MINNEAPOLIS — Everyone knew Circuit City was having a bad fourth quarter. Which made Best Buy's good one a little bit of a surprise.
The results reported by the nation's two largest electronics chains on Wednesday showed Best Buy increasing its lead over its smaller rival, with profit up 18 percent, while Circuit City lost money. While Best Buy profits from its operations outside the U.S., including China, and a major push into selling installation and advice in addition to TVs and iPods, Circuit City is closing Canadian stores and replacing 3,400 workers with cheaper help.
"I think Best Buy is just executing on all fronts. They're clearly the winner in this space and pulling away," said Joseph Feldman, who covers electronics retailers at independent research firm Telsey Advisory Group.
Both have their challenges. Price competition is fierce for their most important product, high-end TVs. And sales of compact discs have been falling. But initiatives Best Buy started a few years ago, such as its international operation, its Geek Squad tech support service, and store sections that cater to big-spending customers, are helping offset profit pressures in its core electronics business.
Meanwhile Circuit City has said it will close 62 company-owned stores in Canada. And its layoff of 3,400 of its most experienced (and expensive) sales workers announced last week has left some analysts wondering whether it is losing its best sales people just when it most needs them.
There are bright spots — Circuit City expects revenue in its home-installation service called "firedog" to double to $400 million this year, and it expects to open 40 or more U.S. stores this year, not counting relocations.
Feldman said the cost-cutting initiatives and new stores should all help Circuit City's bottom line, eventually. He made a rough estimate that the layoffs alone could save as much as $35 million if Circuit City saves $5 per hour per worker. "Even if it's half of that, $17 million, $20 million could be a lot. Every little bit does add up," he said.
Circuit City Chief Executive Philip J. Schoonover ran Best Buy's efforts to focus on its most profitable customers before jumping to Circuit City in 2004. He was named CEO at Circuit City in March 2006. Best Buy CEO and Vice Chairman Brad Anderson has known Schoonover for years.
"What he's taken on is a very difficult job to begin with. This has historically been a real difficult industry for retailers," Anderson said.
"Circuit's a gigantic company, it's a $10 billion-plus enterprise, and one of the largest competitors in our business," he said. "We also have learned, including from our own experience, that because you're down one day doesn't mean you're down forever. There's nothing like being challenged to focus on making an organization more competitive. We're very aware of the threat they bring to the market."
Circuit City Stores Inc.'s $12.2 million quarterly loss stemmed from restructuring charges, although store closings and slower-than-expected sales growth also hurt. The company, based in Richmond, Va., said it lost 7 cents per share compared with a profit of $141.4 million, or 81 cents a share, a year ago.
The quarter included pretax charges of $144.6 million, including an impairment charge of $92 million at the company's international unit, $21.4 million in store-closing charges and $21.3 million in other restructuring costs. Without those, Circuit City would have earned $51.1 million, or 68 cents a share. On that basis analysts surveyed by Thomson Financial expected 63 cents per share.
Sales rose 1 percent to $3.93 billion but missed analysts' $4.04 billion estimate. Sales at stores open at least a year slipped half a percent.
Richfield-based Best Buy Co. Inc. earned $763 million, or $1.55 per share, during the quarter that ended March 3, up from $644 million, or $1.29 per share, in the three months ended Feb. 25, 2006. Revenue rose 21 percent to $12.9 billion from $10.69 billion a year ago, driven by store openings and a quarter that was a week longer than last year's.
Analysts surveyed by Thomson Financial were expecting earnings of $1.52 per share on revenue of $12.67 billion.
Contributing: Zinie Chen Sampson