Why Is Circuit City (CC) Opening New Stores?

Consider the following:

Since 2006, shares of Circuit City have fallen from $30 per share to $2.22.

In FY 2006, the company earned $140 million. In FY 2008, Circuit City lost $320 million.

The company’s balance sheet has deteriorated with increasing debt, a declining cash position, and same store sales fell 11% in the most recent quarter.

Blockbuster (BBI) had expressed interested in acquiring the company but withdrew its offer saying that it had "determined that it is not in the best interest of Blockbuster’s shareholders to proceed with an acquisition of Circuit City."

Given all that, it’s somewhat surprising that Circuit City is opening new stores — including one right down the street from Best Buy, not far from where I live. But the expansion plans are ambitious: 45 to 55 new stores in the next year alone. Many of the stores will be a new format called "The City", with less square footage and more personal customer service: not unlike the "Electronics Playground" store that was going to be Tweeter’s savior (before it filed for bankruptcy).

What is Circuit City thinking? It’s hard to say: the company is currently exploring strategic alternatives, an unusual process for a company in expansion mode. The continued focus on building new stores rather than slashing costs to return to profitability raises questions about how serious the company is about selling itself.

Back when Blockbuster made its offer for the company, Circuit City replied in a press release that "to date Blockbuster has been unable to satisfy Circuit City and its advisers that Blockbuster’s proposal could be financed."

Memo to Circuit City: opening new stores while you’re bleeding cash with double-digit same store sales declines is not going to make financing for another deal any easier, especially given that market conditions have continued to weaken. Anyone buying shares of Circuit City at this point appears to be betting on the company’s ability to turn itself around. Given that competitors like Best Buy have used Circuit City’s flailing as an opportunity to pick up market share, and have the resources to outspend Circuit City in adapting to new trends, that’s not a bet I’ll be making. Color me a cynic, but a look at the company’s stock chart over the past few years doesn’t give me faith that this management team can outmanoeuvre better-financed competitors with better brand positions.

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Zac Bissonnette