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 November 30, 2005
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) 527- 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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No ___
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 November 30, 2005
Common Stock, par value $0.50 177,032,738
A Table of Contents is included on Page 2 and an Exhibit Index is included on
Page 29.
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations -
Three Months and Nine Months Ended November 30, 2005 and 2004 3
Consolidated Balance Sheets -
November 30, 2005, and February 28, 2005 4
Consolidated Statements of Cash Flows -
Nine Months Ended November 30, 2005 and 2004 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 6. Exhibits 27
SIGNATURES 28
EXHIBIT INDEX 29
Page 2 of 29
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Circuit City Stores, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended Nine Months Ended
November 30 November 30
2005 2004 2005 2004
------------ ------------ ------------ -------------
Net sales and operating revenues $2,905,678 $2,532,441 $7,695,835 $7,003,279
Cost of sales, buying and warehousing 2,202,583 1,894,602 5,822,819 5,279,520
------------ ------------- ------------ -------------
Gross profit 703,095 637,839 1,873,016 1,723,759
Finance income - - - 5,564
Selling, general and administrative expenses 676,577 639,641 1,854,991 1,741,713
Stock-based compensation expense 9,321 6,442 19,350 20,839
Interest expense 644 476 1,255 1,625
------------ ------------- ------------ -------------
Earnings (loss) from continuing operations
before income taxes 16,553 (8,720) (2,580) (34,854)
Income tax provision (benefit) 6,411 (2,820) (961) (12,304)
------------ ------------- ------------ -------------
Net earnings (loss) from continuing operations 10,142 (5,900) (1,619) (22,550)
Net loss from discontinued operation - - - (1,214)
------------ ------------- ------------ -------------
Net earnings (loss) $ 10,142 $ (5,900) $ (1,619) $ (23,764)
============ ============= ============ =============
Weighted average common shares:
Basic 174,438 191,135 179,426 195,321
============ ============= ============ =============
Diluted 177,509 191,135 179,426 195,321
============ ============= ============ =============
Net earnings (loss) per share:
Basic:
Continuing operations $ 0.06 $ (0.03) $ (0.01) $ (0.12)
Discontinued operation - - - (0.01)
------------ ------------ ------------ -------------
$ 0.06 $ (0.03) $ (0.01) $ (0.12)
============ ============ ============ =============
Diluted:
Continuing operations $ 0.06 $ (0.03) $ (0.01) $ (0.12)
Discontinued operation - - - (0.01)
------------ ------------ ------------ -------------
$ 0.06 $ (0.03) $ (0.01) $ (0.12)
============ ============ ============ =============
Cash dividends paid per share $ 0.0175 $ 0.0175 $ 0.0525 $ 0.0525
============ ============= ============ =============
See accompanying notes to consolidated financial statements.
Page 3 of 29
Circuit City Stores, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands except share data)
November 30, 2005 Feb. 28, 2005
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 493,659 $ 879,660
Short-term investments 42,274 125,325
Accounts receivable, net of allowance for doubtful accounts 189,749 172,995
Merchandise inventory 2,681,045 1,459,520
Deferred income taxes 24,970 29,518
Income tax receivable 15,051 -
Prepaid expenses and other current assets 61,159 18,697
-------------- ----------
Total current assets 3,507,907 2,685,715
Property and equipment, net of accumulated depreciation of
$1,156,767 and $1,104,137 815,393 738,802
Deferred income taxes 93,491 73,558
Goodwill 228,593 215,884
Other intangible assets, net of accumulated amortization of
$4,773 and $3,035 29,763 31,331
Other assets 42,297 44,092
-------------- ----------
TOTAL ASSETS $4,717,444 $3,789,382
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,127,047 $ 961,718
Accrued expenses and other current liabilities 240,030 228,966
Accrued income taxes - 72,274
Short-term debt 68,560 -
Current installments of long-term debt 1,488 888
---------- ----------
Total current liabilities 2,437,125 1,263,846
Long-term debt, excluding current installments 29,234 11,522
Accrued straight-line rent and deferred rent credits 242,487 230,426
Accrued lease termination costs 78,380 104,234
Other liabilities 94,399 91,920
---------- ----------
TOTAL LIABILITIES 2,881,625 1,701,948
---------- ----------
Stockholders' equity:
Common stock, $0.50 par value;
525,000,000 shares authorized; 177,032,738 shares
issued and outstanding at November 30, 2005
(188,150,383 at February 28, 2005) 88,516 94,075
Capital in excess of par value 475,727 721,038
Retained earnings 1,233,989 1,247,221
Accumulated other comprehensive income 37,587 25,100
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,835,819 2,087,434
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,717,444 $3,789,382
========== ==========
See accompanying notes to consolidated financial statements.
Page 4 of 29
Circuit City Stores, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Nine Months Ended
November 30
2005 2004
-------------- ------------
Operating Activities:
Net loss $ (1,619) $ (23,764)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities of continuing operations:
Loss from discontinued operation - 1,214
Depreciation and amortization 109,685 100,047
Stock option expense 9,821 14,271
Amortization of restricted stock awards 7,871 5,942
(Gain) loss on dispositions of property, equipment and other assets (1,949) 2,262
Provision for deferred income taxes (10,926) (82,063)
Goodwill impairment 2,711 -
Changes in operating assets and liabilities:
Increase in accounts receivable, net (16,898) (19,468)
Decrease in retained interests in securitized receivables - 32,867
Increase in merchandise inventory (1,213,013) (832,085)
Increase in prepaid expenses and other current assets (42,861) (23,607)
Decrease in other assets 327 16,836
Increase in accounts payable 1,162,632 893,546
Decrease in accrued expenses, other current liabilities and
accrued income taxes (71,604) ( 3,369)
(Decrease) increase in other long-term liabilities (12,662) 19,023
--------------- ------------
Net cash (used in) provided by operating activities of continuing
operations (78,485) 101,652
--------------- ------------
Investing Activities:
--------------------
Proceeds from the sale of the private-label finance operation - 475,857
Acquisitions, net of cash acquired of $0 and $30,615 (13,255) (268,668)
Purchases of property and equipment (214,421) (207,755)
Proceeds from sales of property, equipment and other assets 54,400 75,453
Purchases of investment securities (140,803) -
Proceeds from maturities of investment securities 225,000 -
-------------- ------------
Net cash (used in) provided by investing activities of continuing
operations (89,079) 74,887
-------------- ------------
Financing Activities:
--------------------
Proceeds from short-term debt 67,299 10,183
Principal payments on long-term debt (1,078) (15,081)
Repurchases of common stock (298,479) (210,052)
Issuances of common stock, net 25,719 20,849
Dividends paid (9,737) (10,498)
Redemption of preferred share purchase rights (1,876) -
--------------- ----------
Net cash used in financing activities of continuing operations (218,152) (204,599)
--------------- ------------
Net cash used in discontinued bankcard finance operation - (4,282)
Effect of exchange rate changes on cash (285) 1,349
--------------- ------------
Decrease in cash and cash equivalents (386,001) (30,993)
Cash and cash equivalents at beginning of year 879,660 783,471
--------------- ------------
Cash and cash equivalents at end of period $ 493,659 $ 752,478
=============== ============
See accompanying notes to consolidated financial statements.
Page 5 of 29
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
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 primarily engaged in the business of selling
brand-name consumer electronics, personal computers, entertainment
software, and services in Circuit City stores in the United States and via
the Web at www.circuitcity.com. At November 30, 2005, the company's
domestic segment operated 625 Superstores and six other stores in 157 U.S.
media markets.
The international segment is comprised of the operations of InterTAN, Inc.
On May 12, 2004, the company acquired a controlling interest in InterTAN,
Inc. and on May 19, 2004, completed its acquisition of 100 percent of the
common stock of InterTAN for cash consideration of $259.3 million, which
includes transaction costs and is net of cash acquired of $30.6 million. In
addition to giving Circuit City a greater product-sourcing capability and
the ability to accelerate the offering of private-label merchandise to its
customers, the acquisition of InterTAN gave the company its first presence
in the Canadian market. The international segment is primarily engaged in
the business of selling both private-label and brand-name consumer
electronics. The international segment's headquarters are located in
Barrie, Ontario, Canada, and it operates through retail stores and dealer
outlets in Canada under the trade names THE SOURCE BY CIRCUIT CITYSM,
RadioShack(R), Rogers Plus(R) and Battery Plus(R). At November 30, 2005,
the international segment conducted business through 954 retail stores and
dealer outlets, which consisted of 533 company-owned stores, 304 dealer
outlets, 93 Rogers Plus(R) stores and 24 Battery Plus(R) stores. The
international segment also operates a Web site at www.thesourcecc.ca.
InterTAN, Inc. is involved in ongoing litigation with RadioShack
Corporation. As a result of this litigation, the international segment
re-branded virtually all of its company-owned stores and dealer outlets to
THE SOURCE BY CIRCUIT CITYSM. The brand transition costs primarily include
advertising costs and the write-down of RadioShack(R) branded inventory and
totaled $29.8 million for the nine months ended November 30, 2005. See Note
2 for a discussion of the litigation.
On May 25, 2004, the company completed the sale of its private-label
finance operation, comprised of its private-label and co-branded Visa
credit card programs, to Chase Card Services, formerly Bank One
Corporation. Results from the private-label finance operation, including
transition and transaction costs of approximately $6 million related to the
sale of the operation, are included in finance income for the nine months
ended November 30, 2004. The company entered into a Consumer Credit Card
Program Agreement under which Chase Card Services is offering private-label
and co-branded credit cards to new and existing customers. The company is
compensated under the program agreement primarily based on the number of
new accounts opened less promotional financing costs that exceed a
negotiated base amount. The net results from the program agreement are
included in net sales and operating revenues on the consolidated statements
of operations.
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. In the opinion
of management, the accompanying unaudited financial statements contain all
adjustments, which consist only of normal, recurring adjustments, 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 2005 Annual Report on
Form 10-K.
Page 6 of 29
Certain prior year amounts have been reclassified to conform to the current
presentation.
2. Litigation
After Circuit City's March 31, 2004, announcement of its agreement to
acquire InterTAN, RadioShack Corporation asserted early termination of its
licensing and other agreements with InterTAN. On April 5, 2004, RadioShack
filed suit against InterTAN, and amended that suit on April 27, 2004 and
February 4, 2005 (the "RadioShack litigation"). InterTAN disputes the
termination scenarios alleged by RadioShack and is vigorously defending
against those claims. The parties argued a RadioShack motion for partial
summary judgment on February 3, 2005. On March 24, 2005, the court issued
an order on that motion stating that the agreements were terminated no
later than December 31, 2004. Under the ruling, InterTAN's rights under the
agreements expired June 30, 2005.
Circuit City continues to believe that RadioShack is not entitled to early
termination of the agreements, that InterTAN has substantial defenses to
the RadioShack claims and that RadioShack has breached the agreements by
seeking early termination. InterTAN intends to continue defending
vigorously the claims in the RadioShack litigation and to exercise its
rights under the agreements, as well as any appeal rights. Circuit City
believes that this litigation will not have a material adverse effect on
the company's financial condition or results of operations.
3. Finance Income
Finance income for the nine months ended November 30, 2004, includes the
results from the company's private-label finance operation including costs
of approximately $6 million related to the sale of the operation on May 25,
2004.
For the nine months ended November 30, 2004, the components of pretax
finance income were as follows:
Nine Months Ended
(Amounts in millions) November 30, 2004
-------------------------------------------------------------------------
Securitization income............................. $28.1
Less: Payroll and fringe benefit expenses......... 7.6
Other direct expenses..................... 14.9
-----------------------
Finance income.................................... $ 5.6
=======================
Securitization income primarily is comprised of the gain on the sale of
receivables generated by the company's private-label finance operation,
income from retained interests in the credit card receivables and income
related to servicing the receivables, as well as the impact of increases or
decreases in the fair value of the retained interests.
4. Stock-Based Compensation
The company uses the fair value based method of accounting for stock-based
compensation.
The fair value of each stock option granted is estimated on the grant date
using the Black-Scholes option-pricing model with the following weighted
average assumptions.
Three Months Ended Nine Months Ended
November 30 November 30
2005 2004 2005 2004
------------------------------------------------------------------------------------- -----------------------
Expected dividend yield.......................... 0.4% 0.5% 0.4% 0.6%
Expected stock volatility........................ 53% 63% 59% 64%
Risk-free interest rates......................... 4% 3% 4% 4%
Expected lives (in years)........................ 4 5 5 4
Page 7 of 29
Using these assumptions in the Black-Scholes model, the weighted average
fair value of options granted was $7.97 per share for the three months
ended November 30, 2005, and $8.51 per share for the nine months ended
November 30, 2005. The weighted average fair value of options granted was
$8.25 per share for the three months ended November 30, 2004, and $6.61 per
share for the nine months ended November 30, 2004.
5. Comprehensive Income
The components of the company's comprehensive income consist of the net
earnings (loss) and foreign currency translation adjustments. Foreign
currency translation adjustments are recorded net of deferred income taxes
directly as a component of stockholders' equity.
The components of comprehensive income, net of taxes, were as follows:
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2005 2004 2005 2004
----------------------------------------------------------------------------------------- -----------------------
Net earnings (loss)........................................ $10.1 $ (5.9) $ (1.6) $(23.8)
Foreign currency translation adjustments................... 4.0 25.0 12.5 34.6
------------------------- ---------------------
Comprehensive income....................................... $14.2 $19.1 $10.9 $ 10.8
========================= =====================
6. Net Earnings (Loss) Per Share
The following table presents a reconciliation of the denominators used in
the net earnings (loss) per share calculations.
Three Months Ended Nine Months Ended
November 30 November 30
(Shares in millions) 2005 2004 2005 2004
----------------------------------------------------------------------------------------- ----------------------
Weighted average common shares............................. 174.4 191.1 179.4 195.3
Dilutive potential common shares:
Options................................................ 2.6 - - -
Restricted stock....................................... 0.5 - - -
--------------------------- ----------------------
Weighted average common shares and dilutive
potential common shares................................ 177.5 191.1 179.4 195.3
========================== ======================
For the three months ended November 30, 2005, the computation of dilutive
potential common shares excluded 5.6 million options to purchase shares of
common stock because the options' exercise prices were greater than the
average market price of the common shares and, therefore, the effect would
be anti-dilutive.
For the nine months ended November 30, 2005, and the three and nine months
ended November 30, 2004, no stock options or restricted stock were included
in the calculation of diluted net loss per share because the company
reported a loss from continuing operations. Shares excluded were as
follows:
At November 30
(Shares in millions) 2005 2004
-----------------------------------------------------------------------------------------
Options to purchase common stock........................... 15.6 17.4
Restricted stock........................................... 5.5 2.3
7. Common Stock Repurchased
The company's board of directors has authorized stock repurchases up to
$800 million, of which $157.3 million remained available at November 30,
2005. The company repurchased 6.0 million shares of
Page 8 of 29
common stock at a cost of $102.2 million during the three months ended
November 30, 2005, and 17.8 million shares of common stock at a cost of
$298.5 million during the nine months ended November 30, 2005. The company
repurchased 4.5 million shares of common stock at a cost of $69.4 million
during the three months ended November 30, 2004, and 15.6 million shares of
common stock at a cost of $210.1 million during the nine months ended
November 30, 2004. As of November 30, 2005, the company had repurchased
46.2 million shares of common stock at a cost of $642.7 million.
8. 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 were (i) 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.
The components of the net pension (income) expense for the plans were as
follows:
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in thousands) 2005 2004 2005 2004
----------------------------------------------------------------------------------- ----------------------------
Service cost.......................................... $ 703 $3,497 $ 2,332 $ 10,492
Interest cost......................................... 3,455 3,898 10,367 11,694
Expected return on plan assets........................ (4,507) (4,093) (13,522) (12,278)
Recognized prior service cost......................... 54 119 161 356
Recognized actuarial loss............................. 265 1,255 794 3,765
Loss due to curtailment............................... - 243 - 243
------------------------- ----------------------------
Net pension (income) expense.......................... $ (30) $4,919 $ 132 $ 14,272
========================= ============================
Circuit City made no pension plan contributions during the nine months
ended November 30, 2005. The company is currently in the process of
evaluating its assumptions to determine its year end benefit obligations.
Changes in assumptions could affect the amount of contribution and,
therefore, the company cannot estimate the level of contribution, if any,
for fiscal 2006. The company intends to make any contributions to the
defined benefit pension plan necessary to meet ERISA minimum funding
standards and will make any additional contributions as needed to ensure
that the fair value of plan assets at February 28, 2006, exceeds the
accumulated benefit obligation.
A contribution of $529,000, which is equal to the expected benefit payments
for fiscal 2006, is expected to be made to the restoration plan during
fiscal 2006. Benefit payments during the nine months ended November 30,
2005, were $397,000.
9. Discontinued Operation
On November 18, 2003, the company completed the sale of its bankcard
finance operation to FleetBoston Financial. Bankcard results are presented
as results from discontinued operation.
For the nine months ended November 30, 2004, the net loss from the
discontinued bankcard finance operation totaled $1.2 million, which is
comprised of post-closing adjustments related to the sale of the bankcard
operation. Cash flows related to the discontinued operation have been
segregated on the consolidated statements of cash flows.
Page 9 of 29
10. 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 primarily engaged in the
business of selling brand-name consumer electronics, personal computers,
entertainment software, and services in the United States. The
international segment is primarily engaged in the business of selling
private-label and brand-name consumer electronics products in Canada.
Prior to the second quarter of fiscal 2005, the company had another
reportable segment, its finance operation. The company completed the sale
of its private-label finance operation, comprised of its private-label and
Visa co-branded credit card programs, to Chase Card Services on May 25,
2004. Results from the private-label finance operation, including costs of
approximately $6 million related to the sale of the operation, are included
in finance income for the nine months ended November 30, 2004. See Note 3
for additional discussion of finance income. The company has entered into
an arrangement under which Chase Card Services is offering private-label
and co-branded credit cards to new and existing customers and providing
credit card services to all cardholders.
Revenue by reportable segment and the reconciliation to the consolidated
statements of operations were as follows:
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2005 2004 2005 2004(a)
---------------------------------------------------------------------------------------- --------------------------
Domestic segment.......................................... $2,735.1 $2,390.5 $7,269.0 $6,721.9
International segment..................................... 170.6 142.0 426.9 281.4
Finance operation......................................... - - - 28.1
--------------------------- --------------------------
Total revenue............................................. 2,905.7 2,532.4 7,695.8 7,031.4
Less: securitization income(b)............................ - - - 28.1
--------------------------- --------------------------
Net sales and operating revenues ......................... $2,905.7 $2,532.4 $7,695.8 $7,003.3
============================ ==========================
(a)The international segment's revenue is included from May 12, 2004, when
Circuit City acquired a controlling interest in InterTAN, Inc.
(b)Securitization income is included in finance income, which reflects the
results of the finance operation and is reported separately from net sales
and operating revenues on the statements of operations.
The net earnings (loss) from continuing operations by reportable segment
were as follows:
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2005 2004 2005 2004(a)
------------------------------------------------------------------------------------- ------------------------
Domestic segment.......................................... $ 13.1 $(11.4) $ 7.8 $(35.3)
International segment..................................... (3.0) 5.5 (9.5) 9.2
Finance operation......................................... - - - 3.5
----------------------- -----------------------
Net earnings (loss) from continuing operations............ $ 10.1 $ (5.9) $(1.6) $(22.6)
======================= =======================
(a)The international segment's net earnings (loss) from continuing
operations are included from May 12, 2004, when Circuit City acquired a
controlling interest in InterTAN, Inc.
Total assets by reportable segment were as follows:
At November 30 At February 28
(Amounts in millions) 2005 2005
--------------------------------------------------------------------------------------------------
Domestic segment......................................... $4,169.9 $3,354.7
International segment.................................... 547.5 434.7
-------------------------------------
Total assets............................................. $4,717.4 $3,789.4
===================================
Page 10 of 29
11. Supplemental Consolidated Statements of Cash Flows Information
The following table summarizes supplemental cash flow information for the
nine months ended November 30, 2005 and 2004.
Nine Months Ended
November 30
(Amounts in millions) 2005 2004
--------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing
activities:
Capital lease obligations................................................. $17.5 $ 2.8
===== ========
Acquisition of InterTAN:
Fair value of assets acquired:
Cash and cash equivalents............................................ $ - $ 30.6
Merchandise inventory................................................ - 88.8
Property and equipment, net.......................................... - 42.6
Goodwill............................................................. - 186.3
Other intangible assets.............................................. - 28.0
Other assets......................................................... - 12.7
----- -------
Total fair value of assets acquired.................................. - 389.0
Less:
Liablities assumed................................................... - 92.6
Cash acquired........................................................ - 30.6
Stock options issued................................................. - 6.5
----- -------
Acquistion of InterTAN, net of cash acquired............................. $ - $259.3
===== ======
Other acquisitions:
Fair value of assets acquired............................................ $13.6 $ 13.4
Less: liabilities assumed................................................ 0.3 4.1
----- --------
Other acquisitions....................................................... $13.3 $ 9.3
===== ========
12. Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment." SFAS No. 123(R) requires companies to record compensation expense
based on the fair value of employee stock-based compensation awards. The
statement also requires that the compensation expense be recognized over
the period during which the employee is required to provide service in
exchange for the award. SFAS No. 123(R) will be effective for the company's
first quarter of fiscal 2007. The company plans to adopt SFAS No. 123(R)
using the modified prospective transition method. Effective December 1,
2003, the company adopted the fair value based method of accounting for
stock-based compensation in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." Under SFAS No. 123(R),
the company will continue to use the Black-Scholes option-pricing model to
estimate the fair value of stock option grants. The company does not expect
the adoption of SFAS No. 123(R) to have a material impact on its financial
position, results of operations or cash flows.
In October 2005, the FASB issued FASB Staff Position (FSP) No. FAS 13-1,
"Accounting for Rental Costs Incurred During a Construction Period." FSP
No. FAS 13-1 requires companies to expense rent payments for building or
ground leases incurred during a construction period. FSP No. FAS 13.1 is
effective for all interim or annual reporting periods beginning after
December 15, 2005. Retrospective application is permitted, but not
required. The company will adopt FSP No. FAS 13-1 on a prospective basis in
the first quarter of fiscal
Page 11 of 29
2007. The company does not believe the adoption of this new standard will
have a significant impact on its financial position, results of operations
or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On May 12, 2004, we acquired a controlling interest in InterTAN, Inc. for cash
consideration of $259.3 million, which includes transaction costs and is net of
cash acquired of $30.6 million. In addition to giving us a greater
product-sourcing capability and the ability to accelerate the offering of
private-label merchandise to our customers, the acquisition of InterTAN gave us
our first presence in the Canadian market. InterTAN is primarily engaged in the
business of selling both private-label and brand-name consumer electronics.
InterTAN's headquarters are located in Barrie, Ontario, Canada.
On May 25, 2004, we completed the sale of our private-label finance operation,
comprised of our private-label and co-branded Visa credit card programs, to
Chase Card Services. Results from the private-label finance operation are
included in finance income for the nine months ended November 30, 2004. We
entered into a Consumer Credit Card Program Agreement under which Chase Card
Services is offering private-label and co-branded credit cards to new and
existing customers. As part of the program agreement, we jointly develop and
introduce new features, products and services to drive additional sales. We are
compensated under the program primarily based on the number of new accounts
opened less promotional financing costs that exceed a negotiated base amount.
Chase Card Services is obligated to offer special promotional financing terms to
our customers. We determine the frequency, volume and, subject to certain
limits, the terms of these promotions. Chase Card Services is compensated for
these promotions in accordance with a negotiated fee schedule. The program
agreement has an initial seven-year term with three-year renewals. The agreement
has customary representations, warranties, covenants, events of default and
termination rights for an agreement of this type. The net results from the
program agreement are included in net sales and operating revenues on the
consolidated statements of operations.
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 2005
Annual Report on Form 10-K. These policies relate to accounting for cash
consideration received from vendors, the calculation of the liability for lease
termination costs, accounting for goodwill and other identified intangible
assets, accounting for stock-based compensation expense, accounting for pension
plans and accounting for income taxes.
RESULTS OF OPERATIONS
Our operations, in common 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 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. Our domestic segment is primarily engaged in the
business of selling brand-name consumer electronics, personal computers,
entertainment software, and services in our stores in the United States and via
the Web at www.circuitcity.com. Our international segment is primarily engaged
in the business of selling private-label and brand-name consumer electronics
products in Canada and via the Web at www.thesourcecc.ca and principally
includes the operations of InterTAN, Inc., which we acquired in May 2004.
Consolidated results include results from InterTAN from the acquisition date.
Prior to the second quarter of fiscal 2005, we had another reportable segment,
our finance operation. The following tables summarize performance by segment.
Page 12 of 29
SEGMENT PERFORMANCE SUMMARY
Three Months Ended Nov. 30, 2005 Nine Months Ended Nov. 30, 2005
(Amounts in millions) Domestic International Consolidated Domestic International Consolidated
---------------------------------------------------------------------------------- ------------------------------------------
Net sales and operating
revenues........................ $2,735.1 $170.6 $2,905.7 $7,269.0 $426.9 $7,695.8
Gross profit........................ $ 644.2 $ 58.9 $ 703.1 $1,717.2 $155.8 $1,873.0
Selling, general and
administrative expenses......... $ 614.2 $ 62.3 $ 676.6 $1,685.8 $169.2 $1,855.0
Net earnings (loss) from
continuing operations........... $ 13.1 $ (3.0) $ 10.1 $ 7.8 $ (9.5) $ (1.6)
Three Months Ended November 30, 2004
(Amounts in millions) Domestic International Consolidated
-----------------------------------------------------------------------------------------------------
Net sales and operating revenues............... $2,390.5 $142.0 $2,532.4
Gross profit................................... $ 581.8 $ 56.0 $ 637.8
Selling, general and administrative
expenses................................... $ 593.0 $ 46.6 $ 639.6
Net (loss) earnings from continuing
operations................................. $ (11.4) $ 5.5 $ (5.9)
Nine Months Ended November 30, 2004
(Amounts in millions) DomesticInternational(a) Finance Consolidated
---------------------------------------------------------------------------------------------------------------
Net sales and operating revenues............... $6,721.9 $281.4 $ - $7,003.3
Gross profit................................... $1,612.9 $110.9 $ - $1,723.8
Finance income................................. $ - $ - $5.6 $ 5.6
Selling, general and administrative
expenses................................... $1,646.9 $ 94.8 $ - $1,741.7
Net (loss) earnings from continuing
operations................................. $ (35.3) $ 9.2 $3.5 $ (22.6)
(a)Amounts are included from May 12, 2004, when we acquired a controlling
interest in InterTAN, Inc.
Net Sales and Operating Revenues
Consolidated
For the third quarter of fiscal 2006, our total sales increased 14.7 percent to
$2.91 billion, and comparable store sales increased 13.1 percent from the same
period last year. Total sales for the first nine months of fiscal 2006 increased
9.9 percent to $7.70 billion from $7.00 billion for the first nine months of
last fiscal year. Comparable store sales increased 6.5 percent for the first
nine months of fiscal 2006. 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 stores. Beginning June 1,
2005, international segment sales are included in comparable store sales and are
calculated in local currency. The calculation of consolidated comparable store
sales excludes the impact of fluctuations in foreign currency exchange rates.
Domestic Segment
For the third quarter of fiscal 2006, the domestic segment's net sales and
operating revenues were $2.74 billion, an increase of 14.4 percent over the same
period last fiscal year. Comparable store sales increased 13.3 percent. The
sales growth is largely attributed to increases in close rate and average
ticket, since store traffic for the quarter was relatively flat. For the
quarter, Web-originated sales grew by 74 percent over the same period last year.
Page 13 of 29
For the nine months ended November 30, 2005, domestic segment sales were $7.27
billion, an increase of 8.1 percent over the same period last fiscal year.
Comparable store sales increased 6.5 percent.
Our major product categories are the following:
o video, which includes televisions, imaging products, DVD hardware,
camcorders, digital cameras, digital video services, furniture and related
accessories
o information technology, which includes personal computer hardware, personal
computer services, telecommunications products and related product
accessories
o audio, which includes home audio products, mobile audio products, portable
audio products and related accessories
o entertainment, which includes movie software, music software, game
software, game hardware and personal computer software
The percent of domestic segment sales represented by each major product category
for the periods ended November 30, 2005 and 2004, is shown below.
PERCENT OF DOMESTIC SEGMENT SALES BY CATEGORY(a)
Three Months Ended Nine Months Ended
November 30 November 30
2005 2004 2005 2004
-------------------------------------------------------------------------------------- -----------------------
Video..................................................... 46% 43% 43% 42%
Information technology.................................... 28 30 30 33
Audio..................................................... 15 14 16 13
Entertainment............................................. 11 13 11 12
------------------------ ------------------------
Total..................................................... 100% 100% 100% 100%
======================== =======================
(a)Excludes extended warranty revenues and installation revenue
In the video category, we produced a double-digit comparable store sales
increase in the third quarter. Television comparable store sales increased by
double digits, led by triple-digit comparable store sales growth in flat panel
displays. Growth in television sales and double-digit comparable store sales
growth in digital imaging were partially offset by double-digit comparable store
sales declines in DVD players.
In the information technology category, we produced a single-digit comparable
store sales increase in the third quarter driven by a double-digit comparable
store sales increase in notebook computers.
In the audio category, we produced a double-digit comparable store sales
increase in the third quarter, primarily reflecting triple-digit comparable
store sales growth in portable digital audio products. Double-digit comparable
store sales growth in mobile audio products reflects growth in digital satellite
radio and navigation products. Comparable store sales growth in portable and
mobile audio products was partially offset by a single-digit comparable store
sales decline in home audio products.
In the entertainment category, we produced a single-digit comparable store sales
decrease in the third quarter, reflecting a double-digit comparable store sales
decrease in music software and game products, partially offset by a single-digit
comparable store sales increase in video software.
The following table provides the number of our domestic segment stores:
DOMESTIC SEGMENT STORE MIX
Nov. 30, 2005 Feb. 28, 2005 Nov. 30, 2004
----------------------------------------------------------------------------------------------------------------
Superstores....................................... 625 612 622
Other stores...................................... 6 5 5
----------------------------------------------------------
Total domestic segment stores..................... 631 617 627
==========================================================
Page 14 of 29
In the three months ended November 30, 2005, we relocated four Superstores,
opened ten new Superstores and closed one Superstore in the New Orleans, La.
market that received significant storm-related damage from Hurricane Katrina. In
the nine months ended November 30, 2005, we relocated nine Superstores, opened
15 new Superstores, closed one Superstore in the Richmond, Va. market and closed
one Superstore in the New Orleans, La. market. In fiscal 2006, we expect to open
a total of 28 Superstores in our domestic segment, of which 18 are expected to
be new Superstores and 10 are expected to be relocations.
As of November 30, 2005, there were 49 stores that had been relocated under our
store revitalization program with results available for at least 12 months
following their relocation. There were also 62 new stores open more than 12
months on November 30, 2005, that were incremental to our overall store base. Of
those 62 incremental stores, 42 had been open more than 24 months.
The 49 relocated stores open more than 12 months produced the following results
for their 12-month periods after grand opening:
o an average sales change that was approximately 28 percentage points better
than the sales pace of the rest of the store base during the same time
periods
o a return on invested capital, including lease termination and sublease
costs on vacated stores, of approximately 9 percent
o a return on invested capital, excluding lease termination and sublease
costs on vacated stores, of approximately 24 percent
The 62 incremental stores open more than 12 months produced a return on invested
capital of approximately 14 percent measured at the end of the first 12 months
after grand opening. The 42 incremental stores open more than 24 months produced
a return on invested capital of approximately 22 percent measured at the end of
the second 12 months after grand opening.
Extended Warranty Revenues. The extended warranty revenue included in domestic
segment sales was $104.7 million, or 3.8 percent of domestic segment sales, in
the third quarter of fiscal 2006, compared with $91.0 million, or 3.8 percent of
domestic segment sales, in last fiscal year's third quarter. The extended
warranty revenue included in domestic segment sales was $287.1 million for the
first nine months of fiscal 2006, or 3.9 percent of domestic segment sales,
compared with $260.0 million, or 3.9 percent of domestic segment sales, for the
first nine months of last fiscal year.
The domestic segment sells extended warranty programs on behalf of unrelated
third parties who are the primary obligors. Extended warranty sales carry
higher-than-average gross profit margins.
International Segment
The international segment's net sales and operating revenues increased 20.2
percent to $170.6 million for the third quarter of fiscal 2006, compared with
$142.0 million for the third quarter of last fiscal year. Comparable store sales
increased 7.5 percent for the quarter in local currency. Sales from our
wholesale relationships increased 38 percent for the third quarter in local
currency. The effect of fluctuations in foreign currency exchange rates
accounted for approximately 6 percentage points of the international segment's
third quarter total sales increase.
For the nine months ended November 30, 2005, the international segment's net
sales and operating revenues were $426.9 million. For the period from May 12
through November 30, 2004, the international segment's net sales and operating
revenues were $281.4 million. Comparable store sales increased 7.8 percent in
local currency for the first nine months of fiscal 2006. International segment
sales were included in the comparable store sales calculation beginning June 1,
2005.
Page 15 of 29
INTERNATIONAL SEGMENT STORE MIX
Nov. 30, 2005 Feb. 28, 2005 Nov. 30, 2004
----------------------------------------------------------------------------------------------------------------
Company-owned stores.............................. 533 521 518
Dealer outlets.................................... 304 331 335
Rogers Plus(R) stores............................... 93 88 87
Battery Plus(R) stores.............................. 24 26 27
----------------------------------------------------------
Total international segment stores................ 954 966 967
===========================================================
In addition to the 954 retail stores and dealer outlets open as of November 30,
2005, the international segment conducts business through 76 wholesale
relationships. At February 28, 2005, the international segment maintained 64
wholesale relationships, and at November 30, 2004, it maintained 59 wholesale
relationships.
Gross Profit Margin
Consolidated
The gross profit margin was 24.2 percent of sales in the third quarter of fiscal
2006, compared with 25.2 percent in the same period last fiscal year. For the
first nine months of fiscal 2006, the gross profit margin was 24.3 percent of
sales, compared with 24.6 percent for the same period last year.
Domestic Segment
For the third quarter of fiscal 2006, the domestic segment's gross profit margin
decreased 79 basis points from the same period last fiscal year. Approximately
half of the change in the domestic gross profit margin reflects a decline in
store merchandise margin due to continued margin rate declines in video software
and projection televisions. With respect to video software, we continued our
efforts to drive traffic through aggressive movie pricing. With respect to
projection televisions, we opted to remain competitive in the marketplace. The
other half of the decline in domestic gross profit margin results from higher
costs associated with our promotional financing program. The higher costs result
from higher interest rates, higher penetration of Circuit City credit card sales
and the implementation of promotional financing offers that were more
competitive than those offered last year.
For the first nine months of fiscal 2006, the domestic segment's gross profit
margin decreased 37 basis points from the same period last year. The decrease
primarily reflects higher costs associated with our promotional financing
program. The margin rates of video software, projection televisions and PC
hardware also contributed to the decline. Increased extended warranty sales,
which carry higher-than-average gross profit margins, and improvements in the
efficiency of our product service and distribution operations partially offset
these declines.
International Segment
The international segment's gross profit margin in the third quarter of fiscal
2006 decreased 494 basis points from the same period last year. The decline in
the international segment's gross profit margin primarily reflects changes in
the product sales mix. The sales mix change was driven by weak sales performance
in higher-margin categories including batteries, parts, accessories and toys,
and strength in lower-margin categories including video and personal
electronics. Promotional activity in the wireless communications business
produced revenue and margin dollar growth, but at a lower margin rate.
The international segment's gross profit margin for the nine months ended
November 30, 2005, was 36.5 percent of sales. For the period from May 12, 2004
to November 30, 2004, the international segment's gross profit margin was 39.4
percent of sales.
Page 16 of 29
Finance Income
Finance income was $5.6 million in the nine months ended November 30, 2004, and
includes a portion of the loss on the sale of the private-label finance
operation to Chase Card Services and the income generated by the private-label
finance operation from the beginning of fiscal year 2005 through the sale date.
Prior to November 2003, both our bankcard finance operation and our
private-label finance operation were conducted through our wholly owned
subsidiary, First North American National Bank, which was a limited-purpose
credit card bank, and through consolidated special purpose subsidiaries and
off-balance-sheet qualifying special purpose entities. As part of a focus on
strengthening the financial performance of our core business, we sold our
bankcard finance operation to FleetBoston Financial in November 2003 and sold
our private-label finance operation to Chase Card Services in May 2004.
Results from the bankcard finance operation are presented as results from
discontinued operation on the consolidated financial statements; therefore, its
results are not included in the "Components of Finance Income" table. See "Net
Loss from Discontinued Operation."
Coincident with the sale of the private-label operation to Chase Card Services,
we entered into an ongoing arrangement with Chase Card Services under which they
offer private-label and co-branded credit cards to both new and existing
customers.
COMPONENTS OF PRETAX FINANCE INCOME
Nine Months Ended
(Amounts in millions) November 30, 2004
----------------------------------------------------------------------------
Securitization income.............................. $28.1
Less: Payroll and fringe benefit expenses.......... 7.6
Other direct expenses...................... 14.9
-------------------------
Finance income..................................... $ 5.6
=========================
Securitization income primarily is comprised of the gain on the sale of the
credit card receivables generated by our private-label finance operation, income
from the retained interests in the securitized receivables and income related to
servicing the securitized receivables, as well as the impact of increases or
decreases in the fair value of the retained interests.
Selling, General and Administrative Expenses
Consolidated
Three Months Ended November 30 Nine Months Ended November 30
2005 2004 2005 2004
% of % of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales $ Sales
------------------------------------------------------------------------------------ ---------------------------------------------
Store expenses.......................... $587.4 20.2% $559.5 22.1% $1,615.8 21.0% $1,543.4 22.0%
General and administrative
expenses........................... 86.6 3.0 61.0 2.4 243.1 3.2 161.4 2.3
Remodel expenses........................ - - 0.2 - - - 0.3 -
Relocation expenses..................... 2.6 0.1 14.9 0.6 4.9 0.1 33.3 0.5
Pre-opening expenses.................... 4.4 0.1 7.5 0.3 6.7 0.1 12.0 0.2
Interest income......................... (4.3) (0.1) (3.4) (0.1) (15.4) (0.2) (8.8) (0.1)
------------------------------------------ ---------------------------------------------
Total ................................. $676.6 23.3% $639.6 25.3% $1,855.0 24.1% $1,741.7 24.9%
========================================= ============================================
Selling, general and administrative expenses were 23.3 percent of sales in the
third quarter of this fiscal year, compared with 25.3 percent in last year's
third quarter. For the first nine months of fiscal 2006, selling, general and
administrative expenses were 24.1 percent of sales, compared with 24.9 percent
during the same period last fiscal year.
Page 17 of 29
Domestic Segment
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2005 2004 2005 2004
------------------------------------------------------------------------------ ------------------------
Store expenses....................................... $543.0 $521.3 $1,501.0 $1,466.6
General and administrative expenses.................. 68.5 52.6 188.1 143.4
Remodel expenses..................................... - 0.2 - 0.3
Relocation expenses.................................. 2.6 14.9 4.9 33.3
Pre-opening expenses................................. 4.4 7.5 6.7 12.0
Interest income...................................... (4.2) (3.4) (14.8) (8.7)
----------------------- ------------------------
Total................................................ $614.2 $593.0 $1,685.8 $1,646.9
======================= ========================
During the third quarter of fiscal 2006, the domestic segment's expense-to-sales
ratio decreased 235 basis points from the same period last year. Of this
decrease, 195 basis points is attributable to store expenses and reflects
leverage on higher sales that was partially offset by $15.6 million in higher
advertising expense. The decrease also reflects a $9.4 million gain for the 2003
settlement in the Visa/MasterCard antitrust.
The domestic segment's general and administrative expense-to-sales ratio
increased by 30 basis points. The increase in general and administrative
expenses is primarily attributed to innovation initiatives and upgrades to our
information technology systems.
Relocation expenses contributed 53 basis points to the decline of the domestic
segment's expense-to-sales ratio. The domestic segment relocated four stores
during the third quarter of the current fiscal year compared with 12 stores in
the same period last year, resulting in lower store relocation expenses.
During the first nine months of fiscal 2006, the domestic segment's
expense-to-sales ratio decreased 131 basis points from the same period last
fiscal year. The decrease in the domestic segment's expense-to-sales ratio
primarily reflects leverage on higher sales and decreased store relocation
expenses.
International Segment
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2005 2004 2005 2004(a)
------------------------------------------------------------------------------ -------------------------
Store expenses....................................... $44.3 $38.2 $114.8 $76.8
General and administrative expenses.................. 18.1 8.4 55.0 18.0
Interest income...................................... (0.1) - (0.6) (0.1)
----------------------- -------------------------
Total................................................ $62.3 $46.6 $169.2 $94.8
======================= =========================
(a) Selling, general and administrative expenses are included from May 12, 2004,
when we acquired a controlling interest in InterTAN, Inc.
For the third quarter of fiscal 2006, the international segment's
expense-to-sales ratio increased 372 basis points from the same period last
year. The increase in the international segment's store expenses relates to
advertising and payroll expenses. The international segment's general and
administrative expenses in the third quarter of fiscal 2006 include expenses
associated with the brand transition in Canada of $8.3 million, primarily
related to incremental advertising. The effect of fluctuations in foreign
currency exchange rates accounted for approximately $2.4 million of the increase
in the international segment's third quarter selling, general and administrative
expenses.
For the nine months ended November 30, 2005, the international segment's
expense-to-sales ratio was 39.6 percent. The international segment's selling,
general and administrative expenses were 33.7 percent of sales for the period
from May 12, 2004 through November 30, 2004. For the first nine months of fiscal
2006, the international segment's general and administrative expenses include
expenses associated with the brand
Page 18 of 29
transition in Canada. These costs primarily include incremental advertising
costs and the write-down of RadioShack(R) branded inventory as a result of the
ongoing litigation with RadioShack and totaled $29.8 million.
Stock-based Compensation Expense
Stock-based compensation expense was $9.3 million for the three months ended
November 30, 2005, compared with $6.4 million for the three months ended
November 30, 2004. The increase reflects an increase in restricted stock awards
over the prior year.
Stock-based compensation expense was $19.4 million for the nine months ended
November 30, 2005, compared with $20.8 million for the nine months ended
November 30, 2004. The decrease reflects the complete vesting of certain stock
option grants in fiscal 2005 and the first half of fiscal 2006 and lower
weighted-average fair values of recent stock option grants partially offset by
an increase in restricted stock awards over the prior year. The stock-based
compensation expense for the nine months ended November 30, 2004, includes
compensation costs related to performance-based restricted stock grants. Under
the terms of those grants, vesting is contingent upon our achieving a targeted
operating profit margin for fiscal 2006. During the fourth quarter of fiscal
2005, management determined that it is unlikely that the target will be met and,
as a result, reversed the related expense.
Income Tax Provision
The consolidated effective income tax rate applicable to results from continuing
operations was 38.7 percent for the three months ended November 30, 2005, and
32.3 percent for the three months ended November 30, 2004. The effective income
tax rate applicable to results from continuing operations was 37.2 percent for
the nine months ended November 30, 2005, and 35.3 percent for the nine months
ended November 30, 2004. The increase in the tax rate for the nine months ended
November 30, 2005, is due to a change in the provision for state income taxes
and the anticipated resolution of federal and state tax matters.
Net Earnings (Loss) from Continuing Operations
The net earnings from continuing operations were $10.1 million, or 6 cents per
share, in the three months ended November 30, 2005, compared with a net loss of
$5.9 million, or 3 cents per share, in the same period last fiscal year.
For the nine months ended November 30, 2005, the net loss from continuing
operations was $1.6 million, or 1 cent per share, compared with the net loss
from continuing operations of $22.6 million, or 12 cents per share, for the same
period last fiscal year.
Net Loss from Discontinued Operation
On November 18, 2003, we completed the sale of our bankcard finance operation to
FleetBoston Financial. Results from the bankcard finance operation are presented
as results from discontinued operation. The net loss from the discontinued
bankcard finance operation was $1.2 million for the nine months ended November
30, 2004.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment."
SFAS No. 123(R) requires companies to record compensation expense based on the
fair value of employee stock-based compensation awards. The statement also
requires that the compensation expense be recognized over the period during
which the employee is required to provide service in exchange for the award.
SFAS No. 123(R) will be effective for our first quarter of fiscal 2007. We plan
to adopt SFAS No. 123(R) using the modified prospective transition method.
Effective December 1, 2003, we adopted the fair value based method of accounting
for stock-based compensation in
Page 19 of 29
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure." Under SFAS No. 123(R), we will continue to use the Black-Scholes
option-pricing model to estimate the fair value of stock option grants. We do
not expect the adoption of SFAS No. 123(R) to have a material impact on our
financial position, results of operations or cash flows.
In October 2005, the FASB issued FASB Staff Position (FSP) No. FAS 13-1,
"Accounting for Rental Costs Incurred During a Construction Period." FSP No. FAS
13-1 requires companies to expense rent payments for building or ground leases
incurred during a construction period. FSP No. FAS 13.1 is effective for all
interim or annual reporting periods beginning after December 15, 2005.
Retrospective application is permitted, but not required. We will adopt FSP No.
FAS 13-1 on a prospective basis in the first quarter of fiscal 2007. We do not
believe the adoption of this new standard will have a significant impact on our
financial position, results of operations or cash flows.
FINANCIAL CONDITION
Liquidity and Capital Resources
Summary
At November 30, 2005, we had cash, cash equivalents and short-term investments
of $535.9 million, compared with $1.00 billion at February 28, 2005. During the
first nine months of fiscal 2006, we used $298.5 million of cash to repurchase
common stock under our stock repurchase authorization. At November 30, 2004, we
had cash and cash equivalents of $752.5 million. The year-over-year change in
the cash balance primarily reflects the use of $348.3 million to repurchase
common stock under our stock repurchase authorization.
Cash Flows
We used net cash from operating activities of $78.5 million in the nine months
ended November 30, 2005, compared with generating net cash from operating
activities of $101.7 million in the nine months ended November 30, 2004. The
primary use of cash in the nine months ended November 30, 2005, was an $86.7
million decrease in accrued income taxes primarily due to the payment of taxes.
In addition, there was a $50.4 million increase in merchandise inventory, net of
accounts payable, which was due to the seasonal build in inventory. The
generation of cash in the nine months ended November 30, 2004, resulted from a
$32.9 million decrease in retained interests in securitized receivables related
to the sale of the private-label finance operation and an $893.5 million
increase in accounts payable, which was partly offset by an $832.1 million
increase in merchandise inventory.
For the nine months ended November 30, 2005, net cash used in investing
activities was $89.1 million and primarily relates to purchases of property and
equipment and investment securities partly offset by proceeds from the
maturities of investment securities. For the nine months ended November 30,
2004, net cash provided by investing activities was $74.9 million and primarily
relates to cash proceeds of $475.9 million from the sale of the private-label
finance operation, partly offset by the acquisition of InterTAN, Inc. for $259.3
million, net of acquired cash of $30.6 million, and purchases of property and
equipment.
We used net cash from financing activities of $218.2 million in the nine months
ended November 30, 2005, compared with $204.6 million in the nine months ended
November 30, 2004. The primary use of cash for both periods relates to the
repurchase of common stock. The board of directors has authorized stock
repurchases of up to $800 million, of which $157.3 million remained available at
November 30, 2005. We repurchased 17.8 million shares of common stock at a cost
of $298.5 million during the nine months ended November 30, 2005. We repurchased
15.6 million shares of common stock at a cost of $210.1 million during the same
period last fiscal year. As of November 30, 2005, we had repurchased 46.2
million shares of common stock at a cost of $642.7 million. Based on the market
value of the common stock at November 30, 2005, the then remaining $157.3
million of the $800 million authorization would allow for the repurchase of up
to approximately 4 percent of the 177.0 million shares then outstanding.
Page 20 of 29
Sources of Liquidity
We have a $500 million, four-year revolving credit facility secured by inventory
and accounts receivable. This facility is scheduled to mature on June 27, 2009.
On October 18, 2005, we amended the terms of the facility to revise the
borrowing limits for the international and domestic segments. The amendment
increased the international segment's borrowing limit from $50 million to $100
million and decreased the domestic segment's borrowing limit from $450 million
to $400 million. At November 30, 2005, short-term borrowings on this facility
were $68.6 million and related to our international segment. At November 30,
2005, outstanding letters of credit related to this facility were $55.9 million,
leaving $375.5 million available for borrowing. We are in compliance with all
covenants at November 30, 2005.
Net-owned inventory increased by $56.2 million from February 28, 2005, to
November 30, 2005. Net-owned inventory is calculated by subtracting accounts
payable from merchandise inventory. Accounts payable includes merchandise
payable, expenses payable, the liability related to gift cards, customer
deposits and the rebate liability. Merchandise inventory increased to $2.68
billion at November 30, 2005, from $1.46 billion at February 28, 2005, driven by
an increase in domestic segment inventory of $1.13 billion due to the build of
inventory to support shifts in the portfolio of products and to increase store
in-stock positions.
Our primary sources of liquidity include available cash, borrowing capacity
under the credit facility, landlord reimbursements and sale-leaseback
transactions. We expect that our primary sources of liquidity will be sufficient
to fund capital expenditures and working capital for the foreseeable future.
FISCAL 2006 OUTLOOK
Our strategy for improving our operations, financial performance and shareholder
value includes the following:
o upgrading processes, systems and talent to improve the core business
o evolving the core business to generate incremental revenues and profits
o innovating to create new businesses, related to our core business, to
produce long-term growth
Key initiatives to upgrade the core business include the following:
o store revitalization program
o promotional and marketing effectiveness
o product transition and pricing management
o multiple sourcing alternatives
o inventory management, including improved customer-encountered in-stock
levels and reduced net-owned inventory
o collaborative vendor relationships
o information systems enhancements, including a company-wide data warehouse,
as well as improved supply chain, merchandising and marketing systems
Key initiatives to evolve the core business include the following:
o portfolio management of merchandise product categories, matching our
investments in merchandise product categories with the strategic intent of
the specific business
o expanded service offerings
o continued investment in Circuit City brand awareness and in marketing by
our Circuit City Direct business, ensuring a consistent multi-channel brand
o improved customer experience led by Associate engagement
o reduction of performance gap between the best and the poorest performing
stores
Key initiatives to innovate include the following:
o win in home entertainment - be the retail destination for home
entertainment products and services
o digital home services - develop breakthrough consumer electronics service
offerings
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o multi-channel retailing - move focus from transactions to relationships and
provide solutions to customers wherever they want them
We have updated our fiscal 2006 outlook. We revised the range of expectations
for total sales growth. We now expect total sales growth of 10 to 12 percent. We
now expect domestic comparable store sales growth in the upper-single digit
range. We narrowed the range of expectations for operating margin (earnings from
continuing operations before income taxes as a percent of sales) to 1.6 percent
to 2.0 percent.
The fiscal 2006 outlook is based on the following assumptions:
o continued strong sales performance
o a stable competitive environment
o a stable macroeconomic environment
o no unforeseen inventory shortages
Domestic segment Superstore openings are shown in the table below.
DOMESTIC SEGMENT SUPERSTORE OPENINGS
Q1 Q2 Q3 Q4(a) FY06(a)
----------------------------------------------------------------------------------------------------------
Incremental Superstores.............................. 0 5 10 3 18
Relocated Superstores................................ 3 2 4 1 10
- - --- - --
Total expected Superstore openings................... 3 7 14 4 28
= = == = ==
(a)The number of fourth quarter Superstore openings is estimated.
For the year, we expect expenses related to domestic segment store relocations
to total approximately $7 million and stock-based compensation expenses are
expected to total approximately $28 million. For fiscal 2006, capital
expenditures, net of landlord reimbursements and sale leaseback transactions,
are expected to total approximately $205 million. We expect the consolidated
effective income tax rate applicable to results from continuing operations will
be 37.2 percent.
MANAGEMENT TRANSITION
As reported on Form 8-K on December 22, 2005, Circuit City Stores, Inc.
announced that W. Alan McCollough has decided to retire as chief executive
officer effective February 28, 2005 and as chairman of the board of directors at
the 2006 Annual Meeting of Shareholders. Mr. McCollough will not stand for
re-election to the board at the end of his term that expires in June 2006.
At a meeting of the Circuit City board of directors on Saturday, December 17,
2005, following Mr. McCollough's confirmation of his intention to retire, Philip
J. Schoonover was elected unanimously to the board, effective immediately, and
named chief executive officer effective March 1, 2006.
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 2006 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
Page 22 of 29
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 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 changes in general economic conditions including, but not limited to,
financial market performance, consumer credit availability, interest rates,
inflation, 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 presence or absence of, or consumer acceptance of, new products or
product features in the merchandise categories we sell and changes in our
merchandise sales mix
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 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 the impact of initiatives related to upgrading merchandising, marketing and
information systems on revenue and operating margin and the costs
associated with these investments
o the impact of inventory and supply chain management initiatives on
inventory levels and profitability
o our inability to liquidate excess inventory should excess inventory develop
o failure to successfully implement 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 and to generate sales and margin growth through expanded
service offerings
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 the effect of pricing and promotional activities of our competitors and our
response to those actions
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 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 successful implementation of our initiatives to upgrade, evolve and
innovate the core business
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 us or our competitors, 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 reduced investment returns in our pension plan
o changes in our anticipated cash flow
o whether, when and in what amounts share repurchases may be made under our
stock buyback authorization
o adverse results in significant litigation matters
o impacts from legal proceedings, tax audits or other contingencies that,
while not material to the company's financial position or ongoing results
of operations, may be material with respect to results of operations for a
particular fiscal period
o the ultimate outcome of the litigation instituted by RadioShack Corporation
to terminate InterTAN's right to use the RadioShack(R) name in Canada
o currency exchange rate fluctuations between Canadian and U.S. dollars and
other currencies
o the regulatory and trade environment in the U.S. and Canada
o the disruption of global, national or regional transportation systems
Page 23 of 29
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
o the successful execution of the initiatives to achieve revenue growth and
increase operating margin and the accuracy of the assumptions underlying
our projected 2006 results as discussed under "Fiscal 2006 Outlook" in MD&A
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
As a result of the acquisition of InterTAN, 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 InterTAN'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 November 30,
2005, U.S. dollar purchase orders totaled approximately $17.1 million. A 10
percent decline in the value of the Canadian dollar would result in an increase
in product cost of approximately $1.7 million. 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
Fluctuations in the value of the Canadian dollar have a direct effect on
reported consolidated results due to the acquisition of InterTAN. 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 and chief financial 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 their evaluation, the chief executive officer and chief
financial officer concluded that the company's disclosure controls and
procedures are effective.
Changes in Internal Controls
There were no changes in the company's internal control over financial reporting
in the quarter ended November 30, 2005, that have materially affected, or are
reasonably likely to materially affect, the company's internal control over
financial reporting.
Page 24 of 29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 31, 2004, Circuit City announced a public tender offer to purchase the
stock of InterTAN. Circuit City completed the acquisition and InterTAN became a
wholly owned subsidiary of Circuit City on May 19, 2004. Among other things,
InterTAN has operated retail consumer electronics outlets under the
RadioShack(R) name in Canada under a licensing agreement with a subsidiary of
RadioShack Corporation. InterTAN has also operated under two other agreements
with RadioShack and its subsidiaries ("RadioShack"): a merchandising agreement
and an advertising agreement.
After the March 31, 2004 announcement, RadioShack asserted early termination of
all three agreements under a variety of theories and on a variety of proposed
termination dates. RadioShack asserts that InterTAN failed to pay an annual fee
in material breach of the advertising agreement and, alternatively, that a
"without cause" termination of the advertising agreement triggers termination of
the other agreements.
On April 5, 2004, RadioShack filed suit against InterTAN in Tarrant County,
Texas, and amended that suit on April 27, 2004 and February 4, 2005 (the
"RadioShack litigation"). InterTAN disputes the various termination scenarios
alleged by RadioShack and is defending vigorously against those claims. The
parties argued a RadioShack motion for partial summary judgment on February 3,
2005. On March 24, 2005 the court issued an order on that motion stating that
the three agreements were terminated no later than December 31, 2004. Under the
ruling, InterTAN's rights under the three agreements expired June 30, 2005.
Circuit City continues to believe that RadioShack is not entitled to early
termination of the agreements, that InterTAN has substantial defenses to the
RadioShack claims and that RadioShack has breached the agreements by seeking
early termination. InterTAN intends to continue defending vigorously the claims
and to exercise its rights under the agreements, as well as any appeal rights.
Because of the ongoing legal conflict with RadioShack, Circuit City has been
taking steps to position its Canadian operations for continued success,
regardless of the outcome of this litigation. Circuit City believes that this
litigation will not have a material adverse effect on the company's financial
condition or results of operations.
Page 25 of 29
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 November 30, 2005:
Approximate
Total Number Dollar Value of
of Shares Shares that
Average Purchased as May Yet Be
Total Number Price Part of Publicly Purchased
of Shares Paid Announced Under
(Amounts in millions except per share data) Purchased(a) per Share Program the Program(b)
-----------------------------------------------------------------------------------------------------------------------------------
Sept. 1 - Sept. 30, 2005......................... 0.6 $16.82 0.6 $249.5
Oct. 1 - Oct. 31, 2005........................... 5.4 $17.19 5.4 $157.3
Nov. 1 - Nov. 30, 2005........................... - $ - - $157.3
----------------- -----------------
Total fiscal 2006 third quarter.................. 6.0 $17.15 6.0
================= =================
(a)In addition to shares purchased as part of a publicly announced program,
includes 5,000 shares that represent shares purchased in open-market
transactions by an officer of the company who may be considered an "affiliate
purchaser" as defined in Rule 10b -18(c)(3).
(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. There is no
expiration date under the authorization. At November 30, 2005, $157.3 million
remained available for share repurchases under the share repurchase
authorization.
Page 26 of 29
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 December 17, 2005,
filed as Exhibit 3.1 to the company's Current Report on Form 8-K
filed December 22, 2005 (File No. 1-5767), are expressly
incorporated herein by this reference.
Material Contracts
10.1 Circuit City Stores, Inc. Benefit Restoration Plan, as amended
and restated effective February 28, 2005 and amended through
December 2005, filed herewith.*
10.2 Retirement and Consulting Agreement between Circuit City Stores
and W. Alan McCollough effective December 22, 2005, filed
herewith.*
10.3 Amendment to the Circuit City Stores, Inc. Executive Deferred
Compensation Plan effective January 1, 2005, filed herewith.*
10.4 Third Amendment to the Amended and Restated Credit Agreement,
dated as of October 18, 2005, filed herewith.
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of CEO under Rule 13a-14(a) of the Securities
Exchange Act of 1934
31.2 Certification of CFO under Rule 13a-14(a) of the Securities
Exchange Act of 1934
Section 1350 Certifications
32.1 Certification of CEO under Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification of CFO under Section 906 of the Sarbanes-Oxley Act
of 2002
*Indicates management contracts, compensatory plans or arrangements of the
company required to be filed as an exhibit.
Page 27 of 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CIRCUIT CITY STORES, INC.
(Registrant)
By: /s/ W. Alan McCollough
--------------------------------------
W. Alan McCollough
Chairman and Chief Executive Officer
By: /s/ Michael E. Foss
--------------------------------------
Michael E. Foss
Executive Vice President and
Chief Financial Officer
By: /s/ Philip J. Dunn
--------------------------------------
Philip J. Dunn
Senior Vice President, Treasurer,
Corporate Controller and
Chief Accounting Officer
January 6, 2006
Page 28 of 29
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 December 17, 2005,
filed as Exhibit 3.1 to the company's Current Report on Form 8-K
filed December 22, 2005 (File No. 1-5767), are expressly
incorporated herein by this reference.
Material Contracts
10.1 Circuit City Stores, Inc. Benefit Restoration Plan, as amended
and restated effective February 28, 2005 and amended through
December 2005, filed herewith.*
10.2 Retirement and Consulting Agreement between Circuit City Stores,
Inc. and W. Alan McCollough effective December 22, 2005, filed
herewith.*
10.3 Amendment to the Circuit City Stores, Inc. Executive Deferred
Compensation Plan effective January 1, 2005, filed herewith.*
10.4 Third Amendment to the Amended and Restated Credit Agreement,
dated as of October 18, 2005, filed herewith.
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of CEO under Rule 13a-14(a) of the Securities
Exchange Act of 1934
31.2 Certification of CFO under Rule 13a-14(a) of the Securities
Exchange Act of 1934
Section 1350 Certifications
32.1 Certification of CEO under Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification of CFO under Section 906 of the Sarbanes-Oxley Act
of 2002
*Indicates management contracts, compensatory plans or arrangements of the
company required to be filed as an exhibit.
Page 29 of 29