Circuit City's Annual Report (2008)

I picked up a few shares of Circuit City (CC) on a lark when Carl Icahn came in (CC was his pet project before he became consumed with making Yahoo's Jerry Yang pay him off). CC sports a yield of about 3.5%, but that's probably going to be reduced at some point. Even with Icahn's participation and the dividend, CC will need more long-term catalysts to turn itself around. So how is CC revamping itself?

1. CC has expanded its online presence through its website, www.firedog.com Firedog.com is easy to navigate and seems like a Geek Squad for consumer TVs and car electronics.

2. CC is going to remodel some stores into a concept called "the city," a term it has trademarked. What is "the city"? I have no idea. I live near a few Circuit City stores, and I've never seen this advertised. On the other hand, I've been in a Best Buy several times. That's not a good sign.

3. CC seems to be banking on consumers trading their analog signal/broadcasting televisions for digital televisions. "We expect a large number of consumers to replace analog television sets in the next few years." (page 14) Most of CC's revenue is generated during the time period from Thanksgiving through the Super Bowl. I don't think the rebate checks will last until November. That's a problem for CC, unless people are upgrading now.

I didn't see much else in its annual report that made me think that a turnaround was imminent. Some other highlights:

1. CC "had a net loss of $319.9 million for the year ended February 29, 2008, and a net loss of $8.3 million for the year ended February 28, 2007." And you wonder why the shares are trading at around 4 dollars each.

2. Looks like IBM is doing a good job selling its products--CC outsources its "information technology infrastructure operations to IBM."

3. Most of CC's stores are in CA (92), TX (61), and FL (53). No other state has more than 50 stores. Unfortunately for CC, the economies in CA and FL have not been doing very well.

The key point to take from all of the above is Circuit City's net losses expanded by over 300 million dollars in one year. If consumers are going to be hurting even more financially in 2008, I don't see how Circuit City will be able to reduce its net losses. What I predict will happen is that CC will sell off some assets and report artificially inflated earnings as a result of one-time sales. When that happens, I am going to dump its shares. For now, I will be holding onto the tiny number of shares I own.