UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended May 31, 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 Exchange Act Rule 12b-2). Yes |X| No ___
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 June 30, 2005
Common Stock, par value $0.50 185,622,900
A Table of Contents is included on Page 2 and an Exhibit Index is included on
Page 26.
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations -
Three Months Ended May 31, 2005 and 2004 3
Consolidated Balance Sheets -
May 31, 2005 and February 28, 2005 4
Consolidated Statements of Cash Flows -
Three Months Ended May 31, 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 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 6. Exhibits 24
SIGNATURES 25
EXHIBIT INDEX 26
Page 2 of 26
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
May 31
2005 2004
---------- ----------
Net sales and operating revenues $2,228,450 $2,094,381
Cost of sales, buying and warehousing 1,670,549 1,599,662
---------- ----------
Gross profit 557,901 494,719
Finance income - 5,564
Selling, general and administrative expenses 575,325 502,229
Stock-based compensation expense 3,327 5,954
Interest expense 395 350
---------- ----------
Loss from continuing operations before income taxes (21,146) (8,250)
Income tax benefit (8,037) (3,016)
---------- ----------
Net loss from continuing operations (13,109) (5,234)
Net loss from discontinued operation - (707)
---------- ----------
Net loss $ (13,109) $ (5,941)
========== ==========
Weighted average common shares:
Basic 184,729 199,429
========== ==========
Diluted 184,729 199,429
========== ==========
Net loss per share:
Basic:
Continuing operations $ (0.07) $ (0.03)
Discontinued operation - -
---------- ----------
$ (0.07) $ (0.03)
========== ==========
Diluted:
Continuing operations $ (0.07) $ (0.03)
Discontinued operation - -
---------- ----------
$ (0.07) $ (0.03)
========== ==========
Cash dividends paid per share $ 0.0175 $ 0.0175
========= ==========
See accompanying notes to consolidated financial statements.
Page 3 of 26
Circuit City Stores, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands except share data)
May 31, 2005 Feb. 28, 2005
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 598,317 $ 879,660
Short-term investments 200,339 125,325
Accounts receivable, net 164,517 172,995
Merchandise inventory 1,677,981 1,459,520
Deferred income taxes 27,602 29,518
Income tax receivable 13,003 -
Prepaid expenses and other current assets 44,261 18,697
---------- ----------
Total current assets 2,726,020 2,685,715
Property and equipment, net of accumulated depreciation of
$1,125,881 and $1,104,137 716,640 738,802
Deferred income taxes 84,518 73,558
Goodwill 206,267 215,884
Other intangible assets, net of accumulated amortization of
$3,810 and $3,035 30,057 31,331
Other assets 42,687 44,092
---------- ----------
TOTAL ASSETS $3,806,189 $3,789,382
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,169,508 $ 961,718
Accrued expenses and other current liabilities 220,331 228,966
Accrued income taxes - 72,274
Current installments of long-term debt 1,329 888
---------- ----------
Total current liabilities 1,391,168 1,263,846
Long-term debt, excluding current installments 12,134 11,522
Accrued straight-line rent and deferred rent credits 234,045 230,426
Accrued lease termination costs 96,196 104,234
Other liabilities 90,764 91,920
---------- ----------
TOTAL LIABILITIES 1,824,307 1,701,948
---------- -----------
Stockholders' equity:
Common stock, $0.50 par value;
525,000,000 shares authorized; 182,981,087 shares
issued and outstanding at May 31, 2005
(188,150,383 at February 28, 2005) 91,491 94,075
Capital in excess of par value 640,635 721,038
Retained earnings 1,228,936 1,247,221
Accumulated other comprehensive income 20,820 25,100
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 1,981,882 2,087,434
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,806,189 $3,789,382
========== ==========
See accompanying notes to consolidated financial statements.
Page 4 of 26
Circuit City Stores, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Three Months Ended
May 31
2005 2004
--------- --------
Operating Activities:
Net loss $ (13,109) $ (5,941)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities of continuing operations:
Loss from discontinued operation - 707
Depreciation and amortization 40,796 38,952
Stock option expense 2,732 4,011
Amortization of restricted stock awards 269 1,722
Loss on dispositions of property and equipment 1,179 660
Provision for deferred income taxes 3,255 (71,444)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net 10,384 (6,517)
Decrease in retained interests in securitized receivables - 32,867
(Increase) decrease in merchandise inventory (220,837) 74,072
Increase in prepaid expenses and other current assets (24,594) (22,552)
Decrease in other assets 324 5,541
Increase in accounts payable 208,489 71,038
Decrease in accrued expenses, other current liabilities and
accrued income taxes (96,780) (6,341)
Decrease in other long-term liabilities (6,425) (8,463)
--------- ---------
Net cash (used in) provided by operating activities of continuing
operations (94,317) 108,312
--------- ---------
Investing Activities:
Proceeds from the sale of the private-label finance operation - 472,710
Acquisitions, net of cash acquired of $30,615 - (265,456)
Purchases of property and equipment (33,272) (42,694)
Proceeds from sales of property and equipment 10,605 15,803
Purchases of investment securities (99,638) -
Proceeds from maturities of investment securities 25,000 -
--------- ---------
Net cash (used in) provided by investing activities of continuing
operations (97,305) 180,363
--------- ---------
Financing Activities:
Principal payments on long-term debt (341) (2,412)
Repurchases of common stock (92,918) (71,054)
Issuances of common stock, net 8,906 1,223
Dividends paid (3,300) (3,575)
Redemption of preferred share purchase rights (1,876) -
--------- ---------
Net cash used in financing activities of continuing operations (89,529) (75,818)
--------- ---------
Net cash used in discontinued bankcard finance operation - (6,169)
Effect of exchange rate changes on cash (192) 412
--------- ---------
(Decrease) increase in cash and cash equivalents (281,343) 207,100
Cash and cash equivalents at beginning of year 879,660 783,471
--------- ---------
Cash and cash equivalents at end of period $ 598,317 $ 990,571
========= =========
See accompanying notes to consolidated financial statements.
Page 5 of 26
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 Superstores and mall-based stores in the
United States and via the Web at www.circuitcity.com. At May 31, 2005, the
company's domestic segment operated 612 Superstores and five mall-based
stores in 158 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 gives the company its first presence
in the Canadian market. InterTAN is a leading consumer electronics retailer
of both private-label and brand-name products with headquarters in Barrie,
Ontario, Canada. InterTAN 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 May 31, 2005, the
international segment was in the process of re-branding stores operated by
InterTAN under license from RadioShack(R) Corporation to THE SOURCE BY
CIRCUIT CITYSM as a result of the ongoing litigation with RadioShack(R). At
that date, the international segment conducted business through 967 retail
stores and dealer outlets, which consisted of 522 InterTAN-owned stores,
330 dealer outlets, 90 Rogers Plus(R) stores and 25 Battery Plus(R) stores.
The international segment also operates a Web site at www.thesourcecc.ca.
See Note 2 for additional 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 quarter ended
May 31, 2004. The company also 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.
Certain prior year amounts have been reclassified to conform to the current
presentation.
Page 6 of 26
2. Litigation
After Circuit City's March 31, 2004, announcement of its agreement to
acquire InterTAN, RadioShack(R) Corporation asserted early termination of
its licensing and other agreements with InterTAN. On April 5, 2004,
RadioShack(R) filed suit against InterTAN, and amended that suit on April
27, 2004 (the "RadioShack(R) litigation"). InterTAN disputes the
termination scenarios alleged by RadioShack(R) and is vigorously defending
against those claims. InterTAN also has filed claims for disparagement and
unfair business practices against RadioShack(R). The parties argued a
RadioShack(R) 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 three agreements expired June 30, 2005.
Circuit City continues to believe that RadioShack(R) is not entitled to
early termination of the agreements and that InterTAN has substantial
defenses to the RadioShack(R) claims. InterTAN intends to continue
vigorously defending the claims in the RadioShack(R) 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 for
the 2006 fiscal year.
3. Finance Income
Finance income for the three months ended May 31, 2004, includes the
results from the company's private-label finance operation, including
transition and transaction costs of approximately $6 million related to the
sale of the operation to Chase Card Services, through May 25, 2004, the
date the company completed the sale.
For the three months ended May 31, 2004, the components of pretax finance
income were as follows:
Three Months Ended
(Amounts in millions) May 31, 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. Securitization
income is reduced by payroll, fringe benefits and other costs directly
associated with the management and securitization of the private-label
receivables.
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
May 31
2005 2004
--------------------------------------------------------------------------
Expected dividend yield...................... 0.5% 0.6%
Expected stock volatility.................... 55% 65%
Risk-free interest rates..................... 4% 4%
Expected lives (in years).................... 4 5
Page 7 of 26
Using these assumptions in the Black-Scholes model, the weighted average
fair value of options granted was $7.23 per share during the quarter ended
May 31, 2005, and $6.03 per share during the quarter ended May 31, 2004.
5. Comprehensive Loss
The components of the company's comprehensive loss consist of the net loss
and other comprehensive (loss) income. Other comprehensive (loss) income is
comprised of foreign currency translation adjustments and is recorded net
of deferred income taxes directly as a component of stockholders' equity.
The components of comprehensive loss, net of taxes, were as follows:
Three Months Ended
May 31
(Amounts in millions) 2005 2004
-----------------------------------------------------------------------
Net loss...................................... $(13.1) $(5.9)
Foreign currency translation.................. (4.3) 3.3
-------------------------
Comprehensive loss............................ $(17.4) $(2.6)
=========================
6. Net Loss Per Share
For the three months ended May 31, 2005 and 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:
Three Months Ended
May 31
(Shares in millions) 2005 2004
---------------------------------------------------------------------------
Options to purchase common stock................. 15.2 17.3
Restricted stock................................. 1.6 2.5
7. Common Stock Repurchased
The company's board of directors has authorized stock repurchases up to
$800 million, of which $359.8 million remained available at May 31, 2005.
The company repurchased 6.1 million shares of common stock at a cost of
$96.1 million during the three months ended May 31, 2005. The company
repurchased 5.8 million shares of common stock at a cost of $71.1 million
during the same period last fiscal year. As of May 31, 2005, the company
had repurchased 34.5 million shares of common stock at a cost of $440.2
million.
8. Pension Plans
The company has a noncontributory defined benefit pension plan covering the
majority of domestic segment full-time employees who are at least 21 years
of age and have completed one year of service. The cost of the program is
being funded currently. Plan benefits generally are based on years of
service and average compensation. The company also has an unfunded
nonqualified benefit restoration plan that restores retirement benefits for
domestic segment senior executives who are affected by Internal Revenue
Code limitations on benefits provided under the company's pension plan.
The pension plan 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
affected
Page 8 of 26
employees retain any benefits accumulated to the effective date, but are no
longer eligible to increase their benefit. The benefit restoration plan was
frozen as of February 28, 2005, to 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 expense for the plans were as follows:
Three Months Ended
May 31
(Amounts in thousands) 2005 2004
--------------------------------------------------------------------------
Service cost................................... $ 925 $ 3,817
Interest cost.................................. 3,456 3,906
Expected return on plan assets................. (4,508) (4,101)
Recognized prior service cost.................. 54 119
Recognized actuarial loss...................... 265 1,255
---------------------------
Net pension expense............................ $ 192 $ 4,996
===========================
Circuit City made no pension plan contributions during the first quarter of
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. The company does not expect to make a contribution in fiscal
2006.
A contribution of $618,000, 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 first quarter were $115,850.
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 quarter ended May 31, 2004, the net loss from the discontinued
bankcard finance operation totaled $707,000, 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.
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 and
entertainment software 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 a third 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 transition and transaction costs
of approximately $6 million related to the sale of the operation, are
included in finance income for the three months ended May 31, 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. Net credit expenses from
that arrangement of $526,000 for the quarter ended
Page 9 of 26
May 31, 2005, are included in the domestic retail segment's net sales and
operating revenues on the consolidated statement of operations.
Revenue by reportable segment and the reconciliation to the consolidated
statements of operations were as follows:
Three Months Ended
May 31
(Amounts in millions) 2005 2004
--------------------------------------------------------------------------
Domestic segment.............................. $2,115.2 $2,072.7
International segment......................... 113.2 21.7
Finance operation............................. - 28.1
---------------------------
Total revenues................................ 2,228.5 2,122.5
Less: securitization income*................. - 28.1
---------------------------
Net sales and operating revenues ............. $2,228.5 $2,094.4
===========================
*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 loss from continuing operations by reportable segment was as
follows:
Three Months Ended
May 31
(Amounts in millions) 2005 2004
-------------------------------------------------------------------------
Domestic segment.................................. $ (7.1) $(9.1)
International segment............................. (6.0) 0.4
Finance operation................................. - 3.5
----------------------
Net loss from continuing operations............... $(13.1) $(5.2)
======================
Total assets by reportable segment were as follows:
At May 31 At February 28
(Amounts in millions) 2005 2005
-------------------------------------------------------------------------
Domestic segment..................... $3,370.3 $3,354.7
International segment................ 435.8 434.7
------------------------------------
Total assets......................... $3,806.2 $3,789.4
===================================
Page 10 of 26
11. Supplemental Consolidated Statement of Cash Flows Information
The following table summarizes supplemental cash flow information for the
three months ended May 31, 2004.
Three Months Ended
(Amounts in millions) May 31, 2004
------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing
activities:
Capital lease obligation.................................... $ 2.8
=========
Acquisition of InterTAN:
Fair value of assets acquired:
Cash and cash equivalents............................... $ 30.6
Merchandise inventory................................... 93.0
Property and equipment, net............................. 42.6
Goodwill................................................ 172.6
Other intangible assets................................. 37.5
Other assets............................................ 8.7
----------
Total fair value of assets acquired..................... 384.9
Less:
Liablities assumed...................................... 88.7
Cash acquired........................................... 30.6
Stock options issued.................................... 6.5
----------
Acquistion of InterTAN, net of cash acquired................ $259.1
==========
Acquisition of MusicNow:
Fair value of assets acquired............................... $ 7.6
Less: liabilities assumed................................... 1.3
----------
Acquistion of MusicNow...................................... $ 6.3
==========
12. Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 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 has not yet determined the impact
of adopting this standard.
Page 11 of 26
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. InterTAN is a leading consumer electronics
retailer of both private-label and brand-name products with headquarters in
Barrie, Ontario, Canada. 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 gives us our first
presence in the Canadian market.
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, 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. We also 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 automatic
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 Superstores and mall-based 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 a third reportable segment, our finance operation. The following tables
summarize performance by segment.
Page 12 of 26
SEGMENT PERFORMANCE SUMMARY
Three Months Ended May 31, 2005
(Amounts in millions) Domestic International Consolidated
---------------------------------------------------------------------------------------
Net sales and operating revenues............. $2,115.2 $113.2 $2,228.5
Gross profit................................. $ 512.9 $ 45.0 $ 557.9
Selling, general and administrative
expenses................................. $ 520.9 $ 54.4 $ 575.3
Net (loss) from continuing operations........ $ (7.1) $ (6.0) $ (13.1)
Three Months Ended May 31, 2004
(Amounts in millions) Domestic International Finance Consolidated
---------------------------------------------------------------------------------------------------------
Net sales and operating revenues............... $2,072.7 $21.7 $ - $2,094.4
Gross profit................................... $ 486.1 $ 8.6 $ - $ 494.7
Finance income................................. $ - $ - $5.6 $ 5.6
Selling, general and administrative
expenses................................... $ 494.3 $ 7.9 $ - $ 502.2
Net (loss) earnings from continuing
operations................................. $ (9.1) $ 0.4 $3.5 $ (5.2)
Net Sales and Operating Revenues
Consolidated
For the first quarter of fiscal 2006, our total sales increased 6.4 percent to
$2.23 billion, and comparable store sales were unchanged from the prior year. A
store's sales are included in comparable store sales after the store has been
open for a full 12 months. In addition, comparable store sales include
Web-originated sales and sales from relocated stores. International segment
sales will not be included in the company's comparable store sales until the
quarter ending August 31, 2005.
Domestic Segment
For the first quarter of fiscal 2006 the domestic segment's net sales and
operating revenues were $2.12 billion, an increase of 2.1 percent over the same
period last fiscal year. Comparable store sales were unchanged from the prior
year.
A decrease in wireless sales, principally driven by a business model change in
the third quarter of fiscal year 2005, reduced the company's overall first
quarter comparable store sales calculation by approximately 97 basis points. A
decrease in digital video service sales, principally driven by a business model
change in July 2004, reduced the company's overall first quarter comparable
store sales calculation by approximately 106 basis points.
PERCENT OF DOMESTIC MERCHANDISE SALES BY CATEGORY
Three Months Ended
May 31
2005 2004
-------------------------------------------------------------------------
Video............................................ 42% 42%
Information technology........................... 29 33
Audio............................................ 16 13
Entertainment.................................... 13 12
----------------------
Total............................................ 100% 100%
======================
Page 13 of 26
We produced a single-digit comparable store sales increase for the first quarter
in the video category. 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 camcorders, DVD players and digital video services.
A double-digit comparable store sales decline in the information technology
category in the first quarter was driven by double-digit comparable store sales
declines in personal computer hardware, including double-digit comparable store
sales declines in desktop computers, monitors and printers and a single-digit
comparable store sales decline in notebook computers. Comparable store sales for
personal computer accessories were relatively unchanged.
For the first quarter, in the audio category, we produced a double-digit
comparable store sales increase. Triple-digit comparable store sales growth in
portable digital audio products and single-digit comparable store sales growth
in mobile audio products were partially offset by a double-digit comparable
store sales decline in home audio products.
In the entertainment category for the first quarter, we produced a single-digit
comparable store sales increase, reflecting a double-digit comparable store
sales increase in game products and a single-digit comparable store sales
increase in video software, partially offset by a single-digit comparable store
sales decline in music software.
The following table provides the number of our domestic segment stores:
DOMESTIC STORE MIX
May 31, 2005 Feb. 28, 2005 May 31, 2004
----------------------------------------------------------------------------------------------
Superstores.................................. 612 612 602
Mall-based stores............................ 5 5 5
--------------------------------------------------
Total domestic segment stores................ 617 617 607
==================================================
In fiscal 2006, we expect to open 30 to 40 Superstores in our domestic segment,
of which slightly less than half are expected to be relocations. In the first
quarter of fiscal 2006, we relocated three Superstores.
Extended Warranty Revenues. For our domestic segment, the total extended
warranty revenue included in total sales was $85.1 million, or 4.0 percent of
domestic sales, in the first quarter of fiscal 2006, compared with $77.2
million, or 3.7 percent of sales, in last fiscal year's first quarter.
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.
Net Credit Revenues or Expenses. In May 2004, we sold our private-label finance
operation to Chase Card Services. We entered into an arrangement under which
Chase offers private-label and co-branded credit cards to both new and existing
customers. Revenues from new account activations are offset by the cost
associated with promotional financing over a predetermined base. The net credit
revenues or expenses from the program are included in net sales and operating
revenues on the consolidated statement of operations. Net credit expenses for
the three months ended May 31, 2005, were $526,000, as costs associated with
promotional financing more than offset revenue generated through new account
activations.
International Segment
The international segment's net sales and operating revenues were $113.2 million
for the first quarter of fiscal 2006, compared with $21.7 million from May 12
through May 31, 2004. The international segment consists of
Page 14 of 26
the operations of InterTAN, Inc., which Circuit City acquired in May 2004.
International segment sales will not be included in the company's comparable
store sales until the quarter ending August 31, 2005.
INTERNATIONAL STORE MIX
May 31, 2005 Feb. 28, 2005 May 31, 2004
---------------------------------------------------------------------------------------------
InterTAN-owned stores....................... 522 521 509
Dealer outlets.............................. 330 331 334
Roger Plus stores........................... 90 88 84
Battery Plus stores......................... 25 26 30
--------------------------------------------------
Total international segment stores.......... 967 966 957
==================================================
In addition to the 967 retail stores and dealer outlets open as of May 31, 2005,
the international segment conducts business through 65 wholesale relationships.
At February 28, 2005, the international segment maintained 64 wholesale
relationships, and at May 31, 2004, it maintained 45 wholesale relationships.
Gross Profit Margin
Consolidated
The gross profit margin was 25.0 percent in the first quarter of fiscal 2006,
compared with 23.6 percent in the same period last fiscal year. The higher gross
profit margin for the first quarter of fiscal 2006 reflects the inclusion of the
international segment for the full quarter, improved domestic store merchandise
margin principally due to a lower mix of personal computer hardware, increased
domestic extended warranty sales and increased efficiency in our domestic
product service and distribution operations. The inclusion of the international
segment contributed 62 basis points to the improvement.
Domestic Segment
For the first quarter of fiscal 2006, the domestic segment's gross profit margin
of 24.3 percent increased 80 basis points from the same period last fiscal year.
The change in the domestic gross profit margin reflects increased extended
warranty sales, which carry higher-than-average gross profit margins; improved
store merchandise margin principally due to a lower mix of personal computer
hardware; and improvements in the efficiency of our product service and
distribution operations.
International Segment
The international segment's gross profit margin in the first quarter of fiscal
2006 was 39.7 percent of international sales.
Finance Income
Finance income was $5.6 million in the three months ended May 31, 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 the fiscal year 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.
Page 15 of 26
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, we entered
into an ongoing arrangement with Chase under which they offer private-label and
co-branded credit cards to both new and existing customers. Results from that
arrangement are included in net sales and operating revenues on the consolidated
statement of operations.
COMPONENTS OF PRETAX FINANCE INCOME
Three Months Ended
(Amounts in millions) May 31, 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, 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
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Three Months Ended May 31
2005 2004
% of % of
(Dollar amounts in millions) $(a) Sales $(b) Sales
-----------------------------------------------------------------------------
Store expenses..................... $502.0 22.5% $457.6 21.9%
General and administrative
expenses...................... 77.4 3.5 43.9 2.1
Remodel expenses................... - - 0.1 -
Relocation expenses................ 2.0 0.1 1.9 0.1
Pre-opening expenses............... 0.2 - 0.8 -
Interest income.................... (6.3) (0.3) (2.1) (0.1)
-----------------------------------------
Total ............................ $575.3 25.8% $502.2 24.0%
========================================
(a) Includes international segment store expenses of $34.3 million, general and
administrative expenses of $20.3 million and interest income of $0.2 million.
(b) Includes international segment store expenses of $6.6 million and general
and administrative expenses of $1.4 million.
Selling, general and administrative expenses were 25.8 percent of sales in this
year's first quarter compared with 24.0 percent in last year's first quarter.
Of the 184 point increase in the expense ratio from the prior year's first
quarter, the addition of the international segment added 106 basis points.
Domestic Segment
The domestic segment's expense-to-sales ratio increased 78 basis points in the
first quarter of fiscal 2006 from the same period last fiscal year. The increase
in the domestic segment's ratio for the first quarter reflects the impact of
increased rent, occupancy and depreciation expenses of 43 basis points.
Page 16 of 26
As part of our effort to upgrade and evolve our business, we are working with
consultants from Infinitive to capture revenue and margin improvements in fiscal
2006 in our merchandising and marketing functions. We are also working with
consultants from Boston Consulting Group, Inc. to develop and execute innovation
initiatives that will drive the long-term growth in our business. We believe
these investments are necessary and help position us for long-term success.
Expenses associated with the aforementioned consulting services contributed 23
basis points to the increase in expense-to-sales ratio.
International Segment
The international segment's selling, general and administrative expenses for
this year's first quarter were 48.1 percent of international segment sales.
Included in the international segment's selling, general and administrative
expenses are $11.9 million in expenses associated with the brand transition in
Canada. The majority of these expenses directly relates to the write-down of
RadioShack(R) branded inventory as a result of the ongoing litigation with
RadioShack(R). We expect future expenses associated with brand transition to
primarily relate to incremental advertising.
Stock-based Compensation Expense
Stock-based compensation expense was $3.3 million for the three months ended May
31, 2005, compared with $6.0 million for the three months ended May 31, 2004.
The decrease reflects lower weighted-average fair values of recent grants and
the complete vesting of grants during fiscal 2005 and the first quarter of
fiscal 2006. The stock-based compensation expense for the three months ended May
31, 2004, includes compensation costs related to performance-based restricted
stock grants. Under the terms of the restricted stock grant, 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 expense
recorded to date.
Income Tax Provision
The effective income tax rate applicable to results from continuing operations
was 38.0 percent for the three months ended May 31, 2005, and 36.6 percent for
the three months ended May 31, 2004. The increase reflects the inclusion of the
international segment for the full three months ended May 31, 2005, versus the
inclusion for only 20 days for the three months ended May 31, 2004, as well as
an increase in the provision for state and local taxes.
Net Loss from Continuing Operations
The net loss from continuing operations was $13.1 million, or 7 cents per share,
in the first quarter ended May 31, 2005, compared with $5.2 million or 3 cents
per share, in the first quarter of 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 $0.7 million for the quarter ended May 31, 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
Page 17 of 26
required to provide service in exchange for the award. SFAS No. 123(R) will be
effective for our first quarter of fiscal 2007. We have not yet determined the
impact of adopting this standard.
FINANCIAL CONDITION
Liquidity and Capital Resources
Operating Activities
We used net cash of $94.3 million from operating activities in the three months
ended May 31, 2005, compared with generating net cash from operating activities
of $108.3 million in the three months ended May 31, 2004. The largest use of
cash in the three months ended May 31, 2005, was a $72.3 million decrease in
accrued income taxes due to the payment of taxes. The generation of cash in the
three months ended May 31, 2004, resulted from a reduction in merchandise
inventory levels and an increase in accounts payable.
Investing Activities
For the three months ended May 31, 2005, net cash used in investing activities
was $97.3 million and primarily related to the purchase of investment securities
of $99.6 million. For the three months ended May 31, 2004, net cash provided by
investing activities was $180.4 million and primarily related to cash proceeds
of $472.7 million from the sale of the private-label finance operation partly
offset by the acquisition of InterTAN, Inc. for $259.1 million, net of acquired
cash of $30.6 million.
Financing Activities
The board of directors has authorized stock repurchases of up to $800 million,
of which $359.8 million remained available at May 31, 2005. We repurchased 6.1
million shares of common stock at a cost of $96.1 million during the three
months ended May 31, 2005. We repurchased 5.8 million shares of common stock at
a cost of $71.1 million during the same period last fiscal year. As of May 31,
2005, we had repurchased 34.5 million shares of common stock at a cost of $440.2
million. Based on the market value of the common stock at May 31, 2005, the then
remaining $359.8 million of the $800 million authorization would allow for the
repurchase of up to approximately 12 percent of the 183.0 million shares then
outstanding.
We have a $500 million, four-year revolving credit facility secured by inventory
and accounts receivable. At May 31, 2005, we had no short-term borrowings under
the facility. At May 31, 2005, outstanding letters of credit related to this
facility were $61.7 million, leaving $438.3 million available for borrowing. We
were in compliance with all covenants at May 31, 2005.
Cash, Cash Equivalents and Short-term Investments
At May 31, 2005, we had cash, cash equivalents and short-term investments of
$798.7 million, compared with $1.0 billion at February 28, 2005. During the
first quarter of fiscal 2006, we used $92.9 million of cash to repurchase common
stock under our stock repurchase authorization. At May 31, 2004, we had cash and
cash equivalents of $990.6 million. The year-over-year change in the cash
balance primarily reflects the use of $281.7 million to repurchase common stock
under the company's stock repurchase authorization.
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
Page 18 of 26
o innovating to create new businesses, related to our core business, to produce
long-term growth
Key initiatives to upgrade the core business support our fiscal 2006 financial
outlook and include the following:
o store revitalization program
o promotional and marketing effectiveness
o product transition and pricing management
o best sourcing
o inventory management, including improved customer-perceived in-stock levels
and reduced net-owned inventory
o collaborative vendor relationships
o information systems enhancements, including a new point-of-sale system and 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, including expanded technology services offering
nationwide, beginning in the second quarter of fiscal 2006
o continued investment in Circuit City brand awareness and in Circuit City
Direct marketing, 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
o multi-channel - move focus from transactions to relationships and provide
solutions to customers wherever they want them
We reaffirm the following financial guidance for fiscal 2006:
o total sales growth of 3 percent to 6 percent, including domestic comparable
store sales growth in the low single-digit range
o operating margin (earnings from continuing operations before income taxes as a
percent of sales) of 1.3 percent to 2.3 percent
This outlook is based on the following assumptions:
o growth in the international segment
o 30 to 40 store openings, of which approximately 17 to 22 are expected to be
new stores and 13 to 18 are expected to be relocations
o continued growth in our Circuit City Direct business
o more effective advertising and promotions to drive traffic
o an improved customer experience to increase the close rate
o enhanced customer perceived in-stock levels
o leverage in store expenses to be more than offset by investments in
information systems and innovation and the inclusion of the international
segment for the full year
o expenses related to domestic store relocations of $17 million
o effective income tax rate applicable to results from continuing operations for
our domestic segment of 37.1 percent and for our international segment of 39.0
percent
Capital expenditures, net of landlord reimbursements and sale leaseback
transactions, are expected to total approximately $205 million, including the
following components:
o $108 million related to information systems
o $69 million related to the opening of 30 to 40 stores
o $20 million related to the international segment
Page 19 of 26
o $8 million related to store, distribution and other expenditures
We expect that a number of stores may not receive the upgraded point of sale
system until fiscal 2007, which may reduce the anticipated information systems
expenditures in fiscal 2006.
Expected Impact of International Segment Litigation
We are engaged in litigation with RadioShack(R) Corporation regarding early
termination of the licensing, merchandising and advertising agreements with
RadioShack(R). Because of the ongoing legal conflict with RadioShack(R), we have
taken steps to position our Canadian operations for continued success,
regardless of the outcome of this litigation. As of June 30, 2005, we had
re-branded virtually all stores operating under the RadioShack(R) name in Canada
to THE SOURCE BY CIRCUIT CITYSM.
Potential positive impacts of this transition include the following:
o sales benefit from excitement generated by new brand
o discontinuation of payments to RadioShack(R) of royalty and other fees
Potential negative impacts of this transition include the following:
o sales disruption from replacing old brand
o expenses for advertising new brand
o capital expenditures and expenses for new store signage and inventory
write-downs, which were incurred in the first quarter of fiscal 2006
We believe this litigation will not have a material adverse effect on our
financial condition or ongoing results of operations for the 2006 fiscal year.
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," "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 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
Page 20 of 26
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 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 Web site
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 the impact to the average results from relocated and incremental stores as
stores are added to the relocation base and incremental store base
o consumer reaction to new store locations and changes in our store design and
merchandise
o the extent to which customers respond to promotional financing offers and the
types of promotional terms we offer
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 customer service initiatives
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 or other contingencies that, while not material
to the company's financial position or on-going 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(R) Corporation
to terminate InterTAN's right to use the RadioShack(R) name in Canada and
related rights to purchase merchandise through RadioShack(R), any associated
costs, any change in competitive conditions, or any business disruption
resulting from the re-branding of InterTAN's RadioShack(R) branded stores and
dealer outlets 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
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, especially during the peak holiday shopping season
o the successful execution of the initiatives to achieve revenue growth and
increase gross profit margin 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.
Page 21 of 26
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 May 31, 2005,
U.S. dollar purchase orders totaled approximately $30.5 million. A 10 percent
decline in the value of the Canadian dollar would result in an increase in
product cost of approximately $3.0 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 May 31, 2005, that have materially affected, or are
reasonably likely to materially affect, the company's internal control over
financial reporting.
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(R) Corporation. InterTAN has also operated under two other agreements
with RadioShack(R) and its subsidiaries ("RadioShack(R)"): a merchandising
agreement and an advertising agreement.
After the March 31, 2004 announcement, RadioShack(R) asserted early termination
of all three agreements under a variety of theories and on a variety of proposed
termination dates. RadioShack(R) asserts that
Page 22 of 26
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(R) filed suit against InterTAN in Tarrant County,
Texas, and amended that suit on April 27, 2004 (the "RadioShack(R) litigation").
InterTAN disputes the various termination scenarios alleged by RadioShack(R) and
is vigorously defending against those claims. InterTAN also has filed claims for
disparagement and unfair business practices against RadioShack(R). The parties
argued a RadioShack(R) 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(R) is not entitled to early
termination of the agreements and that InterTAN has substantial defenses to the
RadioShack(R) claims. InterTAN intends to continue vigorously defending the
claims and to exercise its rights under the agreements, as well as any appeal
rights.
Because of the ongoing legal conflict with RadioShack(R), 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 for the 2006 fiscal year.
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 May 31, 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 per Share Program the Program*
------------------------------------------------------------------------------------------------------------------------------------
March 1 - March 31, 2005......................... - $ - - $455.8
April 1 - April 30, 2005......................... 4.1 $15.73 4.1 $391.2
May 1 - May 31, 2005............................. 2.0 $16.11 2.0 $359.8
----------------- -----------------
Total fiscal 2006 first quarter.................. 6.1 $15.85 6.1
================= =================
* 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 May 31, 2005, $359.8 million
remained available for share repurchases under the share repurchase
authorization.
Page 23 of 26
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 October
1, 2002, filed as Exhibit 3(i) to the company's Quarterly Report on
Form 10-Q for the quarter ended November 30, 2002 (File No. 1-5767),
are expressly incorporated herein by this reference.
3.2 Circuit City Stores, Inc. Bylaws, as amended and restated April 19,
2005, filed as Exhibit 3.1 to the Company's Current Report on Form 8-K
filed April 21, 2005 (File No. 1-5767), are expressly incorporated
herein by this reference.
Material Contracts
10.1 Form of Performance Accelerated Restricted Stock Award letter, filed as
Exhibit 10.1 to the company's Form 8-K filed on June 23, 2005 (File No.
1-5767), is expressly incorporated herein by this reference.*
10.2 Form of Time-based Restricted Stock Award letter, filed as Exhibit 10.2
to the company's Form 8-K filed on June 23, 2005 (File No. 1-5767), is
expressly incorporated herein by this reference.*
10.3 Form of Non-Qualified Stock Option Grant letter, filed herewith.*
10.4 Circuit City Stores, Inc. 2003 Stock Incentive Plan, as Amended and
Restated, Effective June 21, 2005, filed as Appendix A to the company's
Definitive Proxy Statement dated May 13, 2005, for the Annual Meeting
of Shareholders held on June 21, 2005 (File No. 1-5767), is expressly
incorporated herein by this reference.*
10.5 InterTAN Canada, Ltd. Stock Purchase Program, filed as Appendix B to
the company's Definitive Proxy Statement dated May 13, 2005, for the
Annual Meeting of Shareholders held on June 21, 2005 (File No. 1-5767),
is expressly incorporated herein by this reference.*
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 24 of 26
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
July 8, 2005
Page 25 of 26
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
October 1, 2002, filed as Exhibit 3(i) to the company's Quarterly
Report on Form 10-Q for the quarter ended November 30, 2002 (File
No. 1-5767), are expressly incorporated herein by this reference.
3.2 Circuit City Stores, Inc. Bylaws, as amended and restated April 19,
2005, filed as Exhibit 3.1 to the Company's Current Report on Form
8-K filed April 21, 2005 (File No. 1-5767), are expressly
incorporated herein by this reference.
Material Contracts
10.1 Form of Performance Accelerated Restricted Stock Award letter,
filed as Exhibit 10.1 to the company's Form 8-K filed on June 23,
2005 (File No. 1-5767), is expressly incorporated herein by this
reference.*
10.2 Form of Time-based Restricted Stock Award letter, filed as Exhibit
10.2 to the company's Form 8-K filed on June 23, 2005 (File No.
1-5767), is expressly incorporated herein by this reference.*
10.3 Form of Non-Qualified Stock Option Grant letter, filed herewith.*
10.4 Circuit City Stores, Inc. 2003 Stock Incentive Plan, as Amended and
Restated, Effective June 21, 2005, filed as Appendix A to the
company's Definitive Proxy Statement dated May 13, 2005, for the
Annual Meeting of Shareholders held on June 21, 2005 (File No.
1-5767), is expressly incorporated herein by this reference.*
10.5 InterTAN Canada, Ltd. Stock Purchase Program, filed as Appendix B
to the company's Definitive Proxy Statement dated May 13, 2005, for
the Annual Meeting of Shareholders held on June 21, 2005 (File No.
1-5767), is expressly incorporated herein by this reference.*
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 26 of 26