Those wonderful shops
I been looking at retailers lately – not something I know a lot about. I know enough to know I can hurt myself if I get these wrong – as my post about being a fuddy-duddy old guy reveals.
However I have come across this retailer in relatively good categories with a very low valuation and acceptable looking – though economically cyclic - run of same store sales increases. Here are the numbers:
Fiscal year
Same store sales
1992
1%
1993
7%
1994
8%
1995
15%
1996
5%
1997
-8%
1998
-1%
1999
8%
2000
8%
2001
-4%
2002
-10%
2003
4%
2004
-3%
2005
1%
2006
8%
2007
6%
2008
-8%
The same store sales were up 50 percent over the period 1992 to 2007 – not a great 15 years – but not diabolical. They were down 8% in 2008 – which – given the economy looks bad – but again not pinch yourself bad.
And this stock looks cheap. Really cheap. Breathtakingly cheap.
I am going to leave a few spaces before the rest of this post….
More space…
And more…
So it’s a bait-and-switch – the company is Circuit City – and whilst the same store sales look sort of acceptable they were anything but acceptable when compared to the competitor. Here are Circuit City’s same store sales compared to Best Buy:
Fiscal year
Circuit City
Best Buy
1992
1%
14%
1993
7%
19%
1994
8%
27%
1995
15%
20%
1996
5%
6%
1997
-8%
-5%
1998
-1%
2%
1999
8%
13%
2000
8%
11%
2001
-4%
5%
2002
-10%
2%
2003
4%
2.4%
2004
-3%
7.1%
2005
1%
4.3%
2006
8%
4.9%
2007
6%
5.0%
2008
-8%
2.9%
And now you can see what happened. Circuit City just got crushed. Best Buy had superior sales per-square-foot or sales per unit of cost structure – and that difference got bigger and bigger and bigger.
As it did they could cut price – so whilst Circuit City’s same store sales sort of kept up with the costs their gross margin per unit of costs most certainly did not.
It is impossible to analyse the stock except in the context of its competition. Circuit City’s problems are not it sales per-se – but its sales relative to its competitors. Underperform by that much for that long and – despite your glorious past – there is nothing left. Every investor should have emblazoned on their forehead that “competition is a wealth hazard” and anyone that tries to sell you a stock without analysing the competition should be sacked. [Simple but blunt.]
I visited Circuit City headquarters once. In those days it had a billion dollars of unencumbered cash on its balance sheet. That cash represented past profits. Past glories of which there were many. Circuit City was a fantastic company once…
Circuit City it seemed tried many things to get the sales up (and match Best Buy). The above mentioned cash disappeared when CC had a bad experiment in credit cards. It should be easy enough to drive sales if you lent to people who had no intention of paying you back. Given that, it is surprisingly hard to find the credit card boost in CC’s numbers.
Also about just before I visited them they (finally) got rid of whitegoods – and tried to match the software (music, DVDs etc) offering at Best Buy. They had to refurb all the shops. Lots of cost – and only a few years of interesting same store sales growth.
People seemed to be down on Circuit City sacking its expensive sales staff and rehiring cheap ones a few years before insolvency. But the expensive sales staff hardly helped the sales keep up with Best Buy and would have been sacked anyway when the company was liquidated. The problem lay elsewhere and being sacked two years ago was a relative blessing (the new hires will be hunting for work in this labour market).
Consider this an open thread. What is it that Circuit City did worse than Best Buy? I have my ideas – and will jot them in the comments where appropriate – but I really want yours.
Also – if anyone has a good memory – can they tell me why both companies had lousy sales in 1997?
John