UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended August 31, 2007
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 of Incorporation) (I.R.S. Employer Identification No.)
9950 Mayland Drive
Richmond, Virginia 23233
(Address of principal executive offices) (Zip Code)
(804) 486 - 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |X| Accelerated filer __ Non-accelerated filer __
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes___ No |X|
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 September 30, 2007
Common Stock, par value $0.50 168,560,316
A Table of Contents is included on Page 2 and an Exhibit Index is included on
Page 32.
CIRCUIT CITY STORES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations -
Three Months and Six Months Ended August 31, 2007 and 2006 3
Consolidated Balance Sheets -
August 31, 2007, and February 28, 2007 4
Consolidated Statements of Cash Flows -
Six Months Ended August 31, 2007 and 2006 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits 30
SIGNATURES 31
EXHIBIT INDEX 32
Page 2 of 32
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Circuit City Stores, Inc.
Consolidated Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended Six Months Ended
August 31 August 31
2007 2006 2007 2006
------------ ------------ ------------ -------------
Net sales $2,643,968 $2,818,498 $5,129,505 $5,415,113
Cost of sales, buying and warehousing 2,097,957 2,148,355 4,023,309 4,109,206
------------ ------------- ------------ -------------
Gross profit 546,011 670,143 1,106,196 1,305,907
Selling, general and administrative expenses 677,909 656,670 1,326,263 1,290,962
------------ ------------- ------------ -------------
Operating (loss) income (131,898) 13,473 (220,067) 14,945
Interest income 3,858 5,794 9,595 12,840
Interest expense 124 113 167 325
------------ ------------- ------------ -------------
(Loss) earnings from continuing operations
before income taxes (128,164) 19,154 (210,639) 27,460
Income tax (benefit) expense (65,110) 7,499 (92,773) 10,498
------------ ------------- ------------ -------------
Net (loss) earnings from continuing operations (63,054) 11,655 (117,866) 16,962
Earnings (loss) from discontinued
operations, net of tax 218 (1,614) 464 (2,322)
Cumulative effect of change in accounting
principle, net of tax - - - 1,773
------------ ------------- ------------ -------------
Net (loss) earnings $ (62,836) $ 10,041 $ (117,402) $ 16,413
============ ============= ============ =============
Weighted average common shares:
Basic 164,837 169,973 165,340 170,514
Diluted 164,837 174,659 165,340 175,458
(Loss) earnings per share:
Basic:
Continuing operations $ (0.38) $ 0.07 $ (0.71) $ 0.10
Discontinued operations $ - $ (0.01) $ - $ (0.01)
Cumulative effect of change in
accounting principle $ - $ - $ - $ 0.01
Basic (loss) earnings per share $ (0.38) $ 0.06 $ (0.71) $ 0.10
Diluted:
Continuing operations $ (0.38) $ 0.07 $ (0.71) $ 0.10
Discontinued operations $ - $ (0.01) $ - $ (0.01)
Cumulative effect of change in
accounting principle $ - $ - $ - $ 0.01
Diluted (loss) earnings per share $ (0.38) $ 0.06 $ (0.71) $ 0.09
Cash dividends paid per share $ 0.04 $ 0.0175 $ 0.08 $ 0.0350
See accompanying notes to consolidated financial statements.
Page 3 of 32
Circuit City Stores, Inc.
Consolidated Balance Sheets
(Amounts in thousands except share data)
August 31, 2007 Feb. 28, 2007
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 130,899 $ 141,141
Short-term investments 293,503 598,341
Accounts receivable, net of allowance for doubtful accounts 304,957 382,555
Merchandise inventory 1,833,226 1,636,507
Deferred income taxes 107,187 34,868
Income tax receivable 103,476 42,722
Prepaid expenses and other current assets 73,884 47,378
-------------- -------------
Total current assets 2,847,132 2,883,512
Property and equipment, net of accumulated depreciation of
$1,381,058 and $1,300,267 974,421 921,027
Deferred income taxes 26,613 31,910
Goodwill 134,863 121,774
Other intangible assets, net of accumulated amortization of
$18,192 and $14,179 18,846 19,285
Other assets 35,633 29,775
-------------- -------------
TOTAL ASSETS $ 4,037,508 $ 4,007,283
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Merchandise payable $ 1,110,223 $ 922,205
Expenses payable 293,192 281,709
Accrued expenses and other current liabilities 359,482 404,444
Accrued compensation 69,723 98,509
Accrued income taxes 21,136 -
Current installments of long-term debt 8,272 7,162
-------------- -------------
Total current liabilities 1,862,028 1,714,029
Long-term debt, excluding current installments 50,710 50,487
Accrued straight-line rent and deferred rent credits 283,679 277,636
Accrued lease termination costs 68,967 76,326
Other liabilities 135,075 97,561
-------------- -------------
TOTAL LIABILITIES 2,400,459 2,216,039
-------------- -------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, $0.50 par value;
525,000,000 shares authorized; 168,586,908 shares
issued and outstanding at August 31, 2007
(170,689,406 at February 28, 2007) 84,293 85,345
Additional paid-in capital 310,991 344,144
Retained earnings 1,196,982 1,336,317
Accumulated other comprehensive income 44,783 25,438
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,637,049 1,791,244
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,037,508 $ 4,007,283
============= =============
See accompanying notes to consolidated financial statements.
Page 4 of 32
Circuit City Stores, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Six Months Ended
August 31
2007 2006
------------- ------------
Operating Activities:
Net (loss) earnings $ (117,402) $ 16,413
Adjustments to reconcile net (loss) earnings to net cash
used in operating activities of continuing operations:
Net (earnings) loss from discontinued operations (464) 2,322
Depreciation expense 96,089 86,308
Amortization expense 2,403 1,843
Stock-based compensation expense 12,290 16,393
Loss on dispositions of property and equipment 483 618
Provision for deferred income taxes (72,478) (11,912)
Cumulative effect of change in accounting principle - (1,773)
Other 1,018 943
Changes in operating assets and liabilities:
Accounts receivable, net 55,785 (65,909)
Merchandise inventory (185,180) (148,105)
Prepaid expenses and other current assets (26,835) (19,513)
Other assets 1,144 559
Merchandise payable 182,887 130,835
Expenses payable 19,158 45,561
Accrued expenses, other current liabilities and income taxes (131,279) (115,806)
Other long-term liabilities 29,067 (8,098)
------------ ------------
Net cash used in operating activities of continuing operations (133,314) (69,321)
------------- ------------
Investing Activities:
Purchases of property and equipment (148,161) (113,449)
Proceeds from sales of property and equipment 23,407 10,524
Purchases of investment securities (1,169,510) (284,190)
Sales and maturities of investment securities 1,474,360 502,213
Other investing activities (1,691) (9,864)
------------ ------------
Net cash provided by investing activities of continuing operations 178,405 105,234
------------ ------------
Financing Activities:
Proceeds from short-term borrowings 4,515 26,749
Principal payments on short-term borrowings (4,747) (17,774)
Principal payments on long-term debt (3,756) (4,230)
Change in overdraft balances (9,340) 18,089
Excess tax benefit from stock-based payments 928 11,105
Repurchases of common stock (46,757) (117,129)
Issuances of common stock 4,722 38,453
Dividends paid (13,490) (6,156)
Other financing activities (1,127) -
------------ ------------
Net cash used in financing activities of continuing operations (69,052) (50,893)
------------- ------------
Discontinued Operations:
Operating cash flows 12,233 (4,812)
Investing cash flows - (26)
Financing cash flows (58) -
------------ ------------
Net cash provided by (used in) discontinued operations 12,175 (4,838)
------------ ------------
Effect of exchange rate changes on cash 1,544 (22)
------------- ------------
Decrease in cash and cash equivalents (10,242) (19,840)
Cash and cash equivalents at beginning of year 141,141 315,970
------------- ------------
Cash and cash equivalents at end of period $ 130,899 $ 296,130
============= ============
See accompanying notes to consolidated financial statements.
Page 5 of 32
CIRCUIT CITY STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Description of Business: 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 engaged in the business of selling brand-name
consumer electronics, personal computers, entertainment software, and
related services in Circuit City stores in the United States and via the
Web at www.circuitcity.com and www.firedog.com. At August 31, 2007, the
company's domestic segment operated 652 Superstores and 13 other stores in
158 U.S. media markets.
The international segment, which is comprised of the operations of
InterTAN, Inc., is engaged in the business of selling private-label and
brand-name consumer electronics in Canada. The international segment's
headquarters are located in Barrie, Ontario, Canada, and it operates
through retail stores and dealer outlets in Canada primarily under the
trade name The Source By Circuit CitySM. At August 31, 2007, the
international segment conducted business through 800 retail stores and
dealer outlets, which consisted of 508 company-owned stores, 291 dealer
outlets, and 1 Battery Plus(R) store. The international segment also
operates a Web site at www.thesource.ca.
In February 2007, the board of directors authorized management to explore
strategic alternatives for InterTAN, Inc., which could include the sale of
the operation. The company is continuing to explore its strategic options,
but does not expect any decisions regarding InterTAN will occur prior to
January 2008.
Effective January 28, 2007, the company returned the management of 92
Rogers Plus(R) stores to Rogers Wireless Inc. in accordance with the
Amending Agreement dated March 27, 2004, between Rogers Wireless Inc. and
InterTAN Canada Ltd. Results from the Rogers Plus(R) stores are presented
as results from discontinued operations in all periods presented.
The company closed a domestic segment operation in fiscal 2007 that
previously had been held for sale. Results from this operation are
presented as results from discontinued operations in all periods presented.
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. The
accompanying unaudited financial statements contain all adjustments of a
normal, recurring nature, except as otherwise disclosed herein, which are,
in the opinion of management, 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 2007 Annual Report on Form 10-K.
Within the financial tables in this Quarterly Report on Form 10-Q, certain
columns and rows may not sum due to the use of rounded numbers for
disclosure purposes. Percentages presented are calculated from the
underlying whole-dollar amounts.
2. Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48).
Page 6 of 32
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This Interpretation also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The company
adopted FIN 48 on March 1, 2007. Additional discussion and the impact of
adopting this Interpretation are included in Note 4, Income Taxes.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value and requires additional disclosures about fair value measurements.
The provisions of SFAS No. 157 will be effective for the company beginning
with the first quarter of fiscal 2009. The company has not yet determined
the impact of adopting this standard.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 permits entities
to choose to measure many financial instruments and certain assets and
liabilities at fair value. SFAS No. 159 will be effective for the company
beginning with the first quarter of fiscal 2009. The company has not yet
determined the impact of adopting this standard.
3. (Loss) Earnings Per Share
The following table presents a reconciliation of the denominators used in
the (loss) earnings per share calculations.
Three Months Ended Six Months Ended
August 31 August 31
(Shares in millions) 2007 2006 2007 2006
----------------------------------------------------------------------------------------- -----------------------
Weighted average common shares............................. 164.8 170.0 165.3 170.5
Potentially dilutive common equivalent shares:
Options................................................ - 3.2 - 3.5
Nonvested stock and nonvested stock units.............. - 1.5 - 1.5
------------------------- -----------------------
Weighted average common shares and potentially
dilutive common equivalent shares...................... 164.8 174.7 165.3 175.5
========================= =======================
For the three months and six months ended August 31, 2007, no options or
nonvested stock were included in the computation of diluted loss per share
because the company reported a net loss from continuing operations. For the
three months and six months ended August 31, 2006, the computation of
potentially dilutive common equivalent shares excluded certain options to
purchase shares of common stock because the exercise prices were greater
than the average market price of the common shares and, therefore, the
effect would be anti-dilutive. Shares excluded were as follows:
Three Months Ended Six Months Ended
August 31 August 31
(Shares in millions) 2007 2006 2007 2006
------------------------------------------------------------------------------------------ --------------------
Options...................................................... 7.7 1.1 8.1 1.1
Nonvested stock.............................................. 4.0 - 4.0 -
4. Income Taxes
The consolidated effective income tax rate applicable to results from
continuing operations was 44.0 percent for the six months ended August 31,
2007, and 38.2 percent for the six months ended August 31, 2006. The
increase in the effective tax rate is the result of an increase in
projected tax-exempt investment income in proportion to the projected
full-year net loss from continuing operations. The increase was partially
offset by the recognition of a valuation allowance of $0.7 million related
to the international segment. The valuation allowance was related to a
capital loss carryforward.
Page 7 of 32
On March 1, 2007, the company adopted the provisions of FIN 48. As a
result, the company decreased retained earnings by $8.4 million. At March
1, 2007, the company had unrecognized tax benefits of $38.4 million, of
which $17.6 million would reduce the effective tax rate if recognized in
future periods. At March 1, 2007, the company anticipated that total
unrecognized tax benefits would decrease by approximately $6 million by
February 29, 2008, as a result of the settlement of state tax uncertainties
and the expiration of the statute of limitations in several jurisdictions.
In conjunction with the adoption of FIN 48, the company has classified
unrecognized tax benefits not expected to be settled in one year as other
liabilities on the consolidated balance sheet. It is the company's policy
to account for interest and penalties as a component of income tax
(benefit) expense. The total amount of accrued interest at March 1, 2007,
was $15.3 million. There were no accrued penalties.
The Internal Revenue Service ("IRS") has completed its examination of the
company's federal income tax returns for fiscal years 2001, 2002 and 2003.
All issues relating to these years have been resolved, but the statute of
limitations remains open for these years as a result of waivers. The IRS is
currently examining the company's fiscal 2004, 2005 and 2006 income tax
returns. With limited exceptions, the company is no longer subject to
federal, state, or local income tax examinations for fiscal years before
2001. The statute of limitations for the Canadian tax returns is open for
fiscal 2002 to the present.
During the six months ended August 31, 2007, the company decreased its
unrecognized tax benefits by $3.3 million, of which $2.1 million was a
result of the resolution of the IRS audit of fiscal year 2003. In addition,
the company accrued interest of $0.6 million associated with its uncertain
tax positions.
5. Exit and Other Activities
At a location's cease-use date, estimated lease termination costs to close
a store, distribution center or repair center are recorded in selling,
general and administrative expenses on the consolidated statements of
operations. The calculation of accrued lease termination costs includes
future minimum lease payments, taxes, insurance and maintenance costs from
the date of closure to the end of the remaining lease term. The calculation
also includes estimated sublease income, net of tenant improvement
allowances and broker fees. The liability for lease termination costs is
discounted using a credit-adjusted risk-free rate of interest. The company
evaluates these assumptions each quarter and adjusts the liability
accordingly.
The accrual for lease termination costs for the domestic segment includes
the following activity:
Six Months Ended
August 31
(Amounts in millions) 2007 2006
----------------------------------------------------------------------------------------------------------
Accrued lease termination costs at beginning of period...................... $105.6 $110.0
Provisions for closed locations............................................. 4.2 1.2
Changes in assumptions about future sublease income and
terminations............................................................ 5.3 4.1
Interest accretion.......................................................... 4.0 4.6
Cash payments, net of cash received on subleased locations.................. (19.9) (16.7)
--------------------------
Accrued lease termination costs at end of period............................ 99.2 103.2
Less current portion of accrued lease termination costs..................... 30.2 30.3
--------------------------
Non-current portion of accrued lease termination costs...................... $ 69.0 $ 72.9
==========================
The current portion of accrued lease termination costs is included in
accrued expenses and other current liabilities, and the non-current portion
is presented separately on the consolidated balance sheets.
During the second quarter of fiscal 2008, the company made cash payments of
$8.3 million and recorded an additional accrual of $2.4 million related to
severance arrangements. At August 31, 2007, accrued severance totaled $8.8
million and is included in accrued compensation on the consolidated balance
sheet.
Page 8 of 32
6. Stock-Based Compensation
Under the company's stock-based incentive plans, nonqualified stock
options, nonvested stock, nonvested stock units and other equity-based
awards may be granted to management, key employees and non-employee
directors. At August 31, 2007, 4.2 million shares of common stock were
available for future grants of options, nonvested stock or nonvested stock
units. Upon the exercise of stock options, the grant of nonvested stock, or
the vesting of or lapse of deferral restrictions on nonvested stock units,
common shares are issued from authorized and unissued shares.
Compensation expense for stock-based incentive plans is summarized in the
table below.
Three Months Ended Six Months Ended
August 31 August 31
(Amounts in millions) 2007 2006 2007 2006
----------------------------------------------------------------------------------------- ----------------------
Compensation expense recognized:
Stock options........................................... $2.3 $2.6 $ 5.0 $ 7.0
Nonvested stock and nonvested stock units............... 5.0 5.1 7.3 9.3
Phantom stock units..................................... (0.5) 0.1 (0.6) 1.2
Employee stock purchase plan............................ 0.1 0.2 0.3 0.4
Other................................................... 0.1 - 0.1 0.1
------------------------ ----------------------
Total compensation expense recognized.............. $7.0 $8.0 $12.1 $18.0
======================== =====================
Tax benefit recognized..................................... $2.5 $2.8 $ 4.4 $ 6.1
Stock-based compensation expense is recorded in cost of sales, buying and
warehousing or in selling, general and administrative expenses depending on
the classification of the related employee's payroll cost. The
classification of stock-based compensation expense is summarized in the
table below.
Three Months Ended Six Months Ended
August 31 August 31
(Amounts in millions) 2007 2006 2007 2006
----------------------------------------------------------------------------------------- ----------------------
Cost of sales, buying and warehousing...................... $1.3 $1.4 $ 1.9 $ 2.7
Selling, general and administrative expenses............... 5.7 6.6 10.2 15.3
------------------------ ----------------------
Total compensation expense recognized...................... $7.0 $8.0 $12.1 $18.0
======================== =====================
The company recognizes stock-based compensation expense net of an estimated
forfeiture rate based on historical forfeiture activity. During the first
quarter of fiscal 2008, the company increased the estimated forfeiture rate
on certain nonvested stock awards to reflect changes in expectations
regarding the number of instruments that will vest. These changes were the
result of higher than anticipated actual forfeitures, due in part to
restructuring activities.
The value of each phantom stock unit is based on the market value of one
share of common stock on the vesting date. The units, which will be settled
in cash upon vesting, are remeasured at each reporting date. Due to the
decrease in the market value of the company's common stock, the company
recorded a benefit of $0.6 million related to phantom stock units in the
six months ended August 31, 2007.
The fair value of each option granted is estimated on the grant date using
the Black-Scholes option valuation model with the following weighted
average assumptions:
Six Months Ended
August 31
2007 2006
----------------------------------------------------------------------------------------
Expected dividend yield.................................... 1.3% 0.3%
Expected stock volatility.................................. 44% 61%
Risk-free interest rate.................................... 5% 5%
Expected term (in years)................................... 5 7
Page 9 of 32
During the six months ended August 31, 2006, a stock option grant with a
vesting period of five years and a contractual term of ten years was
awarded. Due to the lack of historical exercise behavior for an option with
similar vesting provisions, the company used a simplified method to
estimate the expected term of the grant. An average of the award's weighted
average vesting period and its contractual term was calculated and resulted
in an expected term of seven years.
Using these assumptions in the Black-Scholes model, the weighted average
grant date fair value of options granted was $5.20 per share for the six
months ended August 31, 2007 and $14.94 per share for the six months ended
August 31, 2006.
The company's stock option activity is summarized in the table below.
Weighted
Average
Weighted Remaining Aggregate
Shares Average Contractual Term Intrinsic Value
(in thousands) Exercise Price (in years) (in millions)
------------------------------------------------------------------------------------------------------------------------------
Outstanding at February 28, 2007................... 8,749 $18.16
Granted............................................ 207 $12.59
Exercised.......................................... (436) $10.70
Forfeited or expired............................... (993) $26.90
------
Outstanding at August 31, 2007..................... 7,527 $17.28 5.1 $4.3
Exercisable at August 31, 2007..................... 5,179 $15.95 3.7 $4.3
As of August 31, 2007, the total remaining unrecognized compensation
expense related to unvested stock options was $19.5 million and is expected
to be recognized over a weighted average period of 2.8 years.
The company's nonvested stock and nonvested stock unit activity is
summarized in the table below.
Weighted Average Aggregate
Shares Grant Date Intrinsic Value
(in thousands) Fair Value (in millions)
------------------------------------------------------------------------------------------------------------
Nonvested at February 28, 2007.................... 3,975 $19.63
Granted........................................... 663 $14.28
Vested............................................ (146) $19.51
Forfeited......................................... (407) $19.58
------
Nonvested at August 31, 2007...................... 4,085 $18.74 $44.4
Total unrecognized compensation expense related to nonvested stock and
nonvested stock units at August 31, 2007, was $36.6 million and is expected
to be recognized over a weighted average period of 1.9 years.
7. Comprehensive (Loss) Income
The components of the company's comprehensive (loss) income consist of net
(loss) earnings and other comprehensive income. Other comprehensive income
is comprised primarily of foreign currency translation adjustments related
to the international segment but also includes unrealized gains and losses
on available-for-sale securities and pension adjustments. Other
comprehensive income is recorded net of deferred income taxes directly as a
component of stockholders' equity.
Page 10 of 32
The components of comprehensive (loss) income, net of taxes, were as
follows:
Three Months Ended Six Months Ended
August 31 August 31
(Amounts in millions) 2007 2006 2007 2006
---------------------------------------------------------------------------------------- ---------------------------
Net (loss) earnings....................................... $(62.8) $10.0 $(117.4) $16.4
Foreign currency translation.............................. 2.6 (0.9) 19.2 6.8
Other..................................................... 0.1 - 0.1 -
-------------------------- ---------------------------
Comprehensive (loss) income............................... $(60.1) $ 9.1 $ (98.1) $23.2
========================== ===========================
8. Common Stock Repurchased
The company's board of directors has authorized the repurchase of up to
$1.2 billion of common stock, of which $233.7 million remained available at
August 31, 2007. As of August 31, 2007, the company had repurchased 60.4
million shares of common stock at a cost of $966.3 million, excluding
commission fees, cumulatively since the inception of the stock repurchase
program.
The company's stock repurchase activity for the three months and six months
ended August 31, 2007, was as follows:
Three Months Ended Six Months Ended
(Amounts in millions) August 31, 2007 August 31, 2007
------------------------------------------------------------------------------------------------------------------
Total number of shares repurchased........................... - 2.5
Cost, excluding commission fees.............................. $ - $46.7
9. Pension Plans
The company's domestic segment has a noncontributory defined benefit
pension plan that was frozen as of February 28, 2005, except for employees
who (i) were 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
employees affected by the plan freeze retain any benefits accumulated to
the effective date, but are no longer eligible to increase their benefit.
The company also has an unfunded nonqualified benefit restoration plan that
restored retirement benefits for domestic segment senior executives who
were affected by Internal Revenue Code limitations on benefits provided
under the company's pension plan. The benefit restoration plan was frozen
as of February 28, 2005, and will provide benefits for participants who, as
of that date, were within 10 years of attaining their early retirement date
or normal retirement date.
On December 22, 2005, the benefit restoration plan was amended to permit W.
Alan McCollough to elect to receive a lump-sum payment following his
retirement, allowing him to receive the maximum benefit payable under the
plan. This lump-sum payment resulted in a loss due to settlement of $0.3
million for the first half of fiscal 2007.
Page 11 of 32
The components of the net pension (income) expense for the plans were as
follows:
Three Months Ended Six Months Ended
August 31 August 31
(Amounts in thousands) 2007 2006 2007 2006
----------------------------------------------------------------------------------- ---------------------------
Service cost........................................... $ 589 $ 657 $ 1,178 $ 1,435
Interest cost......................................... 4,020 3,789 8,040 7,583
Expected return on plan assets........................ (5,182) (4,775) (10,364) (9,557)
Recognized prior service cost......................... 53 54 107 108
Recognized actuarial loss............................. 372 609 744 1,218
Loss due to settlement................................ - 128 - 319
------------------------- ---------------------------
Net pension (income) expense.......................... $ (148) $ 462 $ (296) $ 1,106
========================= ===========================
The company did not make a contribution to the defined benefit pension plan
during the six months ended August 31, 2007. No contributions are required
during fiscal 2008 under applicable law for this pension plan. The company
intends to make any contributions necessary to meet ERISA minimum funding
standards and intends to make additional contributions as needed to ensure
that the fair value of plan assets at February 29, 2008 exceeds the
accumulated benefit obligation.
A contribution of $0.7 million, which is equal to the expected benefit
payments for fiscal 2008, is expected to be made to the restoration plan
during fiscal 2008. Benefit payments during the six months ended August 31,
2007, were $0.3 million.
10. Discontinued Operations
For the three months and six months ended August 31, 2007, net earnings
from discontinued operations totaled $0.2 million and $0.5 million, which
are net of $0.1 million and $0.3 million of income taxes, respectively.
These amounts primarily relate to the operations of the Rogers Plus(R)
stores, of which the management was returned to Rogers Wireless Inc. in
January 2007.
For the quarter ended August 31, 2006, the net loss from discontinued
operations totaled $1.6 million, which is net of $0.6 million of income
taxes, and related to the operations of the Rogers Plus(R) stores and a
domestic segment operation that was closed in fiscal 2007. This $0.6
million of income tax benefit was offset by $0.5 million of income tax
expense resulting from a revision of management's estimate regarding
certain tax uncertainties associated with the company's discontinued
bankcard operation.
For the six months ended August 31, 2006, the net loss from discontinued
operations totaled $2.3 million, which is net of $1.0 million of income
taxes, and related to the operations of the Rogers Plus(R) stores and a
domestic segment operation that was closed in fiscal 2007. This $1.0
million of income tax benefit was offset by $0.5 million of income tax
expense associated with the company's discontinued bankcard operation as
discussed above.
11. 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 engaged in the business of
selling brand-name consumer electronics, personal computers, entertainment
software, and related services in the United States. The international
segment is engaged in the business of selling private-label and brand-name
consumer electronics in Canada.
Page 12 of 32
Net sales by reportable segment were as follows:
Three Months Ended Six Months Ended
August 31 August 31
(Amounts in millions) 2007 2006 2007 2006
---------------------------------------------------------------------------------------- --------------------------
Domestic segment.......................................... $2,511.4 $2,680.6 $4,888.3 $5,166.1
International segment..................................... 132.5 137.9 241.2 249.0
---------------------------- --------------------------
Net sales................................................. $2,644.0 $2,818.5 $5,129.5 $5,415.1
============================ ==========================
Net (loss) earnings from continuing operations by reportable segment were
as follows:
Three Months Ended Six Months Ended
August 31 August 31
(Amounts in millions) 2007 2006 2007 2006
---------------------------------------------------------------------------------------- -------------------------
Domestic segment.......................................... $(63.2) $10.5 $(120.6) $19.8
International segment..................................... 0.1 1.2 2.8 (2.8)
--------------------------- -------------------------
Net (loss) earnings from continuing operations............ $(63.1) $11.7 $(117.9) $17.0
=========================== ==========================
The international segment's net earnings from continuing operations for the
first half of fiscal 2008 include $4.7 million, after-tax, of additional
sales proceeds related to a former subsidiary.
Total assets by reportable segment were as follows:
At August 31 At February 28
(Amounts in millions) 2007 2007
------------------------------------------------------------------------------------------------
Domestic segment......................................... $3,677.2 $3,657.5
International segment.................................... 360.3 349.8
-----------------------------------
Total assets............................................. $4,037.5 $4,007.3
=================================
The domestic segment net sales by category were as follows:
Three Months Ended August 31 Six Months Ended August 31
2007 2006(a) 2007 2006(a)
% of % of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales $ Sales
------------------------------------------------------------------------------- ---------------------------------------------
Video.............................. $ 948.2 37.8% $1,067.5 39.8% $1,882.2 38.5% $2,099.3 40.6%
Information technology............. 774.7 30.8 743.0 27.7 1,403.3 28.7 1,361.8 26.4
Audio.............................. 325.8 13.0 388.7 14.5 660.7 13.5 769.3 14.9
Entertainment...................... 267.1 10.6 242.1 9.1 539.7 11.1 500.9 9.7
Warranty, services
and other(b)................... 195.6 7.8 239.3 8.9 402.5 8.2 434.8 8.4
------------------------------------------- ---------------------------------------------
Net sales.......................... $2,511.4 100.0% $2,680.6 100.0% $4,888.3 100.0% $5,166.1 100.0%
========================================== ============================================
(a) Reclassifications have been made to conform with the current year
presentation. These include reclassifying sales from video and information
technology to warranty, services and other.
(b) Warranty, services and other includes extended warranty net sales;
revenues from PC services, mobile installations, home theater installations
and product repairs; net financing; and revenues from third parties for
services subscriptions.
Page 13 of 32
The international segment net sales by category were as follows:
Three Months Ended August 31 Six Months Ended August 31
2007 2006 2007 2006
% of % of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales $ Sales
------------------------------------------------------------------------------- ---------------------------------------------
Video.............................. $ 26.2 19.7% $ 27.4 19.9% $ 46.2 19.2% $ 47.9 19.2%
Information technology............. 46.6 35.2 53.0 38.4 86.4 35.7 97.6 39.2
Audio.............................. 45.2 34.1 43.9 31.9 81.7 33.9 79.7 32.0
Entertainment...................... 6.2 4.7 4.8 3.5 11.2 4.7 8.0 3.2
Warranty, services
and other(a)................... 8.3 6.3 8.7 6.3 15.6 6.5 15.8 6.3
------------------------------------------ ---------------------------------------------
Net sales.......................... $132.5 100.0% $137.9 100.0% $241.2 100.0% $249.0 100.0%
========================================= ============================================
(a) Warranty, services and other includes extended warranty sales and
product repair revenue.
12. Supplemental Consolidated Statements of Cash Flows Information
The following table summarizes supplemental cash flow information.
Six Months Ended
August 31
(Amounts in millions) 2007 2006
----------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities:
Increase in capital expenditure accrual........................................... $ 1.7 $24.2
Capital lease obligation.......................................................... $ 5.2 $ -
(Decrease) increase in sale-leaseback receivables................................. $(8.2) $ 2.4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are a leading specialty retailer of consumer electronics, home office
products, entertainment software, and related services. We have two reportable
segments: our domestic segment and our international segment.
Our domestic segment is engaged in the business of selling brand-name consumer
electronics, personal computers, entertainment software, and related services in
our stores in the United States and via the Web at www.circuitcity.com and
www.firedog.com. At August 31, 2007, the domestic segment operated 652
Superstores and 13 other stores in 158 U.S. media markets.
Our international segment, which is comprised of the operations of InterTAN,
Inc., is engaged in the business of selling private-label and brand-name
consumer electronics in Canada. The international segment's headquarters are
located in Barrie, Ontario, Canada, and it operates through retail stores and
dealer outlets in Canada primarily under the trade name The Source By Circuit
CitySM. At August 31, 2007, the international segment conducted business through
800 retail stores and dealer outlets, which consisted of 508 company-owned
stores, 291 dealer outlets and 1 Battery Plus(R) store. The international
segment also operates a Web site at www.thesource.ca.
In February 2007, the board of directors authorized management to explore
strategic alternatives for InterTAN, Inc., which could include the sale of the
operation. We are continuing to explore our strategic options, but do not expect
any decisions regarding InterTAN will occur prior to January 2008.
Effective January 28, 2007, we returned the management of 92 Rogers Plus(R)
stores to Rogers Wireless Inc. in accordance with the Amending Agreement dated
March 27, 2004, between Rogers Wireless Inc. and InterTAN
Page 14 of 32
Canada Ltd. Results from the Rogers Plus(R) stores are presented as results from
discontinued operations in all periods presented.
We closed a domestic segment operation in fiscal 2007 that previously had been
held for sale. Results from this operation are presented as results from
discontinued operations in all periods presented.
Management's Discussion and Analysis (MD&A) is designed to provide the reader of
financial statements with a narrative discussion of our results of operations;
financial position, liquidity and capital resources; critical accounting
policies and significant estimates; and the impact of recently issued accounting
standards. Our MD&A is presented in seven sections:
o Executive Summary
o Critical Accounting Policies
o Results of Operations
o Recent Accounting Pronouncements
o Financial Condition
o Financial Outlook
o Forward-Looking Statements
This discussion should be read in conjunction with our Consolidated Financial
Statements and accompanying Notes included in this report, the Annual Report on
Form 10-K for the fiscal year ended February 28, 2007, as well as our reports on
Form 8-K and other SEC filings. All per share amounts are presented on a fully
diluted basis.
Within the financial tables in this Quarterly Report Form 10-Q, certain columns
and rows may not sum due to the use of rounded numbers for disclosure purposes.
Percentages presented are calculated from the underlying whole-dollar amounts.
EXECUTIVE SUMMARY
Fiscal 2008 Second Quarter Performance
o Net sales declined 6.2 percent, driven by a comparable store sales decline
of 7.9 percent. In the same period last fiscal year, we posted total sales
growth of 11.1 percent and comparable store sales growth of 8.5 percent.
o In the domestic segment, direct channel sales, which include Web- and call
center-originated sales, grew 20 percent and PC services and home theater
installation revenues grew 22 percent over the same period last year.
o Gross profit margin declined 313 basis points compared with last year's
result due to a decrease in merchandise margins, which was driven primarily
by a greater mix of PC hardware sales as well as a decrease in PC hardware
and television margins, and a decrease in domestic segment extended
warranty net sales.
o SG&A expenses as a percentage of net sales increased from the prior year by
234 basis points, which primarily reflects the deleveraging impact of lower
sales and incremental expenses associated with new stores, information
technology and services.
o The loss from continuing operations before income taxes was 4.8 percent of
net sales compared with earnings from continuing operations before income
taxes of 0.7 percent of net sales in the same period last year.
o We reported a net loss from continuing operations of $63.1 million, or 38
cents per diluted share, for the second quarter of fiscal 2008, compared
with net earnings from continuing operations of $11.7 million, or 7 cents
per diluted share, in the same period last year.
Page 15 of 32
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 2007
Annual Report on Form 10-K. These policies relate to inventory valuation,
goodwill, accrued lease termination costs, stock-based compensation and pension
plans. We have updated our critical accounting policy for income taxes due to
our adoption of Financial Accounting Standards Board (FASB) Interpretation No.
48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109" (FIN 48).
Income Taxes
We account for income taxes in accordance with Statement of Financial Accounting
Standard (SFAS) No. 109, "Accounting for Income Taxes," which requires that
deferred tax assets and liabilities be recognized using enacted tax rates for
the effect of the temporary differences between the book and tax basis of
recorded assets and liabilities. We make estimates and judgments with regard to
the calculation of certain tax assets and liabilities. SFAS No. 109 requires
that deferred tax assets be reduced by valuation allowances if it is more likely
than not that some portion of the deferred tax asset will not be realized.
Quarterly, we assess the likelihood that the benefits of a deferred tax asset
will be realized by considering historical and projected taxable income and tax
planning strategies. Should a change in circumstances lead to a change in our
judgment regarding the realization of deferred tax assets in future years, we
adjust the valuation allowances in the period that the change in circumstances
occurs, along with a current charge or credit to net earnings. Significant
changes to our estimates and assumptions may result in an increase or decrease
to our tax expense in a subsequent period.
On March 1, 2007, we adopted FIN 48. FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Positions taken by an entity in its income tax returns must satisfy a
more-likely-than-not recognition threshold, assuming that the positions will be
examined by taxing authorities with full knowledge of all relevant information,
in order for the positions to be recognized in the consolidated financial
statements. Quarterly, we evaluate the income tax positions taken by the
company, or expected to be taken by the company, to determine whether these
positions meet the more-likely-than-not threshold prescribed by FIN 48. We are
required to make subjective judgments and assumptions regarding our income tax
exposures and must consider a variety of factors, including the current tax
statutes, the current status of audits performed by tax authorities, and the
statute of limitations in each tax jurisdiction. To the extent an uncertain tax
position is resolved for an amount that varies from the recorded estimated
liability, our income tax expense in a given financial statement period could be
materially affected.
Our unrecognized tax benefits were $35.1 million at August 31, 2007, and $15.2
million at February 28, 2007. In conjunction with the adoption of FIN 48, we
have classified unrecognized tax benefits not expected to be settled in one year
as other liabilities on the consolidated balance sheet. Additional discussion
and the impact of adopting this Interpretation are included in Note 4, Income
Taxes, of the Notes to Consolidated Financial Statements, included in Item 1,
Financial Statements, of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
Our operations, consistent 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 (loss) 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. The following tables summarize performance by segment.
Page 16 of 32
FISCAL 2008 SEGMENT PERFORMANCE SUMMARY
Three Months Ended August 31, 2007
Domestic International Consolidated
% of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales
-------------------------------------------------------------------------------------------------------------------------
Net sales............................... $2,511.4 100.0% $132.5 100.0% $2,644.0 100.0%
Gross profit............................ $ 497.5 19.8% $ 48.5 36.6% $ 546.0 20.7%
Selling, general and administrative
expenses............................ $ 631.4 25.1% $ 46.5 35.1% $ 677.9 25.6%
Net (loss) earnings from continuing
operations.......................... $ (63.2) (2.5)% $ 0.1 0.1% $ (63.1) (2.4)%
Six Months Ended August 31, 2007
Domestic International Consolidated
% of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales
-------------------------------------------------------------------------------------------------------------------------
Net sales............................... $4,888.3 100.0% $241.2 100.0% $5,129.5 100.0%
Gross profit............................ $1,017.9 20.8% $ 88.2 36.6% $1,106.2 21.6%
Selling, general and administrative
expenses............................ $1,243.9 25.4% $ 82.4 34.2% $1,326.3 25.9%
Net (loss) earnings from continuing
operations.......................... $(120.6) (2.5)% $ 2.8 1.1% $ (117.9) (2.3)%
FISCAL 2007 SEGMENT PERFORMANCE SUMMARY
Three Months Ended August 31, 2006
Domestic International Consolidated
% of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales
-------------------------------------------------------------------------------------------------------------------------
Net sales............................... $2,680.6 100.0% $137.9 100.0% $2,818.5 100.0%
Gross profit............................ $ 619.6 23.1% $ 50.5 36.6% $ 670.1 23.8%
Selling, general and administrative
expenses............................ $ 608.4 22.7% $ 48.3 35.0% $ 656.7 23.3%
Net earnings from continuing
operations.......................... $ 10.5 0.4% $ 1.2 0.9% $ 11.7 0.4%
Six Months Ended August 31, 2006
Domestic International Consolidated
% of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales
-------------------------------------------------------------------------------------------------------------------------
Net sales............................... $5,166.1 100.0% $249.0 100.0% $5,415.1 100.0%
Gross profit............................ $1,214.5 23.5% $ 91.4 36.7% $1,305.9 24.1%
Selling, general and administrative
expenses............................ $1,196.0 23.2% $ 95.0 38.1% $1,291.0 23.8%
Net earnings (loss) from continuing
operations.......................... $ 19.8 0.4% $ (2.8) (1.1)% $ 17.0 0.3%
Page 17 of 32
Net Sales
Consolidated
For the second quarter of fiscal 2008, our net sales decreased 6.2 percent to
$2.64 billion, and comparable store sales decreased 7.9 percent from the same
period last fiscal year. Net sales for the first six months of fiscal 2008
decreased 5.3 percent to $5.13 billion from $5.42 billion for the first six
months of last fiscal year. Comparable store sales decreased 6.8 percent for the
first six months of fiscal 2008.
A store's sales are included in comparable store sales after the store has been
open for a full 12 months. Comparable store sales include Web-originated sales
and sales from relocated and remodeled stores. Sales from closed stores are
included in comparable store sales until the month in which the stores are
closed. The calculation of comparable store sales excludes the impact of
fluctuations in foreign currency exchange rates.
Our major sales categories are
o video, which includes televisions, imaging products, DVD hardware,
camcorders, digital cameras, furniture, and related accessories;
o information technology, which includes PC hardware, telecommunications
products and related accessories;
o audio, which includes home audio products, mobile audio products, portable
audio products, navigation products, and related accessories;
o entertainment, which includes movie software, music software, game
software, game hardware and personal computer software; and
o warranty, services and other, which includes extended warranty net sales;
revenues from PC services, mobile installations, home theater installations
and product repairs; net financing; and revenues received from third
parties for services subscriptions.
Domestic Segment
For the second quarter of fiscal 2008, the domestic segment's net sales were
$2.51 billion, a decrease of 6.3 percent from the same period last fiscal year.
Comparable store sales decreased 8.0 percent driven primarily by a decline in
conversion rates as a result of the significant amount of change imposed on the
organization as well as a sharp decline in sales of tube and projection
televisions. While still negative, the comparable store sales change improved
each successive period of the quarter across most regions. We experienced
particular regional sales weakness in the Southeast region and California. For
the quarter, direct channel sales, including Web- and call center-originated
sales, grew 20 percent, and PC services and home theater installation revenues
grew 22 percent over the same period last fiscal year.
For the six months ended August 31, 2007, domestic segment's net sales were
$4.89 billion, a decrease of 5.4 percent over the same period last fiscal year.
Comparable store sales decreased 7.0 percent.
The domestic segment's net sales represented by each major sales category for
the periods ended August 31, 2007 and 2006, are shown below.
Page 18 of 32
NET SALES BY CATEGORY
Three Months Ended August 31 Six Months Ended August 31
2007 2006(a) 2007 2006(a)
% of % of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales $ Sales
--------------------------------------------------------------------------------- ---------------------------------------------
Video................................ $ 948.2 37.8% $1,067.5 39.8% $1,882.2 38.5% $2,099.3 40.6%
Information technology............... 774.7 30.8 743.0 27.7 1,403.3 28.7 1,361.8 26.4
Audio................................ 325.8 13.0 388.7 14.5 660.7 13.5 769.3 14.9
Entertainment........................ 267.1 10.6 242.1 9.1 539.7 11.1 500.9 9.7
Warranty, services and other......... 195.6 7.8 239.3 8.9 402.5 8.2 434.8 8.4
------------------------------------------ ---------------------------------------------
Net sales............................ $2,511.4 100.0% $2,680.6 100.0% $4,888.3 100.0% $5,166.1 100.0%
========================================== ============================================
(a) Reclassifications have been made to conform with the current year
presentation. These include reclassifying sales from video and information
technology to warranty, services and other.
In the video category, we generated a double-digit comparable store sales
decrease in the second quarter. Comparable store sales of flat panel televisions
increased by double digits. Total television comparable store sales decreased by
double digits, as significant comparable store sales decreases in projection and
tube televisions more than offset the flat panel television increase. Comparable
store sales of digital imaging products and accessories decreased by a low
single digit. Comparable store sales of camcorders and DVD hardware declined by
double digits.
In the information technology category, we generated a low-single-digit
comparable store sales increase in the second quarter. Comparable store sales of
notebook computers increased by double digits, and comparable store sales of
desktop computers declined by a low single digit compared with the prior year.
In the audio category, we generated a double-digit comparable store sales
decrease in the second quarter. Comparable store sales of navigation products
increased by strong double digits. Comparable store sales of portable digital
audio, mobile, home audio and digital satellite radio products declined by
double digits.
In the entertainment category, we generated a high-single-digit comparable store
sales increase in the second quarter, reflecting a strong double-digit
comparable store sales increase in video gaming products and a double-digit
comparable store sales increase in PC software. Comparable store sales of video
software and music software declined by double digits.
Domestic segment extended warranty net sales were $67.0 million, or 2.7 percent
of domestic segment net sales, in the second quarter, compared with $107.7
million, or 4.0 percent of domestic segment net sales, in the same period last
year. This decrease was primarily due to reduced attachment rates resulting from
poor execution as the business was undergoing significant amounts of change. PC
services and home theater installation revenues increased 22 percent to $63.6
million from $52.1 million in the same period last year.
The following table provides the number of our domestic segment stores:
DOMESTIC SEGMENT STORE MIX
Aug. 31, 2007 Feb. 28, 2007 Aug. 31, 2006
----------------------------------------------------------------------------------------------------------------
Superstores....................................... 652 642 632
Other stores...................................... 13 12 5
----------------------------------------------------------
Total domestic segment stores..................... 665 654 637
==========================================================
During the second quarter of fiscal 2008, we opened nine incremental Superstores
and relocated four Superstores.
Page 19 of 32
International Segment
The international segment's net sales decreased 3.9 percent to $132.5 million
for the second quarter of fiscal 2008, compared with $137.9 million for the
second quarter of last fiscal year. The decrease was driven by the impact of the
year-over-year decrease of 57 retail stores and dealer outlets, net of openings,
as well as the comparable store sales decline of 4.4 percent in local currency
for the quarter. The effect of fluctuations in foreign currency exchange rates
favorably impacted the sales decline by approximately 5 percentage points.
For the six months ended August 31, 2007, the international segment's net sales
decreased 3.1 percent to $241.2 million, compared with $249.0 million for the
six months ended August 31, 2006. The effect of fluctuations in foreign currency
exchange rates favorably impacted the sales decline by approximately 3
percentage points. Comparable store sales decreased 0.3 percent in local
currency for the first six months of fiscal 2008.
NET SALES BY CATEGORY
Three Months Ended August 31 Six Months Ended August 31
2007 2006 2007 2006
% of % of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales $ Sales
------------------------------------------------------------------------------------ ---------------------------------------------
Video................................... $ 26.2 19.7% $ 27.4 19.9% $ 46.2 19.2% $ 47.9 19.2%
Information technology.................. 46.6 35.2 53.0 38.4 86.4 35.7 97.6 39.2
Audio................................... 45.2 34.1 43.9 31.9 81.7 33.9 79.7 32.0
Entertainment........................... 6.2 4.7 4.8 3.5 11.2 4.7 8.0 3.2
Warranty, services and other............ 8.3 6.3 8.7 6.3 15.6 6.5 15.8 6.3
------------------------------------------ ---------------------------------------------
Net sales............................... $132.5 100.0% $137.9 100.0% $241.2 100.0% $249.0 100.0%
========================================= ============================================
INTERNATIONAL SEGMENT STORE MIX
Aug. 31, 2007 Feb. 28, 2007 Aug. 31, 2006
----------------------------------------------------------------------------------------------------------------
Company-owned stores.............................. 508 509 541
Dealer outlets.................................... 291 296 298
Battery Plus(R) stores.............................. 1 1 18
---------------------------------------------------------
Total international segment stores................ 800 806 857
===========================================================
Effective January 28, 2007, we returned the management of 92 Rogers Plus(R)
stores to Rogers Wireless Inc. in accordance with the Amending Agreement dated
March 27, 2004, between Rogers Wireless Inc. and InterTAN Canada Ltd. As of
August 31, 2006, there were 92 Rogers Plus(R) stores in operation. Results from
these stores are presented as results from discontinued operations in all
periods presented.
Gross Profit Margin
Consolidated
The gross profit margin was 20.7 percent of net sales in the second quarter of
fiscal 2008, compared with 23.8 percent for the same period last fiscal year.
For the first six months of fiscal 2008, the gross profit margin was 21.6
percent of net sales, compared with 24.1 percent for the same period last fiscal
year.
Page 20 of 32
Domestic Segment
The domestic segment's gross profit margin was 19.8 percent of domestic segment
net sales in the second quarter of fiscal 2008, compared with 23.1 percent for
the same period last fiscal year. The 331 basis point decrease impacted the
consolidated gross profit margin decline by 317 basis points. The decrease was
primarily driven by a decrease of 191 basis points in merchandise margins as a
percent of domestic segment net sales. The lower merchandise margins were driven
by a greater mix of lower-margin PC hardware sales as well as a decrease in PC
hardware and television margins. The margin rate was also negatively impacted by
a decrease of 135 basis points in extended warranty net sales as a percent of
domestic segment net sales.
For the first half of fiscal 2008, the domestic segment's gross profit margin
was 20.8 percent of domestic net sales, compared with 23.5 percent for the same
period last fiscal year. The margin rate decline was primarily driven by a
decrease of 154 basis points in merchandise margins as a percent of domestic
segment net sales. The lower merchandise margins were driven by a greater mix of
lower-margin PC hardware sales as well as a decrease in PC hardware and
television margins. The margin rate was also negatively impacted by a decrease
of 99 basis points in extended warranty net sales as a percent of domestic
segment net sales.
International Segment
The international segment's gross profit margin was 36.6 percent of
international segment net sales in the second quarter of fiscal 2008, compared
with 36.6 percent for the same period last fiscal year and did not materially
impact the consolidated gross profit margin decline.
For the first half of fiscal 2008, the international segment's gross profit
margin was 36.6 percent of net sales, compared with 36.7 percent for the same
period last fiscal year and did not materially impact the consolidated gross
profit margin decline.
Selling, General and Administrative Expenses
Consolidated
Three Months Ended August 31 Six Months Ended August 31
2007 2006 2007 2006
% of % of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales $ Sales
------------------------------------------------------------------------------------ ---------------------------------------------
Store expenses.......................... $566.1 21.4% $563.1 20.0% $1,122.9 21.9% $1,097.1 20.3%
General and administrative
expenses........................... 99.3 3.8 83.6 3.0 184.8 3.6 171.0 3.2
Stock-based compensation
expense............................ 5.7 0.2 6.6 0.2 10.2 0.2 15.3 0.3
Remodel expenses........................ - - 0.5 - - - 0.5 -
Relocation expenses..................... 3.4 0.1 0.5 - 4.5 0.1 2.0 -
Pre-opening expenses.................... 3.4 0.1 2.4 0.1 3.9 0.1 5.0 0.1
------------------------------------------ ---------------------------------------------
Total ................................. $677.9 25.6% $656.7 23.3% $1,326.3 25.9% $1,291.0 23.8%
========================================= ============================================
Selling, general and administrative expenses were 25.6 percent of consolidated
net sales in the second quarter of fiscal 2008, compared with 23.3 percent for
the same period last fiscal year. The domestic segment contributed 230 basis
points to the 234 basis point increase in the consolidated selling, general and
administrative expense-to-sales ratio, while the international segment's
selling, general and administrative expense-to-sales ratio did not materially
impact the consolidated expense-to-sales ratio.
For the first half of fiscal 2008, selling, general and administrative expenses
as a percentage of sales increased 202 basis points from the same period last
fiscal year. The domestic segment contributed 216 basis
Page 21 of 32
points to the 202 basis point increase in the consolidated expense-to-sales
ratio, while the international segment's decline in expenses partially offset
this increase.
Domestic Segment
Three Months Ended August 31 Six Months Ended August 31
2007 2006 2007 2006
% of % of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales $ Sales
------------------------------------------------------------------------------------ ---------------------------------------------
Store expenses.......................... $527.4 21.0% $524.2 19.6% $1,051.5 21.5% $1,021.1 19.8%
General and administrative
expenses........................... 91.7 3.7 74.5 2.8 174.1 3.6 153.3 3.0
Stock-based compensation
expense............................ 5.6 0.2 6.4 0.2 9.9 0.2 14.0 0.3
Remodel expenses........................ - - 0.5 - - - 0.5 -
Relocation expenses..................... 3.4 0.1 0.5 - 4.5 0.1 2.0 -
Pre-opening expenses.................... 3.4 0.1 2.4 0.1 3.9 0.1 5.0 0.1
------------------------------------------ ---------------------------------------------
Total ................................. $631.4 25.1% $608.4 22.7% $1,243.9 25.4% $1,196.0 23.2%
========================================= ============================================
For the three months ended August 31, 2007, the domestic segment's
expense-to-sales ratio increased 245 basis points from the same period last
fiscal year. The increase primarily reflects the overall deleveraging impact of
lower sales; 133 basis points in occupancy costs due primarily to store openings
and increased building maintenance; and 73 basis points in incremental expenses
in information technology and services. The unfavorable impacts were partially
offset by a decrease in compensation and travel expenses that resulted from our
expense reduction initiatives.
For the six months ended August 31, 2007, the domestic segment's
expense-to-sales ratio increased 230 basis points from the same period last
fiscal year. The increase primarily reflects the deleveraging impact of lower
sales; 106 basis points relating to increased occupancy costs due to store
openings; and 81 basis points in incremental expenses for information technology
and services.
International Segment
Three Months Ended August 31 Six Months Ended August 31
2007 2006 2007 2006
% of % of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales $ Sales
------------------------------------------------------------------------------------ ---------------------------------------------
Store expenses.......................... $38.8 29.3% $38.9 28.2% $71.4 29.6% $76.0 30.5%
General and administrative
expenses........................... 7.5 5.7 9.2 6.7 10.7 4.4 17.7 7.1
Stock-based compensation
expense............................ 0.2 0.1 0.2 0.1 0.3 0.1 1.3 0.5
------------------------------------------ ---------------------------------------------
Total ................................. $46.5 35.1% $48.3 35.0% $82.4 34.2% $95.0 38.1%
========================================= ============================================
For the three months ended August 31, 2007, the international segment's
expense-to-sales ratio was relatively flat compared to last fiscal year's result
and did not materially impact the consolidated expense-to-sales ratio increase.
For the six months ended August 31, 2007 the international segment's
expense-to-sales ratio decreased 400 basis points from the same period last
fiscal year primarily due to $7.5 million of additional sales proceeds related
to a former subsidiary, reducing fiscal 2008 general and administrative
expenses.
Page 22 of 32
Income Tax (Benefit) Expense
The consolidated effective income tax rate applicable to results from continuing
operations was 44.0 percent for the six months ended August 31, 2007, and 38.2
percent for the six months ended August 31, 2006. The increase in the effective
tax rate is the result of an increase in projected tax-exempt investment income
in proportion to the projected full-year net loss from continuing operations.
The increase was partially offset by the recognition of a valuation allowance of
$0.7 million related to the international segment. The valuation allowance was
related to a capital loss carryforward.
Net (Loss) Earnings from Continuing Operations
The net loss from continuing operations was $63.1 million, or 38 cents per
diluted share, in the three months ended August 31, 2007, compared with net
earnings from continuing operations of $11.7 million, or 7 cents per diluted
share, in the same period last fiscal year.
For the six months ended August 31, 2007, the net loss from continuing
operations was $117.9 million, or 71 cents per diluted share, compared with the
net earnings from continuing operations of $17.0 million, or 10 cents per
diluted share, for the same period last fiscal year.
Earnings (Loss) from Discontinued Operations
For the three months and six months ended August 31, 2007, net earnings from
discontinued operations totaled $0.2 million and $0.5 million, which are net of
$0.1 million and $0.3 million of income taxes, respectively. These amounts
primarily relate to the operations of the Rogers Plus(R) stores, of which the
management was returned to Rogers Wireless Inc. in January 2007.
For the quarter ended August 31, 2006, the net loss from discontinued operations
totaled $1.6 million, which is net of $0.6 million of income taxes, and related
to the operations of the Rogers Plus(R) stores and a domestic segment operation
that was closed in fiscal 2007. This $0.6 million of income tax benefit was
offset by $0.5 million of income tax expense resulting from a revision of
management's estimate regarding certain tax uncertainties associated with our
discontinued bankcard operation.
For the six months ended August 31, 2006, the net loss from discontinued
operations totaled $2.3 million, which is net of $1.0 million of income taxes,
and related to the operations of the Rogers Plus(R) stores and a domestic
segment operation that was closed in fiscal 2007. This $1.0 million of income
tax benefit was offset by $0.5 million of income tax expense associated with our
discontinued bankcard operation as discussed above.
Cumulative Effect of Change in Accounting Principle
In the first quarter of fiscal 2007, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment," using the
modified prospective transition method, resulting in a non-cash after-tax
benefit of $1.8 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. We adopted FIN 48 on March 1, 2007. Additional
discussion and the impact of adopting this Interpretation are included in Note
4, Income Taxes, of the Notes to Consolidated Financial Statements, included in
Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
Page 23 of 32
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
No. 157 defines fair value, establishes a framework for measuring fair value and
requires additional disclosures about fair value measurements. The provisions of
SFAS No. 157 will be effective for us beginning with the first quarter of fiscal
2009. We have not yet determined the impact of adopting this standard.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 permits entities to
choose to measure many financial instruments and certain assets and liabilities
at fair value. SFAS No. 159 will be effective for us beginning with the first
quarter of fiscal 2009. We have not yet determined the impact of adopting this
standard.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash Flows
Cash Flows Summary
The following table summarizes our cash flows for the six months ended August
31, 2007 and 2006:
Six Months Ended
August 31
(Amounts in millions) 2007 2006
----------------------------------------------------------------------------------------
Net cash (used in) provided by:
Operating activities.................................... $(133.3) $(69.3)
Investing activities.................................... 178.4 105.2
Financing activities.................................... (69.1) (50.9)
Discontinued operations................................. 12.2 (4.8)
Effect of exchange rate changes on cash................... 1.5 -
-------------------------
Decrease in cash and cash equivalents..................... $ (10.2) $(19.8)
=========================
Operating Activities
For the six months ended August 31, 2007, net cash used in operating activities
was $133.3 million, compared with net cash used in operating activities of $69.3
million in the six months ended August 31, 2006. The change was due primarily to
the net loss for the six months ended August 31, 2007, compared with net
earnings for the six months ended August 31, 2006. Collections of accounts
receivable partially offset the cash used by operations during the six months
ended August 31, 2007. During the six months ended August 31, 2007, accounts
receivable decreased $55.8 million as we collected vendor receivables more
quickly. During the six months ended August 31, 2006, accounts receivable
increased $65.9 million.
Investing Activities
Net cash provided by investing activities was $178.4 million for the six months
ended August 31, 2007, compared with $105.2 million for the six months ended
August 31, 2006. The increase in cash provided by investing activities was due
primarily to an increase in net sales and maturities of investment securities,
partially offset by increased purchases of property and equipment as we make
investments in new Superstores.
Financing Activities
For the six months ended August 31, 2007, net cash used in financing activities
was $69.1 million, compared with net cash used in financing activities of $50.9
million in the six months ended August 31, 2006. The change was due primarily to
decreases in cash provided by the issuance of common stock and changes in
overdraft balances. Decreases in sources of cash were partially offset by a
decrease in cash used to repurchase common stock.
The board of directors has authorized the repurchase of up to $1.2 billion of
common stock, of which $233.7 million remained available at August 31, 2007.
During the three months ended August 31, 2007, we did not
Page 24 of 32
repurchase common stock primarily due to our desire to maintain a strong cash
position as the business was undergoing a significant amount of change and as we
faced an uncertain macroeconomic environment. During the six months ended August
31, 2007, we used cash to repurchase 2.5 million shares of common stock at an
average price of $18.68 per share, for a total price of $46.7 million, excluding
commission fees. During the same period last fiscal year, we used cash to
repurchase 4.3 million shares of common stock at an average price of $27.23 per
share, for a total price of $117.0 million, excluding commission fees. As of
August 31, 2007, we had repurchased 60.4 million shares of common stock at an
average price of $16.01 per share, for a total price of $966.3 million,
excluding commission fees, cumulatively since the inception of the stock
repurchase program.
During fiscal 2007, the board of directors authorized an increase in our
quarterly dividend rate to $0.04 per share from the previous quarterly dividend
of $0.0175 per share on our common stock. The dividend rate change was effective
with the declaration of the quarterly dividend in the third quarter of fiscal
2007, resulting in an increase in cash used to pay dividends in the six months
ended August 31, 2007, compared with the six months ended August 31, 2006.
Cash, Cash Equivalents and Short-term Investments
At August 31, 2007, we had cash, cash equivalents and short-term investments of
$424.4 million, compared with $739.5 million at February 28, 2007. The $315.1
million decline in the cash position primarily reflects cash used to purchase
property and equipment of $148.2 million and cash used by operations of $133.3
million. Stock repurchases and dividend payments of $60.2 million also drove the
decrease in the cash position.
Net-owned Inventory
Merchandise inventory increased to $1.83 billion at August 31, 2007, from $1.64
billion at February 28, 2007. Net-owned inventory, calculated as merchandise
inventory less merchandise payable, increased by $8.7 million from February 28,
2007, to August 31, 2007. International segment net-owned inventory increased
$19.6 million primarily due to a decrease in merchandise payables related to the
timing of payments. International segment merchandise inventory increased
primarily due to the impact of fluctuations in foreign currency exchange rates.
Domestic segment net-owned inventory decreased by $10.9 million from February
28, 2007, to August 31, 2007. An increase in merchandise payables primarily
related to the timing of payments was largely offset by seasonal inventory
build.
Capital Expenditures
Capital expenditures, net of landlord reimbursements, were $133.2 million in the
six months ended August 31, 2007, compared with $127.0 million in the same
period last fiscal year. The increase in capital expenditures was driven
primarily by increased investments in new and relocated Superstores.
Sources of Liquidity
We have a $500 million revolving credit facility secured by inventory and
accounts receivable. This facility is scheduled to mature in June 2009. The
credit facility provides for a $400 million borrowing limit for the domestic
segment and a $100 million borrowing limit for the international segment. At
August 31, 2007, we had no short-term borrowings. At August 31, 2007,
outstanding letters of credit were $58.1 million, leaving $441.9 million
available for borrowing. We were in compliance with all covenants at August 31,
2007.
Our primary sources of liquidity include available cash, the expected reduction
in net-owned inventory, borrowing capacity under the credit facility and
landlord reimbursements. We expect that our primary sources of liquidity will be
sufficient to fund capital expenditures and working capital for the foreseeable
future.
Contractual Obligations and Contingencies
In March 2007, we signed a seven-year, $775 million information technology
services contract with IBM. Also, as a result of the adoption of FIN 48, we had
$34.9 million of unrecognized tax benefits and the related accrued interest
recorded in other liabilities on the consolidated balance sheet at August 31,
2007. We are not able to reasonably estimate in which future periods these
unrecognized tax benefits will be settled.
Page 25 of 32
FINANCIAL OUTLOOK
We expect continued weakness in our third quarter results, with a net loss from
continuing operations only slightly less than that of the second quarter. The
marginal improvement will result from stabilizing performance levels in the
domestic segment by the end of the quarter as the pace of change slows in both
the stores and the store support center. We expect continued disruption for
approximately 45 to 60 days as the stores fully adjust to the new in-store
customer experience model, which rolled out nationwide during the last week of
September. While the domestic segment's performance is expected to stabilize by
the holiday selling season, the results could be negatively impacted by
unfavorable macroeconomic trends. We expect to deliver a net profit for the
fourth quarter and a full-year net loss from continuing operations.
We have rolled out our domestic segment's new point-of-sale system to 134
stores. We have paused our scale efforts, limiting new system implementation to
new stores only. We expect to resume the full deployment after the holiday
selling season. This pause will enable our Associates to focus on in-store
execution.
We continue to expect to open 60 to 65 incremental and relocated domestic
segment Superstores in fiscal 2008. Domestic segment Superstore openings
estimates are shown in the following table. The timing of store openings depends
upon a number of factors and can change during the year. The company expects
approximately two-thirds of the openings to be in a 20,000 square foot format.
Domestic Segment Superstore Openings Estimates
Q1(a) Q2(a) Q3 Q4 FY08
-------------------------------------------------------------------------------------
Incremental Superstores.................... 0 9 18-19 16-18 43-46
Relocated Superstores...................... 1 4 7-8 5-6 17-19
-----------------------------------------
Total Superstore openings.................. 1 13 25-27 21-24 60-65
===========================================
(a) First and second quarter openings are actual. On February 26, 2007, the
company closed one store in advance of opening a replacement store in the first
quarter of fiscal 2008. The replacement store is included in relocations for the
first quarter of fiscal 2008.
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 2008 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," "anticipate," "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, pricing 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 our response to pricing and promotional activities of our competitors;
Page 26 of 32
o the successful implementation of our initiatives to accelerate sales
growth, gross margin improvement and expense reductions;
o our ability to reduce our overall cost and expense structure and to
maintain cost reductions while growing sales;
o our ability to control and leverage expenses as a percentage of sales;
o changes in general economic conditions including, but not limited to,
financial market performance, consumer credit availability, interest rates,
inflation, energy prices, 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 level of consumer response to new products or product features in the
merchandise categories we sell and changes in our merchandise sales mix;
o the pace of commoditization of digital products;
o the impact of inventory and supply chain management initiatives on
inventory levels and profitability;
o our ability to generate sales and margin growth through expanded services
offerings;
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;
o significant changes in retail prices for products and services 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 our inability to liquidate excess inventory should excess inventory
develop;
o our inability to maintain 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 direct
sales channel;
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 consumer reaction to new store locations and changes in our store design
and merchandise;
o our ability and the ability of Chase Card Services to successfully market
and promote the third party credit card program being offered by Chase Card
Services;
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 the impact of initiatives related to upgrading merchandising, marketing,
point-of-sale and information systems on revenue and operating margin and
the costs associated with these investments;
o the potential financial, accounting and operational impact of delays in the
implementation and completion schedules of the point-of-sale and various
merchandising and marketing systems;
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 imposition of new restrictions or regulations regarding the sale of
products and/or services we sell, changes in tax rules and regulations
applicable to, 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 our strategic evaluation of the international segment, including the impact
of changes in credit markets
o the timely production and delivery of private-label merchandise and level
of consumer demand for those products;
o reduced investment returns or other changes relative to the assumptions for
our pension plans that impact our pension expense;
o changes in our anticipated cash flow;
o whether, when and in what amounts share repurchases may be made under our
stock buyback program;
o adverse results in significant litigation matters;
o currency exchange rate fluctuations between Canadian and U.S. dollars and
other currencies;
Page 27 of 32
o the global regulatory and trade environment;
o the disruption of global, national or regional transportation systems; and
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 peak selling periods.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 our international segment'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 August 31,
2007, U.S. dollar open purchase orders totaled approximately $45.9 million. A 10
percent decline in the value of the Canadian dollar would result in an increase
in product cost of approximately $4.6 million for those orders. 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
Because we translate our international segment's financial results from Canadian
dollars to U.S. dollars, fluctuations in the value of the Canadian dollar have a
direct effect on reported consolidated results. 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, 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 the evaluation, the chief executive officer concluded that the company's
disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There were no changes in the company's internal control over financial reporting
that occurred during the quarter ended August 31, 2007, that have materially
affected, or are reasonably likely to materially affect, the company's internal
control over financial reporting.
Page 28 of 32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended February 28, 2007, which could
materially affect our business, financial condition or future results. There
have been no material changes to those risk factors since we filed our 2007
Annual Report on Form 10-K. The risks described in our Annual Report on Form
10-K are not the only risks facing our company. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.
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 August 31, 2007:
Approximate
Total Number Dollar Value of
of Shares Shares that
Average Purchased as May Yet Be
Total Number Price Part of Publicly Purchased
(Amounts in millions except per of Shares Paid Announced Under
share data and footnote (a) data) Purchased(a) per Share(a) Program the Program(b)
------------------------------------------------------------------------------------------------------------------------------
June 1 - June 30, 2007....................... - $ - - $233.7
July 1 - July 31, 2007....................... 0.1 $15.08 - $233.7
August 1 - August 31, 2007................... - $10.87 - $233.7
----------------- -----------------
Total fiscal 2008 second quarter............. 0.1 $14.70 -
================= =================
(a) These columns include shares of common stock withheld to pay tax withholding
obligations for employees in connection with the vesting of stock awards. The
withholding of 68,231 shares in the month of July and 6,728 shares in the month
of August are not considered part of the share repurchase program described in
(b) below.
(b) 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. In June 2006,
the company announced a $400 million increase in its stock repurchase
authorization, raising the repurchase capacity to $1.2 billion. There is no
expiration date under the authorization. At August 31, 2007, $233.7 million
remained available for stock repurchases under the $1.2 billion stock repurchase
authorization.
Page 29 of 32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the company's shareholders was held June 26, 2007.
(b) At the annual meeting, the shareholders of the company elected Barbara S.
Feigin, Allen B. King and Carolyn Y. Woo as directors for a three-year term
and James F. Hardymon as director for a two-year term. The elections were
approved by the following votes:
Directors For Withheld
------------------------- ---------------- -------------
Barbara S. Feigin 129,384,915 11,861,046
Allen B. King 137,758,359 3,487,602
Carolyn Y. Woo 137,797,810 3,448,151
James F. Hardymon 131,009,244 10,236,717
(c) At the annual meeting, the shareholders of the company voted to ratify the
appointment of KPMG LLP as the company's independent auditors for fiscal
year 2008. This ratification was approved by the following votes:
Broker
For Against Abstain Non-Vote
-------------- -------------- ------------ --------
138,868,286 1,589,308 788,367 0
ITEM 6. EXHIBITS
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
Page 30 of 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIRCUIT CITY STORES, INC.
(Registrant)
By: /s/ Philip J. Schoonover
--------------------------------------
Philip J. Schoonover
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Bruce H. Besanko
--------------------------------------
Bruce H. Besanko
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Philip J. Dunn
--------------------------------------
Philip J. Dunn
Senior Vice President, Treasurer,
Controller and Chief Accounting Officer
(Principal Accounting Officer)
October 9, 2007
Page 31 of 32
EXHIBIT INDEX
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
Page 32 of 32