full knowledge of all relevant information,
in order for the positions to be recognized in the consolidated financial
statements. Quarterly, we evaluate the income tax positions taken by the
company, or expected to be taken by the company, to determine whether these
positions meet the more-likely-than-not threshold prescribed by FIN 48. We are
required to make subjective judgments and assumptions regarding our income tax
exposures and must consider a variety of factors, including the current tax
statutes, the current status of audits performed by tax authorities, and the
statute of limitations in each tax jurisdiction. To the extent an uncertain tax
position is resolved for an amount that varies from the recorded estimated
liability, our income tax expense in a given financial statement period could be
materially affected.
Our unrecognized tax benefits were $35.5 million at May 31, 2007, and $15.2
million at February 28, 2007. In conjunction with the adoption of FIN 48, we
have classified unrecognized tax benefits not expected to be
Page 14 of 29
settled in one year as other liabilities on the consolidated balance sheet.
Additional discussion and the impact of adopting this Interpretation are
included in Note 4, Income Taxes, of the Notes to Consolidated Financial
Statements, included in Item 1, Financial Statements, of this Quarterly Report
on Form 10-Q.
RESULTS OF OPERATIONS
Our operations, consistent with other retailers in general, are subject to
seasonal influences. Historically, we have realized more of our net sales and
net earnings in the fourth quarter, which includes the majority of the holiday
selling season, than in any other fiscal quarter. The net (loss) earnings of any
quarter are seasonally disproportionate to net sales since administrative and
certain operating expenses remain relatively constant during the year.
Therefore, quarterly results should not be relied upon as necessarily indicative
of results for the entire fiscal year.
Summary of Segment Performance
Where relevant, we have included separate discussions of our domestic and
international segments. The following tables summarize performance by segment.
SEGMENT PERFORMANCE SUMMARY
Three Months Ended May 31, 2007
Domestic International Consolidated
% of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales
-------------------------------------------------------------------------------------------------------------------------
Net sales............................... $ 2,376.9 100.0% $ 108.6 100.0% $ 2,485.5 100.0%
Gross profit............................ $ 520.5 21.9% $ 39.7 36.6% $ 560.2 22.5%
Selling, general and administrative
expenses............................ $ 612.5 25.8% $ 35.9 33.0% $ 648.4 26.1%
Net (loss) earnings from continuing
operations.......................... $ (57.4) (2.4)% $ 2.6 2.4% $ (54.8) (2.2)%
Three Months Ended May 31, 2006
Domestic International Consolidated
% of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales
-------------------------------------------------------------------------------------------------------------------------
Net sales............................... $ 2,485.5 100.0% $ 111.1 100.0% $ 2,596.6 100.0%
Gross profit............................ $ 594.9 23.9% $ 40.9 36.8% $ 635.8 24.5%
Selling, general and administrative
expenses............................ $ 587.6 23.6% $ 46.7 42.0% $ 634.3 24.4%
Net earnings (loss) from continuing
operations.......................... $ 9.3 0.4% $ (4.0) (3.6)% $ 5.3 0.2%
Net Sales
Consolidated
For the first quarter of fiscal 2008, our net sales decreased 4.3 percent to
$2.49 billion, and comparable store sales decreased 5.6 percent from the same
period last fiscal year. A store's sales are included in comparable store sales
after the store has been open for a full 12 months. Comparable store sales
include Web-originated sales and sales from relocated and remodeled stores.
Sales from closed stores are included in comparable store sales until the month
in which the stores are closed. The calculation of comparable store sales
excludes the impact of fluctuations in foreign currency exchange rates.
Page 15 of 29
Our major sales categories are
o video, which includes televisions, imaging products, DVD hardware,
camcorders, digital cameras, furniture, and related accessories;
o information technology, which includes personal computer hardware,
telecommunications products and related accessories;
o audio, which includes home audio products, mobile audio products, portable
audio products, navigation products, and related accessories;
o entertainment, which includes movie software, music software, game
software, game hardware and personal computer software; and
o warranty, services and other, which includes extended warranty sales;
revenues from computer-related services, mobile installations, home theater
installations and product repairs; net financing; and revenues received
from third parties for services subscriptions.
Domestic Segment
For the first quarter of fiscal 2008, the domestic segment's net sales were
$2.38 billion, a decrease of 4.4 percent from the same period last fiscal year.
Comparable store sales decreased 6.0 percent driven by a decline in traffic and
close rates as compared to the same period last fiscal year. For the quarter,
direct channel sales grew 21 percent, and services revenues grew 70 percent over
the same period last fiscal year.
The domestic segment's net sales represented by each major sales category for
the periods ended May 31, 2007 and 2006, are shown below.
NET SALES BY CATEGORY
Three Months Ended May 31
2007 2006(a)
% of % of
(Dollar amounts in millions) $ Sales $ Sales
---------------------------------------------------------------------------------------------
Video..................................... $ 934.0 39.3% $1,031.9 41.5%
Information technology.................... 628.6 26.4 618.8 24.9
Audio..................................... 334.9 14.1 380.6 15.3
Entertainment............................. 272.5 11.5 258.8 10.4
Warranty, services and other.............. 206.9 8.7 195.5 7.9
-------------------------------------------------
Net sales................................. $2,376.9 100.0% $2,485.5 100.0%
===============================================
(a) Reclassifications have been made to conform with the current year
presentation. These include reclassifying sales from video and information
technology to warranty, services and other.
In the video category, we produced a double-digit comparable store sales
decrease in the first quarter. Total television comparable store sales decreased
by double digits, as a significant comparable store sales decrease in projection
and tube televisions more than offset high single-digit comparable store sales
growth in flat panel televisions. Comparable store sales of digital imaging
products and accessories decreased by single digits. Comparable store sales of
camcorders and DVD hardware declined by double digits.
In the information technology category, we produced a single-digit comparable
store sales increase in the first quarter. Comparable store sales of notebook
computers increased by double digits, and comparable store sales of desktop
computers were approximately flat compared with the prior year period.
Page 16 of 29
In the audio category, we produced a double-digit comparable store sales
decrease in the first quarter. Double-digit declines in comparable store sales
of portable digital audio, mobile, home audio and digital satellite radio
products were partially offset by a significant double-digit comparable store
sales increase in navigation products.
In the entertainment category, we produced a single-digit comparable store sales
increase in the first quarter, reflecting strong double-digit comparable store
sales increases in video gaming products and PC software. Comparable store sales
of video software declined by low-double digits and comparable store sales in
music software declined by strong double digits.
The domestic segment sells extended warranty programs on behalf of unrelated
third parties who are the primary obligors. Extended warranty net sales were
$73.7 million, or 3.1 percent of domestic segment net sales, in the first
quarter of fiscal 2008, compared with $92.3 million, or 3.7 percent of domestic
segment net sales, in the same period last fiscal year. Services revenues
increased 70 percent to $64.4 million from $37.9 million in the same period last
fiscal year.
The following table provides the number of our domestic segment stores:
DOMESTIC SEGMENT STORE MIX
May 31, 2007 Feb. 28, 2007 May 31, 2006
---------------------------------------------------------------------------------------------------------------
Superstores....................................... 643 642 630
Other stores...................................... 13 12 5
----------------------------------------------------------
Total domestic segment stores..................... 656 654 635
==========================================================
During the first quarter of fiscal 2008, we opened one relocated Superstore,
replacing a store that was closed in February 2007.
International Segment
The international segment's net sales decreased 2.2 percent to $108.6 million
for the first quarter of fiscal 2008, compared with $111.1 million for the first
quarter of last fiscal year. The decrease was driven by the impact of closing 53
retail stores, net of openings, during the fourth quarter of fiscal 2007. The
effect of fluctuations in foreign currency exchange rates favorably impacted the
sales decline by approximately 1 percentage point. Comparable store sales
increased 4.4 percent for the quarter in local currency.
NET SALES BY CATEGORY
Three Months Ended May 31
2007 2006
% of % of
(Dollar amounts in millions) $ Sales $ Sales
---------------------------------------------------------------------------------------------
Video..................................... $ 20.0 18.5% $ 20.5 18.5%
Information technology.................... 39.8 36.6 44.6 40.1
Audio..................................... 36.5 33.6 35.8 32.2
Entertainment............................. 5.0 4.6 3.2 2.9
Warranty, services and other.............. 7.3 6.7 7.0 6.3
-------------------------------------------------
Net sales................................. $108.6 100.0% $111.1 100.0%
===============================================
Page 17 of 29
INTERNATIONAL SEGMENT STORE MIX
May 31, 2007 Feb. 28, 2007 May 31, 2006
---------------------------------------------------------------------------------------------------------------
Company-owned stores.............................. 505 509 540
Dealer outlets.................................... 294 296 299
Battery Plus(R) stores.............................. 1 1 19
-----------------------------------------------------
Total international segment stores................ 800 806 858
=====================================================
Effective January 28, 2007, we returned the management of 92 Rogers Plus(R)
stores to Rogers Wireless Inc. in accordance with the Amending Agreement dated
March 27, 2004, between Rogers Wireless Inc. and InterTAN Canada Ltd. As of May
31, 2006, there were 93 Rogers Plus(R) stores in operation. Results from these
stores are presented as results from discontinued operations in all periods
presented.
Gross Profit Margin
Consolidated
The gross profit margin was 22.5 percent of net sales in the first quarter of
fiscal 2008, compared with 24.5 percent for the same period last fiscal year.
Domestic Segment
The domestic segment's gross profit margin was 21.9 percent of domestic segment
net sales in the first quarter of fiscal 2008, compared with 23.9 percent for
the same period last fiscal year. The 204 basis points decrease impacted the
consolidated gross profit margin decline by 197 basis points. The decline was
driven primarily by a decrease of 61 basis points in extended warranty net sales
as a percent of domestic segment net sales as well as a decrease of 116 basis
points in merchandise margins as a percent of domestic segment net sales. The
lower merchandise margins were driven by a greater mix of lower-margin PC
hardware sales which reflects both strength in that business as well as
below-plan sales in the television category.
International Segment
The international segment's gross profit margin was 36.6 percent of
international segment net sales in the first quarter of fiscal 2008, compared
with 36.8 percent for the same period last fiscal year. The international
segment's gross profit margin decline of 22 basis points did not materially
impact the consolidated gross profit margin rate. The decrease resulted
primarily from a mix shift from higher-margin categories, such as parts,
batteries and accessories, to lower-margin categories, such as video games,
navigation products and PC hardware.
Page 18 of 29
Selling, General and Administrative Expenses
Consolidated
Three Months Ended May 31
2007 2006
% of % of
(Dollar amounts in millions) $ Sales $ Sales
------------------------------------------------------------------------------------
Store expenses.......................... $556.7 22.4% $534.0 20.6%
General and administrative
expenses........................... 85.5 3.4 87.4 3.4
Stock-based compensation
expense............................ 4.5 0.2 8.7 0.3
Remodel expenses........................ - - - -
Relocation expenses..................... 1.1 - 1.5 0.1
Pre-opening expenses.................... 0.5 - 2.6 0.1
------------------------------------------
Total ................................. $648.4 26.1% $634.3 24.4%
=========================================
Selling, general and administrative expenses were 26.1 percent of consolidated
net sales in the first quarter of fiscal 2008, compared with 24.4 percent for
the same period last fiscal year. The domestic segment contributed 201 basis
points to the 166 basis point increase in the consolidated expense-to-sales
ratio, while the international segment's decline in expenses partially offset
the increase in the domestic segment's expense-to-sales ratio.
Domestic Segment
Three Months Ended May 31
2007 2006
% of % of
(Dollar amounts in millions) $ Sales $ Sales
------------------------------------------------------------------------------------
Store expenses.......................... $524.2 22.1% $496.9 20.0%
General and administrative
expenses........................... 82.4 3.5 78.9 3.2
Stock-based compensation
expense............................ 4.3 0.2 7.6 0.3
Remodel expenses........................ - - - -
Relocation expenses..................... 1.1 - 1.5 0.1
Pre-opening expenses.................... 0.5 - 2.6 0.1
------------------------------------------
Total ................................. $612.5 25.8% $587.6 23.6%
=========================================
For the three months ended May 31, 2007, the domestic segment's expense-to-sales
ratio increased 213 basis points from the same period last fiscal year. The
increase primarily reflects approximately 90 basis points in net incremental
expenses, related to investments in information technology, multi-channel
capabilities and innovation activities, as a percentage of consolidated net
sales, and the de-leveraging impact of lower sales. The segment incurred general
and administrative expenses of $4.9 million, or 20 basis points as a percentage
of consolidated net sales, associated with severance from restructuring
activities.
Page 19 of 29
International Segment
Three Months Ended May 31
2007 2006
% of % of
(Dollar amounts in millions) $ Sales $ Sales
------------------------------------------------------------------------------------
Store expenses.......................... $32.6 30.0% $37.1 33.4%
General and administrative
expenses........................... 3.1 2.9 8.5 7.7
Stock-based compensation
expense............................ 0.2 0.1 1.1 1.0
------------------------------------------
Total ................................. $35.9 33.0% $46.7 42.0%
=========================================
For the first quarter of fiscal 2007, the international segment's
expense-to-sales ratio decreased 900 basis points from the same period last year
primarily due to $7.5 million of additional sales proceeds related to a former
subsidiary, reducing current period general and administrative expenses. The
international segment also benefited from the impact of store closings during
the fourth quarter of last fiscal year.
Income Tax (Benefit) Expense
The consolidated effective income tax rate applicable to results from continuing
operations was 33.5 percent for the three months ended May 31, 2007, and 36.1
percent for the three months ended May 31, 2006. The decrease in the effective
tax rate is the result of an increase in tax-exempt investment income in
proportion to projected earnings.
Net (Loss) Earnings from Continuing Operations
The net loss from continuing operations was $54.8 million, or 33 cents per
share, in the three months ended May 31, 2007, compared with net earnings from
continuing operations of $5.3 million, or 3 cents per share, in the same period
last fiscal year.
Earnings (Loss) from Discontinued Operations
For the quarter ended May 31, 2007, the net earnings from discontinued
operations totaled $0.2 million, which is net of $0.2 million of income taxes,
and primarily related to the operations of the Rogers Plus(R) stores, of which
the management was returned to Rogers Wireless Inc. in January 2007.
For the quarter ended May 31, 2006, the net loss from discontinued operations
totaled $0.7 million, which is net of $0.4 million of income taxes, and related
to the operations of the Rogers Plus(R) stores and a domestic segment operation
that was closed in fiscal 2007.
Cumulative Effect of Change in Accounting Principle
In the first quarter of fiscal 2007, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment," using the
modified prospective transition method, resulting in a non-cash after-tax
benefit of $1.8 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.
Page 20 of 29
We adopted FIN 48 on March 1, 2007. Additional discussion and the impact of
adopting this Interpretation are included in Note 4, Income Taxes, of the Notes
to Consolidated Financial Statements, included in Item 1, Financial Statements,
of this Quarterly Report on Form 10-Q.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
No. 157 defines fair value, establishes a framework for measuring fair value and
requires additional disclosures about fair value measurements. The provisions of
SFAS No. 157 are effective for us beginning with the first quarter of fiscal
2009. We have not yet determined the impact of adopting this standard.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 permits entities to
choose to measure many financial instruments and certain assets and liabilities
at fair value. SFAS No. 159 will be effective for us beginning with the first
quarter of 2009. We have not yet determined the impact of adopting this
standard.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash Flows
Cash Flows Summary
The following table summarizes our cash flows for the three months ended May 31,
2007 and 2006:
Three Months Ended
May 31
(Amounts in millions) 2007 2006
----------------------------------------------------------------------------------------
Net cash (used in) provided by:
Operating activities.................................... $(254.6) $(151.2)
Investing activities.................................... 290.1 244.4
Financing activities.................................... (76.1) (15.3)
Discontinued operations................................. 11.2 (1.6)
Effect of exchange rate changes on cash................... 0.6 0.2
----------------------------
(Decrease) increase in cash and
cash equivalents........................................ $ (28.8) $ 76.5
============================
Operating Activities
For the three months ended May 31, 2007, net cash used in operating activities
was $254.6 million, compared with net cash used in operating activities of
$151.2 million in the three months ended May 31, 2006. The change was due
primarily to a net loss of $54.6 million for the three months ended May 31,
2007, compared with net earnings of $6.4 million for the three months ended May
31, 2006. Also driving the increase in cash used by operations were changes in
net-owned inventory, calculated as merchandise inventory less merchandise
payable. During the three months ended May 31, 2007, the increase in net-owned
inventory was $108.6 million. During the three months ended May 31, 2006,
net-owned inventory increased by $88.1 million.
Investing Activities
Net cash provided by investing activities was $290.1 million for the three
months ended May 31, 2007, compared with $244.4 million for the three months
ended May 31, 2006. The increase in cash provided by investing activities was
due primarily to an increase in net sales and maturities of investment
securities, partially offset by increased purchases of property and equipment as
we make investments in new Superstores, store refreshes and category resets.
Financing Activities
For the three months ended May 31, 2007, net cash used in financing activities
was $76.1 million, compared with net cash used in financing activities of $15.3
million in the three months ended May 31, 2006. The change
Page 21 of 29
was due primarily to a decrease in overdraft balances and a decrease in the cash
provided by the issuance of common stock.
The board of directors has authorized the repurchase of up to $1.2 billion of
common stock, of which $233.7 million remained available at May 31, 2007. During
the three months ended May 31, 2007, we used cash to repurchase 2.5 million
shares of common stock at an average price of $18.68 per share, for a total
price of $46.7 million, excluding commission fees. During the same period last
fiscal year, we used cash to repurchase 1.7 million shares of common stock at an
average price of $28.92 per share, for a total price of $50.0 million, excluding
commission fees As of May 31, 2007, we had repurchased 60.4 million shares of
common stock at an average price of $16.01 per share, for a total price of
$966.3 million, excluding commission fees, cumulatively since inception of the
stock repurchase program.
During fiscal 2007, the board of directors authorized an increase in our
quarterly dividend rate to $0.04 per share from the previous quarterly dividend
of $0.0175 per share on our common stock. The dividend rate change was effective
with the declaration of the quarterly dividend in the third quarter of fiscal
2007, resulting in an increase in cash used to pay dividends in the three months
ended May 31, 2007, compared with the three months ended May 31, 2006.
Cash, Cash Equivalents and Short-term Investments
At May 31, 2007, we had cash, cash equivalents and short-term investments of
$364.1 million, compared with $739.5 million at February 28, 2007. The $375.4
million decline in the cash position primarily reflects cash used by operations
of $254.6 million, including a $108.6 million increase in net-owned inventory.
Also driving the decrease in cash were $65.7 million in purchases of property
and equipment and $53.5 million in stock repurchase activities and dividend
payments.
Net-owned Inventory
Merchandise inventory increased to $1.75 billion at May 31, 2007, from $1.64
billion at February 28, 2007. Net-owned inventory, calculated as merchandise
inventory less merchandise payable, increased by $108.6 million from February
28, 2007, to May 31, 2007. Domestic segment net-owned inventory increased by
$76.6 million from February 28, 2007, to May 31, 2007, primarily due to seasonal
inventory build.
Capital Expenditures
Capital expenditures, net of landlord reimbursements, were $63.3 million in the
three months ended May 31, 2007, compared with $33.9 million in the same period
last fiscal year. The increase in capital expenditures was driven primarily by
increased investments in new and relocating Superstores.
Sources of Liquidity
We have a $500 million revolving credit facility secured by inventory and
accounts receivable. This facility is scheduled to mature in June 2009. The
credit facility provides for a $400 million borrowing limit for the domestic
segment and a $100 million borrowing limit for the international segment. At May
31, 2007, short-term borrowings were $4.7 million and related to our
international segment. At May 31, 2007, outstanding letters of credit were $57.5
million, leaving $437.8 million available for borrowing. We were in compliance
with all covenants at May 31, 2007.
Our primary sources of liquidity include available cash, the expected reduction
in net-owned inventory, borrowing capacity under the credit facility and
landlord reimbursements. We expect that our primary sources of liquidity will be
sufficient to fund capital expenditures and working capital for the foreseeable
future.
Contractual Obligations and Contingencies
In March 2007, we signed a seven-year, $775 million information technology
services contract with IBM. Also, as a result of the adoption of FIN 48, we had
$31.1 million of unrecognized tax benefits and the related accrued interest
recorded in other liabilities on the consolidated balance sheet at May 31, 2007.
We are not able to reasonably estimate in which future periods these
unrecognized tax benefits will be settled.
Page 22 of 29
FINANCIAL OUTLOOK
In the first quarter, the amount of change that we introduced to the company led
to significant volatility, which we expect to continue through the summer as we
roll out the new retail operating platform, convert to the new point-of-sale
system in additional stores, gain experience with the new organizational
structure and develop competence with using our new merchandising and marketing
systems. Combined with an uncertain macroeconomic environment, it is difficult
to project sales and earnings performance for the balance of the fiscal year. As
a result, we withdrew financial guidance on June 20, 2007.
We continue to expect to open 60 to 65 new and relocated domestic segment
Superstores in fiscal 2008. Domestic segment Superstore openings estimates are
shown in the following table. The timing of store openings depends upon a number
of factors and can change during the year. We expect more than half of the
openings to be in a 20,000 square foot format. Initial results from the 20,000
square foot formats indicate reduced capital expenditures and operating
expenses, resulting in higher returns, as compared with the 30,000 square foot
formats.
Domestic Segment Superstore Openings Estimates(a)
Q1(a) Q2 Q3 Q4 FY08
-------------------------------------------------------------------------------------
Incremental Superstores.................... 0 10 17-18 16-18 43-46
Relocated Superstores...................... 1 4 7-8 5-6 17-19
-----------------------------------------
Total Superstore openings.................. 1 14 24-26 21-24 60-65
===========================================
(a) First quarter openings are actual. On February 26, 2007, we closed one store
in advance of opening a replacement store in the first quarter of fiscal 2008.
The replacement store is included in relocations for the first quarter of fiscal
2008.
In fiscal 2009, we expect to open 75 to 100 Superstores.
FORWARD-LOOKING STATEMENTS
The provisions of the Private Securities Litigation Reform Act of 1995 provide
companies with a "safe harbor" when making forward-looking statements. This
"safe harbor" encourages companies to provide prospective information about
their companies without fear of litigation. We wish to take advantage of the
"safe harbor" provisions of the Act. Our statements that are not historical
facts, including statements about management's expectations for fiscal 2008 and
beyond, are forward-looking statements and involve various risks and
uncertainties. In most cases, you can identify our forward-looking statements by
words such as "expect," "anticipate," "believe," "should," "may," "plan," "will"
or similar words.
Forward-looking statements are estimates and projections reflecting our judgment
and involve a number of risks and uncertainties that could cause actual results
to differ materially from those suggested by the forward-looking statements.
Although we believe that the estimates and projections reflected in the
forward-looking statements are reasonable, our expectations may prove to be
incorrect. The retail industry and the specialty retail industry, in particular,
are dynamic by nature and have undergone significant changes in recent years.
Our ability to anticipate and successfully respond to the continuing challenges
of our industry is key to achieving our expectations. Important factors that
could cause actual results to differ materially from estimates or projections
contained in our forward-looking statements include the following:
o changes in the amount and degree of competition, pricing and promotional
pressure exerted by current competitors and potential new competition from
competitors using either similar or alternative methods or channels of
distribution such as the Internet, telephone shopping services and mail
order;
o our response to pricing and promotional activities of our competitors;
o the successful implementation of our initiatives to accelerate sales
growth, gross margin improvement and expense reductions;
o our ability to reduce our overall cost and expense structure and to
maintain cost reductions while growing sales;
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o our ability to control and leverage expenses as a percentage of sales;
o changes in general economic conditions including, but not limited to,
financial market performance, consumer credit availability, interest rates,
inflation, energy prices, personal discretionary spending levels, trends in
consumer retail spending, (both in general and in our product categories),
unemployment and consumer sentiment about the economy in general;
o the level of consumer response to new products or product features in the
merchandise categories we sell and changes in our merchandise sales mix;
o the pace of commoditization of digital products;
o the impact of inventory and supply chain management initiatives on
inventory levels and profitability;
o our ability to generate sales and margin growth through expanded services
offerings;
o the impact of new products and product features on the demand for existing
products and the pricing and profit margins associated with the products we
sell;
o significant changes in retail prices for products and services we sell;
o changes in availability or cost of financing for working capital and
capital expenditures, including financing to support development of our
business;
o the lack of availability or access to sources of inventory or the loss or
disruption in supply from one of our major suppliers;
o our inability to liquidate excess inventory should excess inventory
develop;
o our inability to maintain sales and profitability improvement programs for
our Circuit City Superstores, including our store revitalization plan;
o our ability to continue to generate strong sales growth through our direct
sales channel;
o the availability of appropriate real estate locations for relocations and
new stores;
o the cost and timeliness of new store openings and relocations;
o consumer reaction to new store locations and changes in our store design
and merchandise;
o our ability and the ability of Chase Card Services to successfully market
and promote the third party credit card program being offered by Chase Card
Services;
o the extent to which customers respond to promotional financing offers and
the types of promotional terms we offer;
o our ability to attract and retain an effective management team or changes
in the costs or availability of a suitable work force to manage and support
our service-driven operating strategies;
o the impact of initiatives related to upgrading merchandising, marketing,
point of sale and information systems on revenue and operating margin and
the costs associated with these investments;
o changes in production or distribution costs or costs of materials for our
advertising;
o effectiveness of our advertising and marketing programs for increasing
consumer traffic and sales;
o the imposition of new restrictions or regulations regarding the sale of
products and/or services we sell, changes in tax rules and regulations
applicable to, the imposition of new environmental restrictions,
regulations or laws or the discovery of environmental conditions at current
or future locations, or any failure to comply with such laws or any adverse
change in such laws;
o our strategic evaluation of the international segment;
o further deterioration of the expected future performance of our
international segment resulting in an additional goodwill impairment
charge;
o the timely production and delivery of private-label merchandise and level
of consumer demand for those products;
o reduced investment returns or other changes relative to the assumptions for
our pension plans that impact our pension expense;
o changes in our anticipated cash flow;
o whether, when and in what amounts share repurchases may be made under our
stock buyback program;
o adverse results in significant litigation matters;
o currency exchange rate fluctuations between Canadian and U.S. dollars and
other currencies;
o the global regulatory and trade environment;
o the disruption of global, national or regional transportation systems; and
o the occurrence of severe weather events or natural disasters that could
significantly damage or destroy stores or prohibit consumers from traveling
to our retail locations, especially during peak selling periods.
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We believe our forward-looking statements are reasonable. However, undue
reliance should not be placed on forward-looking statements, which are based on
current expectations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from potential changes in the U.S./Canadian
currency exchange rates as they relate to inventory purchases and the
translation of our international segment's financial results.
Inventory Purchases
A portion of InterTAN's purchases are from vendors requiring payment in U.S.
dollars. Accordingly, there is risk that the value of the Canadian dollar could
fluctuate relative to the U.S. dollar from the time the goods are ordered until
payment is made. InterTAN's management monitors the foreign exchange risk
associated with its U.S. dollar open orders on a regular basis by reviewing the
amount of such open orders; exchange rates, including forecasts from major
financial institutions; local news; and other economic factors. At May 31, 2007,
U.S. dollar open purchase orders totaled approximately $10.8 million. A 10
percent decline in the value of the Canadian dollar would result in an increase
in product cost of approximately $1.1 million for those orders. The incremental
cost of such a decline in currency values, if incurred, would be reflected in
higher cost of sales in future periods. In these circumstances, management would
take product pricing action, to the degree commercially feasible.
Translation of Financial Results
Because we translate our international segment's financial results from Canadian
dollars to U.S. dollars, fluctuations in the value of the Canadian dollar have a
direct effect on reported consolidated results. We do not hedge against the
possible impact of this risk. A 10 percent adverse change in the foreign
currency exchange rate would not have a significant impact on our consolidated
results of operations or financial position.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the company's management,
including the chief executive officer, the company has evaluated the
effectiveness of its "disclosure controls and procedures," as that term is
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, as
of the end of the period covered by this Quarterly Report on Form 10-Q. Based
upon the evaluation, the chief executive officer concluded that the company's
disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There were no changes in the company's internal control over financial reporting
that occurred during the quarter ended May 31, 2007, that have materially
affected, or are reasonably likely to materially affect, the company's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
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ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended February 28, 2007, which could
materially affect our business, financial condition or future results. There
have been no material changes to those risk factors since we filed our 2007
Annual Report on Form 10-K. The risks described in our Annual Report on Form
10-K are not the only risks facing our company. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about common stock repurchases by
or on behalf of the company during the quarter ended May 31, 2007:
Approximate
Total Number Dollar Value of
of Shares Shares that
Average Purchased as May Yet Be
Total Number Price Part of Publicly Purchased
(Amounts in millions except per of Shares Paid Announced Under
share data and footnote (a) data) Purchased(a) per Share(a) Program the Program(b)
-----------------------------------------------------------------------------------------------------------------------------------
March 1 - March 31, 2007......................... - $ - - $280.4
April 1 - April 30, 2007......................... 2.5 $18.68 2.5 $233.7
May 1 - May 31, 2007............................. - $ - - $233.7
----------------- -----------------
Total fiscal 2008 first quarter.................. 2.5 $18.68 2.5
================= =================
(a) In addition to purchases under the share repurchase authorization, these
columns include shares of common stock withheld to pay tax withholding
obligations for employees in connection with the vesting of stock awards. The
withholding of 1,193 shares in the month of March and 116 shares in the month of
April are not considered part of the share repurchase program described in (b)
below.
(b) In January 2003, the company announced that the board of directors had
authorized the repurchase of up to $200 million of common stock. In June 2004,
the company announced a $200 million increase in its stock repurchase
authorization, raising the repurchase capacity to $400 million. In March 2005,
the company announced a $400 million increase in its stock repurchase
authorization, raising the repurchase capacity to $800 million. In June 2006,
the company announced a $400 million increase in its stock repurchase
authorization, raising the repurchase capacity to $1.2 billion. There is no
expiration date under the authorization. At May 31, 2007, $233.7 million
remained available for stock repurchases under the $1.2 billion stock repurchase
authorization.
ITEM 6. EXHIBITS
Articles of Incorporation and Bylaws
3.1 Circuit City Stores, Inc. Amended and Restated Articles of Incorporation,
effective February 3, 1997, as amended through August 16, 2005, filed as
Exhibit 3.1 to the company's Form 8-A/A filed September 13, 2005 (File No.
1-5767), are expressly incorporated herein by this reference.
3.2 Circuit City Stores, Inc. Bylaws, as amended April 17, 2007, filed as
Exhibit 3.1 to the company's Current Report on Form 8-K filed April 19,
2007 (File No. 1-5767), are expressly incorporated herein by this
reference.
3.3 Circuit City Stores, Inc. Bylaws, as amended June 26, 2007, filed as
Exhibit 3.1 to the company's Current Report on Form 8-K filed July 2, 2007
(File No. 1-5767), are expressly incorporated herein by this reference.
Page 26 of 29
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of CEO and Principal Financial Officer under Rule 13a-14(a)
of the Securities Exchange Act of 1934
Section 1350 Certifications
32.1 Certification of CEO and Principal Financial Officer under Section 906 of
the Sarbanes-Oxley Act of 2002
Page 27 of 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIRCUIT CITY STORES, INC.
(Registrant)
By: /s/ Philip J. Schoonover
--------------------------------------
Philip J. Schoonover
Chairman, President and Chief Executive Officer
Principal Financial Officer
By: /s/ Philip J. Dunn
--------------------------------------
Philip J. Dunn
Senior Vice President, Treasurer,
Controller and
Chief Accounting Officer
July 3, 2007
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EXHIBIT INDEX
Articles of Incorporation and Bylaws
3.1 Circuit City Stores, Inc. Amended and Restated Articles of Incorporation,
effective February 3, 1997, as amended through August 16, 2005, filed as
Exhibit 3.1 to the company's Form 8-A/A filed September 13, 2005 (File No.
1-5767), are expressly incorporated herein by this reference.
3.2 Circuit City Stores, Inc. Bylaws, as amended April 17, 2007, filed as
Exhibit 3.1 to the company's Current Report on Form 8-K filed April 19,
2007 (File No. 1-5767), are expressly incorporated herein by this
reference.
3.3 Circuit City Stores, Inc. Bylaws, as amended June 26, 2007, filed as
Exhibit 3.1 to the company's Current Report on Form 8-K filed July 2, 2007
(File No. 1-5767), are expressly incorporated herein by this reference.
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of CEO and Principal Financial Officer under Rule 13a-14(a)
of the Securities Exchange Act of 1934
Section 1350 Certifications
32.1 Certification of CEO and Principal Financial Officer under Section 906 of
the Sarbanes-Oxley Act of 2002
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