Circuit City (CC) Viability Questionable
Circuit City Stores Inc (CC): There was time when Circuit City was the store for consumer electronics. It used to be the place to visit if you happen to be in the market for electronic goods. Today, the company is struggling to remain competitive. The increased competitions and changing consumer buying pattern have resulted in a dim outlook. Is this company viable? Trading below $20 per share, is this a good buy?
The Internet has changed the way people shop for consumer electronics. Studies have shown that most consumers will now start by shopping online. Visiting the stores is no longer the first step. It used to be that if you were in the market for a TV, you need to drive around town to compare prices. Today, one can visit a site like shopping.com that will not only find you the best prices, but also provide consumers with a wealth of information. For a brick-and-mortar retailer such as Circuit City, this is bad news. While Circuitcity.com offers consumers a choice, the competition within this space is intense. The company is no longer just competing with local stores, competition is worldwide.
The competition is even more intense from other brick-and-mortar retailers. Large retailers such as Wal-Mart, Target, Costco and Best Buys are all gunning for the same consumers. The only way to really compete in this market is by reducing prices, thus lowering their margin.
In an effort to remain competitive, the company announced plans to layoff about 3,400 employees. The one thing that differentiates Circuit City from their competitors is having a knowledgeable sales staff. This will no longer be the case. While we admire management’s efforts to reduce cost, firing knowledgeable staff will ultimately hurt their service. This move does not make much sense. Firing employees because they are being paid a little more than the other guy down the street is a sign of desperation. In the end, Circuit City will end up losing more market share as customer service will decline.
To answer our initial question of viability, our opinion is no. The influx of competitions and changing habits of consumer makes Circuit City an unattractive investment. Circuit City will likely end up getting acquired for cheap or ultimately suffer the same fate as their former competitor, the GoodGuys. While some may view the job cut as a positive, we see it as a desperate measure. There is no catalyst that we see that will drive this stock.
