Circuit City: Due for a Change?

There is no question that Philip Schoonover's job, as CEO of electronics store chain Circuit City (CC), is in jeopardy. On Feb. 29, Wattles Capital Management, which recently bought 6.5% of the company's stock, proposed replacing Circuit City's entire 12-member board of directors with at least five of its own nominees. "Phil's actions in the past year show that he doesn't understand retail; he's completely mismanaged the company, and it's time for him to go," says Mark Wattles, principal of the investment firm, in an interview with BusinessWeek.com.

Under Schoonover's leadership in the past couple of years, Circuit City's performance has been dismal. The company, which is the second-largest specialty consumer electronics chain behind Best Buy (BBY), has posted net losses every quarter in the past year. That follows a $12 million net loss in its fiscal year that ended Feb. 28, 2007. Schoonover has told shareholders that management is dissatisfied with the results. Since Schoonover took over the top job in March, 2006, he has talked of a turnover plan to relocate underperforming stores and improve customer service, which seemed to give a lift to the company in the first few months. But two years and many quarterly losses later, Schoonover's plans sound hollow. "Our current focus is to rebuild our selling culture," said Schoonover to analysts on Dec. 21, after reporting third-quarter losses totaling $207.3 million.

That focus might be too little, too late. Especially since almost all analysts who cover the company blame its current woes on Schoonover's decision last March to fire 3,400 of Circuit City's most experienced employees. At the time the company said those workers were making too much money and could be replaced with cheaper workers. Analysts say the move led to a devastating loss of morale and a decline in customer service. "Obviously, if customers prefer to walk into a Best Buy rather than a Circuit City, which carry almost exactly the same things, the only point of difference is customer service," says Bob Bacarella, portfolio manager at the Monetta Funds, based in Wheaton, Ill., and a shareholder of competitor Best Buy.

Circuit City's stock, trading at 4.50, has declined 77% in the past year. Despite annual sales of $12 billion, the company's market capitalization today is a mere $760 million, making it a ripe target for shareholder actions like the one from Wattles Capital Management, as big investors can buy huge chunks of stock on the cheap.

The Wal-Mart Effect

To be fair, not all of Circuit City's problems are self-inflicted. A lot of them can be traced to 2006 holiday sales (BusinessWeek.com, 4/23/07), when a dramatic shift took place in the hottest selling flat-panel TV category. A calculated decision by giant retailer Wal-Mart Stores (WMT) to break the below-$1,000 barrier for 43-in. TVs triggered a financial meltdown among several consumer-electronics retailers. Tweeter Home Entertainment Group (TWTR), the high-end chain, shuttered 49 of its 153 stores before filing for bankruptcy. So did regional retailer Rex Stores (RSC), which boarded up dozens of its outlets.

Circuit City subsequently closed 70 stores in the U.S., put its 800 Canadian stores on the block, and then laid off the 3,400 workers. To many of his critics, that move demonstrated Schoonover's lack of experience in running stores. "Nobody who has worked in the field would have made the kind of firing decision that Phil made last year," says investor Wattles. "Phil didn't realize that you cannot cut costs and save your way out of deterioration. He didn't have a plan, and that crushed the stores."

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