Circuit City, Flailing, Looks to Higher Margins and More Services

For starters, here is how Chairman and CEO Philip Schoonover began his presentation to financial analysts to explain the numbers: "Financially, fiscal year 2008 was a very disappointing year." He quickly followed up by pointing out that its most recent quarter was a little bit better, but it's clear the company is frantically trying to change its "selling culture" and do what successful resellers realized they had to do 10 years or more ago: stop pushing boxes and start adding value.

Circuit City's earnings were flat with a year ago, largely due to aggressive cost-cutting. Analysts, on average, had actually expected much worse performance and those polled by Thomson Financial actually expected a seven-cents per share loss. But it's clear the business has stalled and all of the industry's growth is going to Circuit City's competitors.

One way the company wants to accomplish a return to growth is to boost attach rates of its Firedog services business to store-sold products, so Circuit City can make some after-sale money. At the same time, there are strong hints that Circuit City will stop slashing prices and margins on PCs and other products so it can present a better bottom line. Bruce Besanko, Circuit City's CFO, told analysts:

One question that went largely unanswered: How is Circuit City going to pay for all this increased growth in services? For the VAR channel that made the switch years ago to a more services-driven approach, it wasn't without substantial investment and even substantial pain in many quarters. And executives just can't wish their way to a company's growth in services. Ask executives at Dell. We're all still waiting for Dell to reach the once-promised $10 billion annual services run rate. It's not as easy as it looks.

It also bears watching to see if Circuit City becomes less aggressive with PC pricing as competitors like Best Buy continue to expand their vendor line cards. The company does have a lot going on all at once, and for its rivals, there could very well be lessons learned from how it all turns out for Circuit City.