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, 2006
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) 527- 4000
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No ____
Indicate by check mark whether the registrant is 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, 2006
Common Stock, par value $0.50 175,160,748
A Table of Contents is included on Page 2 and an Exhibit Index is included on
Page 33.
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations -
Three Months and Six Months Ended August 31, 2006 and 2005 3
Consolidated Balance Sheets -
August 31, 2006, and February 28, 2006 4
Consolidated Statements of Cash Flows -
Six Months Ended August 31, 2006 and 2005 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 1A. Risk Factors 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits 31
SIGNATURES 32
EXHIBIT INDEX 33
Page 2 of 33
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Circuit City Stores, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended Six Months Ended
August 31 August 31
2006 2005 2006 2005
------------ ------------ ------------ -------------
Net sales $ 2,839,193 $ 2,557,091 $ 5,456,166 $ 4,784,941
Cost of sales, buying and warehousing 2,163,354 1,947,449 4,139,950 3,617,407
------------ ------------- ------------ -------------
Gross profit 675,839 609,642 1,316,216 1,167,534
Selling, general and administrative expenses 662,791 608,099 1,302,159 1,191,107
------------ ------------- ------------ -------------
Operating income (loss) 13,048 1,543 14,057 (23,573)
Interest income 5,794 4,602 12,840 10,894
Interest expense 113 215 325 630
------------ ------------- ------------ -------------
Earnings (loss) from continuing operations
before income taxes 18,729 5,930 26,572 (13,309)
Income tax provision (benefit) 7,350 2,065 10,187 (5,291)
------------ ------------- ------------ -------------
Net earnings (loss) from continuing operations 11,379 3,865 16,385 (8,018)
Loss from discontinued operations, net of tax (1,338) (2,517) (1,745) (3,743)
Cumulative effect of change in accounting
principle, net of tax - - 1,773 -
------------ ------------- ------------ -------------
Net earnings (loss) $ 10,041 $ 1,348 $ 16,413 $ (11,761)
============ ============= ============ =============
Weighted average common shares:
Basic 169,973 179,057 170,514 181,893
Diluted 174,659 181,801 175,458 181,893
Earnings (loss) per share:
Basic:
Continuing operations $ 0.07 $ 0.02 $ 0.10 $ (0.04)
Discontinued operations $ (0.01) $ (0.01) $ (0.01) $ (0.02)
Cumulative effect of change in
accounting principle $ - $ - $ 0.01 $ -
Net earnings (loss) $ 0.06 $ 0.01 $ 0.10 $ (0.06)
Diluted:
Continuing operations $ 0.07 $ 0.02 $ 0.09 $ (0.04)
Discontinued operations $ (0.01) $ (0.01) $ (0.01) $ (0.02)
Cumulative effect of change in
accounting principle $ - $ - $ 0.01 $ -
Net earnings (loss) $ 0.06 $ 0.01 $ 0.09 $ (0.06)
Cash dividends paid per share $ 0.0175 $ 0.0175 $ 0.0350 $ 0.0350
See accompanying notes to consolidated financial statements.
Page 3 of 33
Circuit City Stores, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands except share data)
August 31, 2006 February 28, 2006
--------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 296,130 $ 315,970
Short-term investments 303,455 521,992
Accounts receivable, net of allowance for doubtful accounts 303,085 220,869
Merchandise inventory 1,849,480 1,698,026
Deferred income taxes 32,818 29,598
Income tax receivable 1,685 5,571
Prepaid expenses and other current assets 57,870 41,315
-------------- -------------
Total current assets 2,844,523 2,833,341
Property and equipment, net of accumulated depreciation of
$1,252,988 and $1,179,481 884,626 839,356
Deferred income taxes 101,478 97,889
Goodwill 229,055 223,999
Other intangible assets, net of accumulated amortization of
$11,067 and $6,123 26,630 30,372
Other assets 43,572 44,087
-------------- -------------
TOTAL ASSETS $ 4,129,884 $ 4,069,044
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Merchandise payable $ 982,980 $ 850,359
Expenses payable 288,874 202,300
Accrued expenses and other current liabilities 415,587 464,511
Accrued income taxes 3,050 75,909
Short-term debt 31,661 22,003
Current installments of long-term debt 7,178 7,248
-------------- -------------
Total current liabilities 1,729,330 1,622,330
Long-term debt, excluding current installments 48,191 51,985
Accrued straight-line rent and deferred rent credits 260,173 256,120
Accrued lease termination costs 72,860 79,091
Deferred income taxes 2,127 -
Other liabilities 101,950 104,885
-------------- -------------
TOTAL LIABILITIES 2,214,631 2,114,411
------------- -------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, $0.50 par value;
525,000,000 shares authorized; 173,972,371 shares
issued and outstanding at August 31, 2006
(174,789,390 at February 28, 2006) 86,986 87,395
Capital in excess of par value 402,199 458,211
Retained earnings 1,374,995 1,364,740
Accumulated other comprehensive income 51,073 44,287
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,915,253 1,954,633
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,129,884 $ 4,069,044
============== =============
See accompanying notes to consolidated financial statements.
Page 4 of 33
Circuit City Stores, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Six Months Ended
August 31
2006 2005
-------------- ------------
(Restated - Note 2)
Operating Activities:
Net earnings (loss) $ 16,413 $ (11,761)
Adjustments to reconcile net earnings (loss) to net cash (used in)
provided by operating activities:
Net loss from discontinued operations 1,745 3,743
Depreciation expense 86,328 78,795
Amortization expense 4,696 1,558
Stock-based compensation expense 16,393 9,502
Loss (gain) on dispositions of property and equipment 618 (1,779)
Provision for deferred income taxes (12,948) (910)
Cumulative effect of change in accounting principle (1,773) -
Other 944 (514)
Changes in operating assets and liabilities:
Accounts receivable, net (67,205) 50,065
Merchandise inventory (147,419) (204,593)
Prepaid expenses and other current assets (19,400) (32,756)
Other assets 660 (333)
Merchandise payable 131,333 225,756
Expenses payable 45,561 21,520
Accrued expenses, other current liabilities and accrued income taxes (116,176) (111,079)
Other long-term liabilities (8,789) (15,171)
-------------- ------------
Net cash (used in) provided by operating activities of continuing operations (69,019) 12,043
-------------- ------------
Investing Activities:
--------------------
Purchases of property and equipment (113,472) (131,650)
Proceeds from sales of property and equipment 10,524 32,260
Purchases of investment securities (284,190) (427,863)
Sales and maturities of investment securities 502,213 253,575
Other investing activities (9,864) -
-------------- ------------
Net cash provided by (used in) investing activities of continuing
operations 105,211 (273,678)
-------------- ------------
Financing Activities:
--------------------
Proceeds from short-term borrowings 26,749 16,417
Principal payments on short-term borrowings (17,774) -
Principal payments on long-term debt (4,230) (702)
Change in overdraft balances 18,089 (45,640)
Excess tax benefit from stock-based payments 11,105 -
Repurchases of common stock (117,129) (196,270)
Issuances of common stock 38,453 22,417
Dividends paid (6,156) (6,517)
Redemption of preferred share purchase rights - (1,876)
-------------- ------------
Net cash used in financing activities of continuing operations (50,893) (212,171)
-------------- ------------
Discontinued Operations:
-----------------------
Operating cash flows (5,117) (5,006)
Investing cash flows - (13,438)
-------------- ------------
Net cash used in discontinued operations (5,117) (18,444)
-------------- ------------
Effect of exchange rate changes on cash (22) 229
-------------- ------------
Decrease in cash and cash equivalents (19,840) (492,021)
Cash and cash equivalents at beginning of year 315,970 879,660
-------------- ------------
Cash and cash equivalents at end of period $ 296,130 $ 387,639
============== =============
See accompanying notes to consolidated financial statements.
Page 5 of 33
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
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 primarily 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,
2006, the company's domestic segment operated 632 Superstores and 5 other
stores in 158 U.S. media markets.
The international segment, which is comprised of the operations of
InterTAN, Inc., is primarily 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 names The Source By Circuit CitySM, Rogers
Plus(R) and Battery Plus(R). At August 31, 2006, the international segment
conducted business through 949 retail stores and dealer outlets, which
consisted of 541 company-owned stores, 298 dealer outlets, 92 Rogers
Plus(R) stores and 18 Battery Plus(R) stores. The international segment
also operates a Web site at www.thesource.ca.
In accordance with the Amending Agreement dated March 27, 2004, between
Rogers Wireless Inc. ("Rogers") and InterTAN Canada Ltd., Rogers has
notified InterTAN that they do not intend to continue the existing
arrangement with respect to InterTAN's operation of the Rogers Plus(R)
stores after December 31, 2006. Under the Amending Agreement, Rogers will
pay to InterTAN, among other amounts, in each of 2007, 2008 and 2009 an
amount equal to the average of the annual volume rebate attributable to the
Rogers Plus(R) stores paid to InterTAN in 2005 and 2006. Exit costs related
to the transition are expected to be inconsequential.
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and
liabilities. Actual results may differ from those estimates. In the opinion
of management, the accompanying unaudited financial statements contain all
adjustments, which consist only of normal, recurring adjustments, necessary
for a fair presentation. Due to the seasonal nature of the company's
business, interim results are not necessarily indicative of results for the
entire fiscal year. The company's consolidated financial statements
included in this report should be read in conjunction with the notes to the
audited financial statements in the company's fiscal 2006 Annual Report on
Form 10-K.
Reclassifications and Adjustments: The company has made revisions and
reclassifications to its fiscal 2006 consolidated statement of operations
as disclosed in Note 1, Basis of Presentation, of the Notes to the
Consolidated Financial Statements, included in Item 8, Financial Statements
and Supplementary Data, of the company's fiscal 2006 Annual Report on Form
10-K. Such revisions and reclassifications include the following:
o Amounts previously reported as rent expense related to financing lease
obligations have been reclassified to interest expense.
o Interest income has been reclassified from selling, general and
administrative expenses to a separate line item on the consolidated
statement of operations.
o The results of a domestic segment operation that is held for sale and a
domestic segment subsidiary, MusicNow, LLC, have been presented as
results from discontinued operations.
Page 6 of 33
During the first quarter of fiscal 2007, the company reclassified fiscal
2006 stock-based compensation expense from a separate line item on the
consolidated statement of operations to selling, general and administrative
expenses.
2. Restatement of Cash Flows
As disclosed in Note 22, Quarterly Financial Data (Unaudited), of the Notes
to Consolidated Financial Statements, included in Item 8, Financial
Statements and Supplementary Data, of the company's fiscal 2006 Annual
Report on Form 10-K, the company identified errors in its previously filed
consolidated statement of cash flows for the six months ended August 31,
2005, and restated the consolidated statement of cash flows for the six
months ended August 31, 2005. The company had classified variable rate
demand notes as cash and cash equivalents; however, these notes should have
been classified as short-term investments and their purchases and sales as
investing activities. The company incorrectly reflected bank overdrafts as
a change in accounts payable in operating activities rather than in
financing activities. The company incorrectly included accruals for
purchases of property and equipment in operating activities and investing
activities. The company incorrectly reflected deposits in transit as a
reduction to accounts payable.
In addition, the company sold the assets of a domestic segment subsidiary,
MusicNow, LLC, during the third quarter of fiscal 2006 and began holding
the assets of a domestic segment operation for sale during the fourth
quarter of fiscal 2006. The cash flow activities related to MusicNow, LLC,
and the domestic segment operation have been reclassified and reported
separately as cash flows from discontinued operations.
The following table summarizes the cash flow activities as previously
reported for the six months ended August 31, 2005, compared with the
revised cash flow activities to reflect the errors and cash flows from
discontinued operations.
Six Months Ended
(Amounts in millions) August 31, 2005
--------------------------------------------------------------------------------------------
Operating cash flows as previously reported.................. $ (46.1)
Operating cash flows as revised.............................. $ 12.0
Investing cash flows as previously reported.................. $ (65.3)
Investing cash flows as revised.............................. $(273.7)
Financing cash flows as previously reported.................. $(166.5)
Financing cash flows as revised.............................. $(212.2)
Discontinued operations cash flows as previously
reported.................................................. $ -
Discontinued operations cash flows as revised................ $ (18.4)
Decrease in cash and cash equivalents as
previously reported....................................... $(277.7)
Decrease in cash and cash equivalents as revised............ $(492.0)
3. Stock-Based Compensation
Effective March 1, 2006, the company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment," (SFAS
No. 123(R)), using the modified prospective transition method. Prior to the
adoption of SFAS No. 123(R), the company accounted for stock-based
compensation using a fair value-based method in accordance with SFAS No.
123, "Stock-Based Compensation." Because the fair value recognition
provisions of SFAS No. 123 and SFAS No. 123(R) were materially consistent
under the company's stock-based incentive plans, the adoption of SFAS No.
123(R) did not have a material impact on the company's financial position,
results of operations or cash flows.
Page 7 of 33
Under SFAS No. 123(R), companies are required to report excess tax benefits
as a financing cash inflow rather than as a reduction of taxes paid. Under
SFAS No. 123, benefits of tax deductions in excess of recognized
compensation costs were reported as operating cash flows.
SFAS No. 123(R) requires companies to estimate the number of equity awards
granted that are expected to be forfeited, recognize compensation cost
based on the number of awards that are expected to vest, and subsequently
adjust estimated forfeitures to reflect actual forfeitures. Under SFAS No.
123, the company recognized forfeitures when they occurred. During the
first quarter of fiscal 2007, the company recorded an after-tax benefit of
$1.8 million, $2.8 million pretax, as a cumulative effect of a change in
accounting principle to adjust for awards granted prior to March 1, 2006,
that are not expected to vest.
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. The company previously referred to nonvested stock as restricted
stock and nonvested stock units as restricted stock units. At August 31,
2006, 3.5 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
restrictions on nonvested stock units, common shares are issued from
authorized and unissued shares.
Stock-based compensation cost is recorded in cost of sales, buying and
warehousing or selling, general and administrative expenses depending on
the classification of the related Associate's payroll cost. Compensation
cost for stock-based incentive plans is summarized in the table below.
Three Months Ended Six Months Ended
August 31 August 31
(Amounts in millions) 2006 2005 2006 2005
----------------------------------------------------------------------------------------- ----------------------
Compensation cost recognized:
Stock options........................................... $2.6 $3.4 $ 7.0 $ 6.2
Nonvested stock and nonvested stock units............... 5.1 3.1 9.3 3.3
Phantom stock........................................... 0.1 - 1.2 -
Employee stock purchase plan............................ 0.2 0.1 0.4 0.3
Other................................................... - 0.1 0.1 0.2
------------------------ ----------------------
Total compensation cost recognized................. $8.0 $6.7 $18.0 $10.0
======================== ======================
Tax benefit recognized..................................... $2.8 $2.4 $ 6.1 $ 3.5
(A) Stock Options: The exercise price for nonqualified options must be
equal to, or greater than, the market value at the grant date. Options
generally are exercisable over a period of one year to ten years from the
grant date. The company values stock options issued using the Black-Scholes
option-pricing model and recognizes this value as an expense over the
period in which the options vest. Option valuation models require the
company to make subjective assumptions. Changes in the subjective
assumptions can materially affect the fair value estimate. The expected
stock volatility assumption is based on historical volatility of the
company's stock. The expected dividend yield is based on expected annual
dividends and the market value of the company's stock on the grant date.
The expected life represents the period of time that options granted are
expected to be outstanding and is primarily based on the historical
exercise experience and post-vesting employment termination behavior of the
company's Associates. The company evaluates historical exercise behavior
for two separate groups based on the Associate's position in the company.
During the first quarter of fiscal 2007, a stock option grant with a
vesting period of five years was made to the chairman, president and chief
executive officer. 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 life of the grant. An average of the
award's weighted average vesting period and its contractual term was
calculated and resulted in an expected life of 7 years. The risk-free
interest rate is based on the U.S. Treasury Strip rate posted at the grant
date for the expected term of the option.
Page 8 of 33
The fair value of each option granted is estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
Three Months Ended Six Months Ended
August 31 August 31
2006 2005 2006 2005
------------------------------------------------------------------------------------- -----------------------
Expected dividend yield.......................... 0.6% 0.4% 0.3% 0.4%
Expected stock volatility........................ 52% 60% 61% 60%
Risk-free interest rates......................... 6% 4% 5% 4%
Expected lives (in years)........................ 5 5 7 5
Using these assumptions in the Black-Scholes model, the weighted average
fair value of options granted was $13.31 per share for the three months
ended August 31, 2006, and $14.94 per share for the six months ended August
31, 2006. The weighted average fair value of options granted was $8.66 per
share for the three months ended August 31, 2005, and $8.58 per share for
the six months ended August 31, 2005.
The total intrinsic value of options exercised was $15.9 million for the
three months ended August 31, 2006, and $38.3 million for the six months
ended August 31, 2006. The total intrinsic value of options exercised was
$10.9 million for the three months ended August 31, 2005, and $17.6 million
for the six months ended August 31, 2005. The tax benefits realized from
stock options exercised were $2.2 million for the three months ended August
31, 2006, and $8.7 million for the six months ended August 31, 2006. The
tax benefits realized from stock options exercised were $1.3 million for
the three months ended August 31, 2005, and $2.4 million for the six months
ended August 31, 2005.
The fair value of stock options that vested was $8.6 million for the three
months ended August 31, 2006, and $10.8 million for the six months ended
August 31, 2006. The fair value of stock options that vested was $5.1
million for the three months ended August 31, 2005, and $12.6 million for
the six months ended August 31, 2005. Total unrecognized compensation cost
related to unvested stock options at August 31, 2006, was $31.9 million and
is expected to be recognized over a weighted average period of 2 years.
The company's stock option activity is summarized in the table below.
Weighted
Average
Weighted Remaining Aggregate
Shares Average Contractual Life Intrinsic Value
(in thousands) Exercise Price (in years) (in millions)
-----------------------------------------------------------------------------------------------------------------------------------
Outstanding at February 28, 2006................. 14,109 $16.41
Granted.......................................... 1,105 $24.32
Exercised........................................ (1,439) $11.86
Forfeited or expired............................. (225) $15.37
---------
Outstanding at May 31, 2006...................... 13,550 $17.55
Granted.......................................... 91 $27.16
Exercised........................................ (1,414) $14.82
Forfeited or expired............................. (23) $16.71
---------
Outstanding at August 31, 2006................... 12,204 $17.94 5.2 $ 73.7
=========
Options exercisable at August 31, 2006........... 8,795 $17.49 3.7 $ 57.2
(B) Nonvested Stock and Nonvested Stock Units: Under the company's
stock-based incentive plans, shares of nonvested stock are granted in the
name of an employee or a non-employee director, who has all the rights of a
shareholder, including the right to receive dividends, subject to certain
restrictions and possible forfeitures. Restrictions on nonvested stock
generally expire one year to four years from the grant date, when the stock
typically becomes fully vested. Beginning June 2005, certain awards made to
employees who are named executive officers in the proxy statement for the
fiscal year-end prior to the completion of the service condition also are
subject to a market condition. The market condition could
Page 9 of 33
extend the vesting period up to an additional three years and could result
in the awards being forfeited if the market condition is not satisfied. The
fair value of nonvested stock is the market value on the grant date, which
is expensed over the vesting period.
The weighted average fair value of nonvested stock granted was $26.55 per
share for the three months ended August 31, 2006, and $24.03 per share for
the six months ended August 31, 2006. The weighted average fair value of
nonvested stock granted was $16.95 per share for the three months and six
months ended August 31, 2005. A portion of the outstanding nonvested stock
awards is performance-accelerated shares that are eligible for accelerated
vesting if the company achieves earnings from continuing operations before
income taxes as a percentage of sales targets in fiscal 2007, fiscal 2008
or fiscal 2009. If vesting is not accelerated, the shares vest on July 1,
2009 except for awards to the named executive officers in the proxy
statement immediately prior to that date that are subject to the market
condition.
The company also issues nonvested stock units. Nonvested stock units are
granted in the name of an employee or a non-employee director. Once
granted, nonvested stock units are eligible for dividends but have no
voting rights. The nonvested stock units are redeemed for company stock
once the vesting period and any applicable deferral restrictions have been
satisfied. The fair value of nonvested stock units is the market value on
the grant date. Compensation cost is recognized over the vesting period,
which is generally one year to three years. The weighted average fair value
of nonvested stock units granted was $26.88 per share for the three months
and six months ended August 31, 2006. The weighted average fair value of
nonvested stock units granted was $16.62 per share for the three months and
six months ended August 31, 2005.
The fair value of nonvested stock and nonvested stock units that vested was
$0.7 million for the three months ended August 31, 2006, and $0.8 million
for the six months ended August 31, 2006. The fair value of nonvested stock
and nonvested stock units that vested was $0.4 million for the three months
ended August 31, 2005, and $2.2 million for the six months ended August 31,
2005. Total unrecognized compensation cost related to nonvested stock and
nonvested stock units at August 31, 2006, was $56.0 million and is expected
to be recognized over a weighted average period of 3 years. If nonvested
stock or nonvested stock units are forfeited or cancelled, the shares
issued as nonvested stock or the shares reserved for the nonvested stock
units are available for future granting.
The company's nonvested stock and nonvested stock unit activity is
summarized in the table below.
Weighted
Average Intrinsic
Shares Grant Date Value
(in thousands) Fair Value (in millions)
------------------------------------------------------------------------------------------------------
Nonvested at February 28, 2006.............. 3,825 $17.08
Granted..................................... 491 $25.44
Vested...................................... (10) $12.26
Forfeited................................... (231) $16.95
-------
Nonvested at May 31, 2006................... 4,075 $18.11
Granted..................................... 483 $26.57
Vested...................................... (64) $11.40
Forfeited................................... (76) $18.13
-------
Nonvested at August 31, 2006................ 4,418 $19.13 $104.3
=====
(C) Phantom Stock Program: The company issues phantom stock units through a
long-term incentive program. An Associate does not receive rights of a
shareholder, nor is any stock transferred. The value of one unit is based
on the market value of one share of common stock on the vesting date. The
units will be paid out in cash at the end of the two year vesting period.
The cost of the grants is recognized over the vesting period, and the
related liability is included in accrued expenses and other current
liabilities on the consolidated balance sheets. At August 31, 2006, 0.2
million phantom stock units were outstanding. No
Page 10 of 33
phantom stock units were granted during the three months and six months
ended August 31, 2006, and the three months and six months ended August 31,
2005.
(D) Employee Stock Purchase Plan: The company has an employee stock
purchase plan for all domestic segment employees meeting certain
eligibility criteria. Under the plan, eligible employees may, subject to
certain limitations, purchase shares of common stock. The company matches
$0.15 for each $1.00 contributed by employees. Purchases are limited to 10
percent of an employee's eligible compensation, up to a maximum of $13,000
per year. The company has authorized 18.5 million shares of common stock
for purchase under the plan. At August 31, 2006, a total of 1.5 million
shares remained available under the plan. The number of shares of common
stock that were issued to or purchased on the open market on behalf of
employees was 0.1 million for the three months and six months ended August
31, 2006. The number of shares of common stock that were issued to or
purchased on the open market on behalf of employees was 0.1 million for the
three months ended August 31, 2005, and 0.2 million for the six months
ended August 31, 2005. The average price per share of common stock
purchased under the plan was $25.50 for the three months ended August 31,
2006, $27.21 for the six months ended August 31, 2006, $17.43 for the three
months ended August 31, 2005, and $16.77 for the six months ended August
31, 2005. The obligation for the company match is included in accrued
expenses and other current liabilities on the consolidated balance sheets.
4. Comprehensive Income (Loss)
The components of the company's comprehensive income (loss) consist of the
net earnings (loss) and foreign currency translation adjustments. Foreign
currency translation adjustments are recorded net of deferred income taxes
directly as a component of stockholders' equity.
The components of comprehensive income (loss), net of taxes, were as
follows:
Three Months Ended Six Months Ended
August 31 August 31
(Amounts in millions) 2006 2005 2006 2005
----------------------------------------------------------------------------------------- ------------------------
Net earnings (loss)........................................ $10.0 $ 1.3 $16.4 $(11.8)
Foreign currency translation............................... (0.9) 12.8 6.8 8.5
------------------------- ------------------------
Comprehensive income (loss)................................ $ 9.1 $14.1 $23.2 $ (3.3)
========================= ========================
5. Net Earnings (Loss) Per Share
The following table presents a reconciliation of the denominators used in
the net earnings (loss) per share calculations.
Three Months Ended Six Months Ended
August 31 August 31
(Shares in millions) 2006 2005 2006 2005
----------------------------------------------------------------------------------------- -----------------------
Weighted average common shares............................. 170.0 179.1 170.5 181.9
Dilutive potential common shares:
Options................................................ 3.2 2.5 3.5 -
Nonvested stock and nonvested stock units.............. 1.5 0.2 1.5 -
------------------------- -----------------------
Weighted average common shares and potentially
dilutive common equivalent shares...................... 174.7 181.8 175.5 181.9
========================= =======================
For the three months and six months ended August 31, 2006, and the three
months ended August 31, 2005, the computations 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:
Page 11 of 33
At August 31
(Shares in millions) 2006 2005
-----------------------------------------------------------------------------------------
Options to purchase common stock........................... 1.1 5.5
For the six months ended August 31, 2005, 15.7 million stock options and
5.4 million shares of nonvested stock and nonvested stock units were
excluded from the calculation of diluted net loss per share because the
company reported a loss from continuing operations.
6. Accrued Lease Termination Costs
At a location's cease use date, estimated lease termination costs to close
a store, distribution center or service 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) 2006 2005
--------------------------------------------------------------------------------------------------------------
Accrued lease termination costs at beginning of period...................... $110.0 $128.2
Provisions for closed locations............................................. 1.2 1.9
Changes in assumptions about future sublease income and
terminations............................................................ 4.1 4.4
Interest accretion.......................................................... 4.6 5.5
Cash payments, net of cash received on subleased locations.................. (16.7) (26.2)
-----------------------------
Accrued lease termination costs at end of period............................ 103.2 113.8
Less current portion of accrued lease termination costs..................... 30.3 38.6
-----------------------------
Non-current portion of accrued lease termination costs...................... $ 72.9 $ 75.2
=============================
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.
7. Common Stock Repurchased
In June 2006, the company's board of directors authorized a $400 million
increase in its stock repurchase authorization for an aggregate
authorization of $1.2 billion, of which $400.3 million remained available
at August 31, 2006. As of August 31, 2006, the company had repurchased 52.1
million shares of common stock at a cost of $799.7 million, excluding
commission fees, cumulatively since inception of the stock repurchase
program.
The company's stock repurchase activity for the three months and six months
ended August 31, 2006, was as follows:
Three Months Ended Six Months Ended
(Amounts in millions) August 31, 2006 August 31, 2006
------------------------------------------------------------------------------------------------------------------
Total number of shares repurchased........................... 2.6 4.3
Cost, excluding commission fees.............................. $67.0 $117.0
Page 12 of 33
8. 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 allow W.
Alan McCollough to elect to receive a lump-sum payment following his
retirement. Mr. McCollough received additional age and service credit under
the benefit restoration plan, which is expected to result in Mr. McCollough
receiving the maximum benefit payable under the plan.
The components of the net pension expense (income) for the plans were as
follows:
Three Months Ended Six Months Ended
August 31 August 31
(Amounts in thousands) 2006 2005 2006 2005
----------------------------------------------------------------------------------- --------------------------
Service cost........................................... $ 657 $ 704 $ 1,435 $ 1,629
Interest cost......................................... 3,789 3,456 7,583 6,912
Expected return on plan assets........................ (4,775) (4,507) (9,557) (9,015)
Recognized prior service cost......................... 54 53 108 107
Recognized actuarial loss............................. 609 264 1,218 529
Loss due to settlement................................ 128 - 319 -
------------------------- --------------------------
Net pension expense (income).......................... $ 462 $ (30) $ 1,106 $ 162
========================= =============================
The company did not make a contribution to the defined benefit pension plan
during the six months ended August 31, 2006. No contributions are required
during fiscal 2007 under applicable law to meet ERISA minimum funding
standards. However, the company may make voluntary contributions to the
defined benefit pension plan to ensure that the fair value of plan assets
at February 28, 2007, exceeds the accumulated benefit obligation. The
company does not expect to make a contribution in fiscal 2007.
A contribution of $5.1 million, which is equal to the expected benefit
payments for fiscal 2007, is expected to be made to the restoration plan
during fiscal 2007. The expected benefit payments for fiscal 2007 include a
lump-sum payment to Mr. McCollough of $4.4 million, which is expected to be
paid during the fourth quarter. The impact of this lump sum payment is
reflected as a loss due to settlement in the preceding table. Benefit
payments during the six months ended August 31, 2006, were $290,000.
9. Discontinued Operations
For the quarter ended August 31, 2006, the net loss from discontinued
operations totaled $1.3 million, which is net of $0.5 million of income
taxes, and related to a domestic segment operation that is held for sale.
For the quarter ended August 31, 2006, this $0.5 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 discontinued bankcard operations. For the six months
ended August 31, 2006, the net loss from discontinued operations totaled
$1.7 million, which is net of $0.7 million of income taxes, and related to
a domestic segment operation that is held for sale. For the first half of
fiscal 2007,
Page 13 of 33
this $0.7 million of income tax benefit was offset by $0.5 million of
income tax expense associated with the discontinued bankcard operations as
discussed above.
For the quarter ended August 31, 2005, the net loss from discontinued
operations totaled $2.5 million, which is net of $1.4 million of income
taxes, and related to a domestic segment operation that is held for sale
and a domestic segment subsidiary, MusicNow, LLC, which was sold in October
2005. For the six months ended August 31, 2005, the net loss from
discontinued operations totaled $3.7 million, which is net of $2.1 million
of income taxes, and related to a domestic segment operation that was held
for sale and MusicNow.
10. Segment Information
The company has two reportable segments: its domestic segment and its
international segment. The company identified these segments based on its
management reporting structure and the nature of the products and services
offered by each segment. The domestic segment is primarily engaged in the
business of selling brand-name consumer electronics, personal computers,
entertainment software, and related services in the United States. The
international segment is primarily engaged in the business of selling
private-label and brand-name consumer electronics products in Canada.
Net sales by reportable segment were as follows:
Three Months Ended Six Months Ended
August 31 August 31
(Amounts in millions) 2006 2005 2006 2005
---------------------------------------------------------------------------------------- --------------------------
Domestic segment.......................................... $2,680.6 $2,414.0 $5,166.1 $4,528.7
International segment..................................... 158.6 143.0 290.0 256.3
---------------------------- --------------------------
Net sales................................................. $2,839.2 $2,557.1 $5,456.2 $4,784.9
============================ ==========================
Net earnings (loss) from continuing operations by reportable segment were
as follows:
Three Months Ended Six Months Ended
August 31 August 31
(Amounts in millions) 2006 2005 2006 2005
---------------------------------------------------------------------------------------- --------------------------
Domestic segment.......................................... $10.5 $4.4 $19.8 $(1.5)
International segment..................................... 0.9 (0.5) (3.4) (6.5)
---------------------------- --------------------------
Net earnings (loss) from continuing operations............ $11.4 $3.9 $16.4 $(8.0)
============================ ==========================
Total assets by reportable segment were as follows:
At August 31 At February 28
(Amounts in millions) 2006 2006
--------------------------------------------------------------------------------------------------
Domestic segment......................................... $3,629.0 $3,594.4
International segment.................................... 500.9 474.6
-------------------------------------
Total assets............................................. $4,129.9 $4,069.0
===================================
Page 14 of 33
11. Supplemental Consolidated Statements of Cash Flows Information
The following table summarizes supplemental cash flow information.
Six Months Ended
August 31
(Amounts in millions) 2006 2005
--------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities:
Change in capital expenditure accrual..................................... $ 24.2 $ 2.8
Capital lease obligation.................................................. $ - $ 2.2
Acquisition(a):
Fair value of assets acquired............................................. $ - $13.3
Less: liabilities assumed................................................. - 0.3
------- ------
Acquisition............................................................... $ - $13.0
======= =====
(a)The acquisition is reflected in investing cash flows for discontinued
operations on the consolidated statement of cash flows.
12.Recent Accounting Pronouncements
As discussed in Note 3, Stock-Based Compensation, the company adopted SFAS
No. 123(R) during the first quarter of fiscal 2007.
In October 2005, the Financial Accounting Standards Board issued FASB Staff
Position (FSP) No. FAS 13-1, "Accounting for Rental Costs Incurred During a
Construction Period." FSP No. FAS 13-1 requires companies to expense rent
payments for building or ground leases incurred during a construction
period. The company adopted FSP No. FAS 13-1 on a prospective basis in the
first quarter of fiscal 2007. The adoption of this new standard did not
have a material impact on the company's financial position, results of
operations or cash flows.
In June 2006, the FASB issued Interpretation ("FIN") No. 48, "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
109." FIN No. 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
provisions of FIN No. 48 are effective for the company beginning with the
first quarter of fiscal 2008. The company has not yet determined the impact
of adopting this standard.
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 are 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 September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of
FASB Statements No. 87, 88, 106, and 132(R)." SFAS No. 158 requires an
employer to recognize a plan's overfunded or underfunded status in its
balance sheets and recognize the changes in a plan's funded status in
comprehensive income in the year in which the changes occur. These
provisions of SFAS No. 158 are effective for the company's fiscal year
ending February 28, 2007. In addition, SFAS No. 158 requires an employer to
measure plan assets and obligations that determine its funded status as of
the end of its fiscal year, with limited exceptions. This provision of SFAS
No. 158 is effective for the company's fiscal year ending February 28,
2009. The company has not yet determined the impact of adopting this
standard.
Page 15 of 33
13.Subsequent Event
As previously reported in the company's Annual Report on Form 10-K for the
year ended February 28, 2006, the company was involved in litigation with
RadioShack Corporation ("RadioShack") related to various agreements between
InterTAN and RadioShack and its subsidiaries. In September 2006, RadioShack
and Circuit City reached an agreement that settles the litigation between
the two companies.
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 primarily 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, 2006, the domestic
segment operated 632 Superstores and 5 other stores in 158 U.S. media markets.
Our international segment, which is comprised of the operations of InterTAN,
Inc., is primarily 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 names The
Source By Circuit CitySM, Rogers Plus(R) and Battery Plus(R). At August 31,
2006, the international segment conducted business through 949 retail stores and
dealer outlets, which consisted of 541 company-owned stores, 298 dealer outlets,
92 Rogers Plus(R) stores and 18 Battery Plus(R) stores. The international
segment also operates a Web site at www.thesource.ca.
In accordance with the Amending Agreement dated March 27, 2004, between Rogers
Wireless, Inc. ("Rogers") and InterTAN Canada Ltd., Rogers has notified InterTAN
that they do not intend to continue the existing arrangement with respect to
InterTAN's operation of the Rogers Plus(R) stores after December 31, 2006. Under
the Amending Agreement, Rogers will pay to InterTAN, among other amounts, in
each of 2007, 2008 and 2009 an amount equal to the average of the annual volume
rebate attributable to the Rogers Plus(R) stores paid to InterTAN in 2005 and
2006. Exit costs related to the transition are expected to be inconsequential.
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 Fiscal 2007 Outlook
o Forward-Looking Statements
This discussion should be read in conjunction with our consolidated financial
statements and notes to the financial statements included in this report, the
Annual Report on Form 10-K for the fiscal year ended February 28, 2006, as well
as our reports on Form 8-K and other SEC filings.
Page 16 of 33
EXECUTIVE SUMMARY
Fiscal 2007 Second Quarter Performance
o Net sales grew 11.0 percent, driven by a comparable store sales gain of 8.3
percent. Domestic segment Web-originated sales grew 74 percent over the
same period last year.
o Gross profit margin rate was flat compared with the same period last year.
For the domestic segment, a modest decline in merchandise margin was offset
by a margin contribution from net financing.
o SG&A expenses as a percentage of sales declined 44 basis points from the
same period last year, driven by a 31 basis point improvement in the
domestic segment. The domestic segment improvement was driven by leverage
of payroll as well as rent and occupancy expenses. The improvement in the
international segment SG&A expense-to-sales ratio contributed 13 basis
points to the consolidated improvement.
o Earnings from continuing operations before income taxes were 0.7 percent of
sales compared with 0.2 percent of sales in the same period last year.
o We reported net earnings from continuing operations of 7 cents per diluted
share compared with 2 cents per diluted share in the same period last year.
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 2006
Annual Report on Form 10-K. These policies relate to accounting for cash
consideration received from vendors, the calculation of the liability for lease
termination costs, accounting for goodwill and other identified intangible
assets, accounting for pension plans and accounting for income taxes. We have
updated our critical accounting policy for Stock-Based Compensation due to our
adoption of Statement of Financial Accounting Standards No. 123(R), "Share-Based
Payment," (SFAS No. 123(R)).
Accounting for Stock-Based Compensation
We account for stock-based compensation using a fair value-based method in
accordance with SFAS No. 123(R). The Black-Scholes option valuation model is
used to determine the fair value of stock options at the grant date, and expense
is recognized over the period in which the options vest. Option valuation models
require us to make subjective assumptions, including the expected future
volatility of the stock price, expected dividend yield, and expected life of the
option. Changes in the subjective assumptions can materially affect the fair
value estimate. We estimate the number of equity awards granted that are
expected to be forfeited, recognize compensation cost based on the number of
awards that are expected to vest, and subsequently adjust the estimated
forfeitures to reflect actual forfeitures.
RESULTS OF OPERATIONS
Our operations, in common with other retailers in general, are subject to
seasonal influences. Historically, we have realized more of our net sales and
net earnings in the fourth quarter, which includes the majority of the holiday
selling season, than in any other fiscal quarter. The net earnings of any
quarter are seasonally disproportionate to net sales since administrative and
certain operating expenses remain relatively constant during the year.
Therefore, quarterly results should not be relied upon as necessarily indicative
of results for the entire fiscal year.
Reclassifications and Adjustments
We have made revisions and reclassifications to our fiscal 2006 consolidated
statement of operations as disclosed in Note 1, Basis of Presentation, of the
Notes to the Consolidated Financial Statements, included in Item 8, Financial
Statements and Supplementary Data, of our fiscal 2006 Annual Report on Form
10-K. Such revisions and reclassifications include the following:
Page 17 of 33
o Amounts previously reported as rent expense related to financing lease
obligations have been reclassified to interest expense.
o Interest income has been reclassified from selling, general and
administrative expenses to a separate line item on the consolidated
statement of operations.
o The results of a domestic segment operation that is held for sale and a
domestic segment subsidiary, MusicNow, LLC, have been presented as results
from discontinued operations.
During the first quarter of fiscal 2007, we reclassified fiscal 2006 stock-based
compensation expense from a separate line item on the consolidated statement of
operations to selling, general and administrative expenses.
Summary of Segment Performance
Where relevant, we have included separate discussions of our domestic and
international segments. The following tables summarize performance by segment.
SEGMENT PERFORMANCE SUMMARY
Three Months Ended August 31, 2006 Six Months Ended August 31, 2006
(Amounts in millions) Domestic International Consolidated Domestic International Consolidated
---------------------------------------------------------------------------------- ------------------------------------------
Net sales........................... $ 2,680.6 $ 158.6 $ 2,839.2 $5,166.1 $290.0 $5,456.2
Gross profit........................ $ 619.6 $ 56.2 $ 675.8 $1,214.5 $101.7 $1,316.2
Selling, general and
administrative expenses......... $ 608.4 $ 54.4 $ 662.8 $1,196.0 $106.2 $1,302.2
Net earnings (loss) from
continuing operations........... $ 10.5 $ 0.9 $ 11.4 $ 19.8 $ (3.4) $ 16.4
Three Months Ended August 31, 2005 Six Months Ended August 31, 2005
(Amounts in millions) Domestic International Consolidated Domestic International Consolidated
---------------------------------------------------------------------------------- ------------------------------------------
Net sales........................... $ 2,414.0 $ 143.0 $ 2,557.1 $4,528.7 $256.3 $4,784.9
Gross profit........................ $ 557.8 $ 51.9 $ 609.6 $1,070.7 $ 96.9 $1,167.5
Selling, general and
administrative expenses......... $ 555.4 $ 52.7 $ 608.1 $1,083.6 $107.5 $1,191.1
Net earnings (loss) from
continuing operations........... $ 4.4 $ (0.5) $ 3.9 $ (1.5) $ (6.5) $ (8.0)
Net Sales
Consolidated
For the second quarter of fiscal 2007, our net sales increased 11.0 percent to
$2.84 billion, and comparable store sales increased 8.3 percent from the same
period last year. Net sales for the first six months of fiscal 2007 increased
14.0 percent to $5.46 billion from $4.78 billion for the first six months of
last fiscal year. Comparable store sales increased 11.3 percent for the first
six months of fiscal 2007. 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 stores. The calculation of
comparable store sales excludes the impact of fluctuations in foreign currency
exchange rates.
Domestic Segment
For the second quarter of fiscal 2007, the domestic segment's net sales were
$2.68 billion, an increase of 11.0 percent over the same period last fiscal
year. Comparable store sales increased 8.9 percent. For the quarter, our sales
growth was driven by the addition of 16 net new Superstores over the past four
quarters and by average ticket increases, which primarily resulted from sales
growth in flat panel televisions. In addition, domestic segment Web-originated
sales grew 74 percent, and domestic segment services revenues grew 100 percent
over the same period last year. Services revenues are comprised of home theater
installations and computer-related services.
Page 18 of 33
For the six months ended August 31, 2006, domestic segment sales were $5.17
billion, an increase of 14.1 percent over the same period last fiscal year.
Comparable store sales increased 11.9 percent.
The domestic segment's major product categories are
o video, which includes televisions, imaging products, DVD hardware,
camcorders, digital cameras, digital video services, furniture, and related
accessories;
o information technology, which includes personal computer hardware, personal
computer services, telecommunications products and services, and related
accessories;
o audio, which includes home audio products, mobile audio products, portable
audio products, and related accessories; and
o entertainment, which includes movie software, music software, game
software, game hardware and personal computer software.
The percent of domestic segment sales represented by each major product category
for the periods ended August 31, 2006 and 2005 is shown below.
PERCENT OF DOMESTIC SEGMENT SALES BY CATEGORY(a)
Three Months Ended Six Months Ended
August 31 August 31
2006 2005 2006 2005
-------------------------------------------------------------------------------------- -----------------------
Video..................................................... 42% 41% 43% 42%
Information technology.................................... 33 34 31 31
Audio..................................................... 15 15 16 16
Entertainment............................................. 10 10 10 11
------------------------ ------------------------
Total..................................................... 100% 100% 100% 100%
======================== ========================
(a)Excludes extended warranty revenues and installation revenue.
In the video category, we produced a low-double-digit comparable store sales
increase in the second quarter. Total television comparable store sales
increased by double digits, led by strong double-digit comparable store sales
growth in flat panel displays. Comparable store sales of digital imaging
products and accessories increased by double digits. Growth in the category was
partially offset by double-digit declines in comparable store sales of
camcorders and DVD hardware.
In the information technology category, we produced a high-single-digit
comparable store sales increase in the second quarter, driven by a single-digit
comparable store sales increase in PC hardware. Comparable store sales of
notebook computers increased by double digits. Growth in the category was
partially offset by single-digit decreases in comparable store sales of printers
and monitors and a double-digit decrease in comparable store sales of desktop
computers. Comparable store sales of PC services nearly doubled.
In the audio category, we produced a high-single-digit comparable store sales
increase in the second quarter, primarily resulting from double-digit comparable
store sales growth in portable digital audio products and portable digital audio
accessories. Double-digit comparable store sales growth in mobile audio products
reflects growth in navigation products. Comparable store sales growth in
portable and mobile audio products was partially offset by a mid-single-digit
comparable store sales decline in home audio products.
In the entertainment category, we produced a mid-single-digit comparable store
sales increase in the second quarter, reflecting a double-digit comparable store
sales increase in gaming products and PC software and a mid-single-digit
increase in video software, partially offset by a double-digit comparable store
sales decrease in music software.
Page 19 of 33
The following table provides the number of our domestic segment stores:
DOMESTIC SEGMENT STORE MIX
Aug. 31, 2006 Feb. 28, 2006 Aug. 31, 2005
----------------------------------------------------------------------------------------------------------------
Superstores....................................... 632 626 616
Outlet and mall stores............................ 5 5 5
----------------------------------------------------------
Total domestic segment stores..................... 637 631 621
==========================================================
In the first half of fiscal 2007, we relocated two Superstores and opened five
new Superstores. One of the relocated Superstores replaced a store that was
closed in February 2006. We opened two outlet stores and closed two mall stores.
We also completed one remodel, which consisted of rebuilding a storm-damaged
store.
Extended Warranty Net Sales. The domestic segment sells extended warranty
programs on behalf of unrelated third parties who are the primary obligors. The
extended warranty net sales were $107.7 million, or 4.0 percent of domestic
segment sales, in the second quarter of fiscal 2007, compared with $97.4
million, or 4.0 percent of domestic segment sales, in the same period last
fiscal year. The extended warranty net sales were $200.0 million for the first
half of fiscal 2007, or 3.9 percent of domestic segment sales, compared with
$182.4 million, or 4.0 percent of domestic segment sales, for the first half of
last fiscal year. Effective fiscal year 2008, we will no longer report extended
warranty net sales separately from consolidated net sales. Management views
warranty revenue as one component of many that contribute to both sales and
gross margin, reflecting our expanded ability to provide high value services in
a growing number of ways. We will continue reporting domestic segment extended
warranty net sales for the balance of fiscal year 2007.
International Segment
The international segment's net sales increased 10.9 percent to $158.6 million
for the second quarter of fiscal 2007, compared with $143.0 million for the
second quarter of last fiscal year. The effect of fluctuations in foreign
currency exchange rates accounted for approximately 9 percentage points of the
international segment's second quarter net sales increase. Sales from our dealer
relationships had a double-digit percentage increase for the second quarter in
local currency, and the international segment added 13 net new retail stores
during the past four quarters. Comparable store sales decreased 2.1 percent for
the quarter in local currency as we cycled against the heavy advertising during
the second quarter of fiscal 2006 related to the brand launch of The Source By
Circuit CitySM.
For the six months ended August 31, 2006, the international segment's net sales
increased 13.2 percent to $290.0 million, compared with $256.3 million for the
six months ended August 31, 2005. The effect of fluctuations in foreign currency
exchange rates accounted for approximately 9 percentage points of the
international segment's year-over-year net sales increase. Comparable store
sales decreased 0.1 percent in local currency for the first six months of fiscal
2007.
INTERNATIONAL SEGMENT STORE MIX
Aug. 31, 2006 Feb. 28, 2006 Aug. 31, 2005
----------------------------------------------------------------------------------------------------------------
Company-owned stores.............................. 541 540 522
Dealer outlets.................................... 298 300 300
Rogers Plus(R) stores............................... 92 93 91
Battery Plus(R) stores.............................. 18 21 25
----------------------------------------------------------
Total international segment stores................ 949 954 938
============================================================
Page 20 of 33
Gross Profit Margin
Consolidated
The gross profit margin was 23.8 percent of net sales in the second quarter of
fiscal 2007, unchanged from the same period last fiscal year. For the first six
months of fiscal 2007, the gross profit margin was 24.1 percent of net sales,
compared with 24.4 percent for the same period last fiscal year.
Domestic Segment
For the second quarter of fiscal 2007, the domestic segment's gross profit
margin rate was even with the rate for the same period last fiscal year as a
modest decline in merchandise margin was offset by a margin contribution from
net financing as promotion periods shortened compared with last year.
For the first half of fiscal 2007, the domestic segment's gross profit margin
was 23.5 percent of net sales, compared with 23.6 percent for the same period
last fiscal year. The slight margin rate decline resulted from modest declines
in merchandise margin and net financing.
International Segment
For the second quarter of fiscal 2007, the international segment gross profit
margin rate decline of 81 basis points did not materially impact the
consolidated gross profit margin rate. The decrease resulted primarily from a
greater percentage of sales of products in the computer category and margin rate
declines in video and personal electronics.
For the first half of fiscal 2007, the international segment's gross profit
margin was 35.1 percent of net sales, compared with 37.8 percent for the same
period last fiscal year. The decrease resulted primarily from margin rate
declines within wireless communications, video and personal electronics
categories. Also, a sales mix shift from higher-margin categories, such as
batteries, to lower-margin categories, such as computers, contributed to the
decline.
Selling, General and Administrative Expenses
Consolidated
Three Months Ended August 31 Six Months Ended August 31
2006 2005 2006 2005
% of % of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales $ Sales
------------------------------------------------------------------------------------ ---------------------------------------------
Store expenses.......................... $567.5 20.0% $520.2 20.3% $1,105.4 20.3% $1,020.4 21.3%
General and administrative
expenses........................... 85.3 3.0 78.9 3.1 173.9 3.2 156.3 3.3
Stock-based compensation
expense.......................... 6.6 0.2 6.6 0.3 15.3 0.3 9.8 0.2
Remodel expenses........................ 0.5 - - - 0.5 - - -
Relocation expenses..................... 0.5 - 0.3 - 2.0 - 2.3 -
Pre-opening expenses.................... 2.4 0.1 2.1 0.1 5.0 0.1 2.3 -
------------------------------------------ ---------------------------------------------
Total ................................. $662.8 23.3% $608.1 23.8% $1,302.2 23.9% $1,191.1 24.9%
========================================= ============================================
Selling, general and administrative expenses as a percentage of sales declined
44 basis points to 23.3 percent of net sales in the second quarter of this
fiscal year. The domestic segment's expense-to-sales ratio decreased 31 basis
points from the same period last year. The international segment contributed 13
basis points to the decrease in the consolidated expense-to-sales ratio.
Page 21 of 33
For the first half of fiscal 2007, selling, general and administrative expenses
as a percentage of sales declined 103 basis points from the same period last
fiscal year. The domestic segment's expense-to-sales ratio decreased 78 basis
points from the same period last year. The international segment contributed 25
basis points to the decrease in the consolidated expense-to-sales ratio.
Domestic Segment
Three Months Ended August 31 Six Months Ended August 31
2006 2005 2006 2005
% of % of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales $ Sales
------------------------------------------------------------------------------------ ---------------------------------------------
Store expenses.......................... $524.2 19.6% $484.0 20.1% $1,021.1 19.8% $ 949.9 21.0%
General and administrative
expenses........................... 74.5 2.8 62.6 2.6 153.3 3.0 119.6 2.6
Stock-based compensation
expense.......................... 6.4 0.2 6.4 0.3 14.0 0.3 9.5 0.2
Remodel expenses........................ 0.5 - - - 0.5 - - -
Relocation expenses..................... 0.5 - 0.3 - 2.0 - 2.3 0.1
Pre-opening expenses.................... 2.4 0.1 2.1 0.1 5.0 0.1 2.3 0.1
------------------------------------------ ---------------------------------------------
Total ................................. $608.4 22.7% $555.4 23.0% $1,196.0 23.2% $1,083.6 23.9%
========================================= ============================================
For the three months ended August 31, 2006, the domestic segment's improvement
primarily reflects leverage of payroll as well as rent and occupancy expenses.
These improvements were partially offset by incremental store expenses related
to Circuit City Direct, innovation activities and advertising as well as by
general and administrative expenses related to information systems and
innovation activities.
For the six months ended August 31, 2006, the domestic segment's improvement
primarily reflects leverage of payroll as well as rent and occupancy expenses.
These improvements were partially offset by incremental store expenses related
to Circuit City Direct, innovation activities and advertising as well as by
general and administrative expenses related to information systems and
innovation activities.
International Segment
Three Months Ended August 31 Six Months Ended August 31
2006 2005 2006 2005
% of % of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales $ Sales
------------------------------------------------------------------------------------ ---------------------------------------------
Store expenses.......................... $43.4 27.3% $36.2 25.3% $ 84.3 29.1% $ 70.5 27.5%
General and administrative
expenses........................... 10.9 6.9 16.4 11.4 20.6 7.1 36.7 14.3
Stock-based compensation
expense.......................... 0.2 0.1 0.2 0.1 1.3 0.5 0.4 0.1
------------------------------------------ ---------------------------------------------
Total ................................. $54.4 34.3% $52.7 36.8% $106.2 36.6% $ 107.5 42.0%
========================================= ============================================
For the second quarter of fiscal 2007, the international segment's
expense-to-sales ratio decreased 252 basis points from the same period last
year. The international segment's general and administrative expenses in the
second quarter of fiscal 2006 included expenses of $9.6 million associated with
the brand transition in Canada. Excluding the brand costs in fiscal 2006, the
expense-to-sales ratio increased 420 basis points primarily due to increased
expenses related to the increase in the number of stores open versus last year
and increased advertising expense.
For the six months ended August 31, 2006, the international segment's
expense-to-sales ratio decreased 534 basis points from the same period last
fiscal year. The international segment's general and administrative expenses in
the first half of fiscal 2006 included expenses of $21.5 million associated with
the brand transition in Canada. Excluding the brand costs in fiscal 2006, the
expense-to-sales ratio increased 305 basis points
Page 22 of 33
primarily due to increased expenses related to the increase in the number of
stores open versus last year and increased advertising expense.
Income Tax Provision
The effective income tax rate applicable to results from continuing operations
was 38.3 percent for the six months ended August 31, 2006, and 39.8 percent for
the six months ended August 31, 2005. The effective tax rate for the six months
ended August 31, 2006, reflects an adjustment for a change in management's
estimate regarding certain tax uncertainties, which was recorded as a discrete
item for the second quarter. Absent this adjustment, we would have reported an
effective tax rate applicable to results from continuing operations of 36.3
percent. The decrease in the effective tax rate, excluding the effect of the
discrete item, resulted from increased tax-exempt earnings.
Net Earnings (Loss) from Continuing Operations
The net earnings from continuing operations were $11.4 million, or 7 cents per
share, in the three months ended August 31, 2006, compared with net earnings
from continuing operations of $3.9 million, or 2 cents per share, in the same
period last fiscal year.
For the six months ended August 31, 2006, the net earnings from continuing
operations were $16.4 million, or 9 cents per share, compared with the net loss
from continuing operations of $8.0 million, or 4 cents per share, for the same
period last fiscal year.
Net Loss from Discontinued Operations
For the quarter ended August 31, 2006, the net loss from discontinued operations
totaled $1.3 million, which is net of $0.5 million of income taxes, and related
to a domestic segment operation that is held for sale. For the quarter ended
August 31, 2006, this $0.5 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
operations. For the six months ended August 31, 2006, the net loss from
discontinued operations totaled $1.7 million, which is net of $0.7 million of
income taxes, and related to a domestic segment operation that is held for sale.
For the first half of fiscal 2007, this $0.7 million of income tax benefit was
offset by $0.5 million of income tax expense associated with our discontinued
bankcard operations as discussed above.
For the quarter ended August 31, 2005, the net loss from discontinued operations
totaled $2.5 million, which is net of $1.4 million of income taxes, and related
to a domestic segment operation that is held for sale and a domestic segment
subsidiary, MusicNow, LLC, which was sold in October 2005. For the six months
ended August 31, 2005, the net loss from discontinued operations totaled $3.7
million, which is net of $2.1 million of income taxes, and related to a domestic
segment operation that was held for sale and MusicNow.
Cumulative Effect of Change in Accounting Principle
In the first quarter of fiscal 2007, we adopted SFAS No. 123(R) using the
modified prospective transition method, resulting in a non-cash after-tax
benefit of $1.8 million.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective March 1, 2006, we adopted SFAS No. 123(R), which requires companies to
record compensation expense based on the fair value of employee stock-based
compensation awards. The statement also requires that the compensation expense
be recognized over the period during which the employee is required to provide
service in exchange for the award. Prior to the adoption of SFAS No. 123(R), we
accounted for stock-based compensation using a fair-value based method in
accordance with SFAS No. 123, "Stock-Based Compensation." We adopted SFAS No.
123(R) using the modified prospective transition method. The
Page 23 of 33
adoption of SFAS No. 123(R) did not have a material impact on our financial
position, results of operations or cash flows.
In October 2005, the Financial Accounting Standards Board issued FASB Staff
Position (FSP) No. FAS 13-1, "Accounting for Rental Costs Incurred During a
Construction Period." FSP No. FAS 13-1 requires companies to expense rent
payments for building or ground leases incurred during a construction period. We
adopted FSP No. FAS 13-1 on a prospective basis in the first quarter of fiscal
2007. The adoption of this new standard did not have a material impact on our
financial position, results of operations or cash flows.
In June 2006, the FASB issued Interpretation ("FIN") No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109." FIN
No. 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 provisions of FIN No. 48 are effective
for us beginning with the first quarter of fiscal 2008. We have not yet
determined the impact of adopting this standard.
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 are effective for us beginning with the first quarter of fiscal
2009. We have not yet determined the impact of adopting this standard.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R)." SFAS No. 158 requires an employer to
recognize a plan's overfunded or underfunded status in its balance sheets and
recognize the changes in a plan's funded status in comprehensive income in the
year in which the changes occur. These provisions of SFAS No. 158 are effective
for our fiscal year ending February 28, 2007. In addition, SFAS No. 158 requires
an employer to measure plan assets and obligations that determine its funded
status as of the end of its fiscal year, with limited exceptions. This provision
of SFAS No. 158 is effective for our fiscal year ending February 28, 2009. We
have not yet determined the impact of adopting this standard.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash Flows
Restatement of Cash Flows
As disclosed in Note 22, Quarterly Financial Data (Unaudited), of the Notes to
Consolidated Financial Statements, included in Item 8, Financial Statements and
Supplementary Data, of our fiscal 2006 Annual Report on Form 10-K, we identified
errors in our previously filed consolidated statement of cash flows for the six
months ended August 31, 2005, and restated the consolidated statement of cash
flows for the six months ended August 31, 2005. We had classified variable rate
demand notes as cash and cash equivalents; however, these notes should have been
classified as short-term investments and their purchases and sales as investing
activities. We incorrectly reflected bank overdrafts as a change in accounts
payable in operating activities rather than in financing activities. We
incorrectly included accruals for purchases of property and equipment in
operating activities and investing activities. We incorrectly reflected deposits
in transit as a reduction to accounts payable.
Page 24 of 33
Cash Flows Summary
The following table summarizes our cash flows for the six months ended August
31, 2006 and 2005:
Six Months Ended
August 31
(Amounts in millions) 2006 2005
----------------------------------------------------------------------------------------
Net cash (used in) provided by:
Operating activities.................................... $ (69.0) $ 12.0
Investing activities.................................... 105.2 (273.7)
Financing activities.................................... (50.9) (212.2)
Discontinued operations................................. (5.1) (18.4)
Effect of exchange rate changes on cash................... - 0.2
----------------------------
Decrease in cash and cash equivalents..................... $ (19.8) $ (492.0)
============================
Operating Activities
We used net cash from operating activities of $69.0 million in the six months
ended August 31, 2006, compared with net cash provided by operating activities
of $12.0 million in the six months ended August 31, 2005. The change was due
primarily to increases in net accounts receivable and merchandise inventory, net
of merchandise payable, and was partially offset by an increase in net earnings.
The increase in accounts receivable during the six months ended August 31, 2006
was primarily due to an increase in vendor receivables. The decrease in accounts
receivable during the six months ended August 31, 2005 was primarily due to a
decrease in credit card receivables due to the timing of month-end settlements.
During the six months ended August 31, 2006, the increase in merchandise
inventory, net of merchandise payable, was $16.1 million and was driven by
increases in purchases across many product categories to support increased sales
trends and improved customer encountered in-stock positions. During the six
months ended August 31, 2005, merchandise inventory, net of merchandise payable,
decreased $21.2 million. These changes were partially offset by cash provided by
net earnings, which were $16.4 million for the six months ended August 31, 2006,
compared with a net loss of $11.8 million during the same period last fiscal
year.
Investing Activities
For the six months ended August 31, 2006, net cash provided by investing
activities was $105.2 million, compared with net cash used by investing
activities of $273.7 million in the six months ended August 31, 2005. The change
was due primarily to an increase in the proceeds from sales and maturities of
investment securities and a decrease in purchases of investment securities.
Financing Activities
We used net cash from financing activities of $50.9 million in the six months
ended August 31, 2006, compared with $212.2 million in the six months ended
August 31, 2005. The change was due primarily to a decrease in cash used to
repurchase common stock under the stock repurchase authorization. In June 2006,
the board authorized a $400 million increase in the stock repurchase
authorization resulting in a total stock repurchase authorization of up to $1.2
billion, of which $400.3 million remained available at August 31, 2006. During
the six months ended August 31, 2006, we used cash to repurchase 4.3 million
shares of common stock at a total price of $117.0 million, excluding commission
fees. During the same period last fiscal year, we used cash to repurchase 11.8
million shares of common stock at a total price of $196.3 million, excluding
commission fees. As of August 31, 2006, we had repurchased a cumulative 52.1
million shares of common stock at a total price of $799.7 million, excluding
commission fees. Based on the market value of the common stock at August 31,
2006, the then remaining $400.3 million of the $1.2 billion authorization would
allow for the repurchase of up to approximately 10 percent of the 174.0 million
shares then outstanding.
Also in June 2006, 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.
Page 25 of 33
Cash, Cash Equivalents and Short-term investments
At August 31, 2006, we had cash, cash equivalents and short-term investments of
$599.6 million, compared with $838.0 million at February 28, 2006. During the
first six months of fiscal 2007, we used cash to repurchase 4.3 million shares
of common stock at a total price of $117.0 million, excluding commission fees.
In addition, during the first six months of fiscal 2006, we used cash of $113.5
million to purchase property and equipment. At August 31, 2005, we had cash,
cash equivalents and short-term investments of $688.1 million. The
year-over-year change in the cash balance primarily reflects the use of cash to
repurchase common stock and purchase property and equipment, partially offset by
cash provided by operations.
Net-owned Inventory
Merchandise inventory increased to $1.85 billion at August 31, 2006, from $1.70
billion at February 28, 2006, driven by an increase in domestic segment
inventory of $134.7 million due to an increase in inventory purchases to support
increased sales trends and customer encountered in-stock positions. Net-owned
inventory, calculated as merchandise inventory less merchandise payable,
increased by $18.8 million from February 28, 2006, to August 31, 2006, due to
increases in inventory to support strong sales trends. Domestic segment
net-owned inventory increased by $7.4 million from February 28, 2006 to August
31, 2006.
Capital Expenditures
Capital expenditures, net of landlord reimbursements, were $127.0 million in the
six months ended August 31, 2006, compared with $102.2 million in the same
period last fiscal year.
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, 2006, short-term borrowings were $31.7 million and related to our
international segment. At August 31, 2006, outstanding letters of credit were
$53.3 million, leaving $415.0 million available for borrowing. We were in
compliance with all covenants at August 31, 2006.
Our primary sources of liquidity include available cash, 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.
FISCAL 2007 OUTLOOK
We expect to generate the following results in fiscal 2007:
o consolidated net sales growth of 9 percent to 11 percent, including
domestic segment comparable store sales growth of 7 percent to 9 percent
o earnings from continuing operations before income taxes (EBT) as a
percentage of sales of 2.0 percent to 2.4 percent
The outlook also includes the following expectations:
o depreciation and amortization expense of approximately $180 million
o incremental expenses in information systems, Circuit City Direct and
innovation activities, primarily related to expenses for investments, that
will total approximately 100 basis points as a percentage of consolidated
sales
o expenses of $30 million related to domestic segment store revitalization
activities including Superstore relocations, remodels and refreshes
o consolidated effective income tax rate applicable to results from
continuing operations of 36.5 percent
o reduction in domestic segment net-owned inventory of $50 million to $100
million from February 28, 2006, to February 28, 2007
Domestic segment Superstore openings and estimates are shown in the following
table. The timing of store openings depends upon a number of factors and can
change during the year. We expect approximately one
Page 26 of 33
third of the openings to be in the 20,000 square foot format. We also plan to
remodel two locations, one of which was completed in the first quarter.
Domestic Segment Superstore Openings(a)
Q1 Q2 Q3 Q4 FY07
-----------------------------------------------------------------------------------
Incremental Superstores.................... 3 2 8 9-10 22-23
Relocated Superstores...................... 2 - 4 4-6 10-12
--------------------------------------
Total expected Superstore openings......... 5 2 12 13-16 32-35
========================================
(a) First and second quarter openings are actual. On February 28, 2006, we
closed one store in advance of opening a replacement store in the first quarter
of fiscal 2007. The replacement store is included in relocations for the first
quarter of fiscal 2007.
We anticipate that capital expenditures, net of landlord reimbursements, will
total approximately $290 million in fiscal 2007. Of the fiscal 2007 estimate,
o $139 million relates to store activities including new store construction,
relocations, remodels, store refresh and category reset activities;
o $119 million relates to information systems;
o $21 million relates to distribution and other expenditures; and
o $11 million relates to the international segment.
The fiscal 2007 outlook is based on the following assumptions:
o a continuation of current competitive and macroeconomic environments
o continued sales growth in key product areas including flat panel
televisions, notebook computers, digital imaging and portable digital audio
players, as well as related accessories and services
o continued growth in Web-originated sales
o store traffic relatively unchanged from the prior year, an improvement in
the sales conversion rate and an increase in the average sales dollars per
ticket
o return to annual profitability in the international segment
o increased sales from domestic segment new store openings, relocations,
store refreshes and category resets
o continued improvement in the customer experience that increases the
conversion rate
o improved customer-encountered inventory in-stock levels
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 2007 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:
Page 27 of 33
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 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 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 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 and
information systems on revenue and operating margin and the costs
associated with these investments;
o our ability to control and leverage expenses as a percentage of sales;
o changes in production or distribution costs or costs of materials for our
advertising;
o effectiveness of our advertising and marketing programs for increasing
consumer traffic and sales;
o the successful implementation of our customer service initiatives;
o the imposition of new restrictions or regulations regarding the sale of
products and/or services we sell, changes in tax rules and regulations
applicable to, 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 failure to successfully implement sales and profitability improvement
programs for our international segment;
o deterioration of the expected future performance of our international
segment may result in a goodwill impairment charge;
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 28 of 33
o the global regulatory and trade environment;
o the disruption of global, national or regional transportation systems;
o the occurrence of severe weather events or natural disasters that could
significantly damage or destroy stores or prohibit consumers from traveling
to our retail locations, especially during peak holiday periods; and
o the successful execution of the initiatives to achieve revenue growth and
increase operating margin and the accuracy of the assumptions underlying
our projected 2007 results as discussed under "Fiscal 2007 Outlook" in
MD&A.
We believe our forward-looking statements are reasonable. However, undue
reliance should not be placed on forward-looking statements, which are based on
current expectations.
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,
2006, U.S. dollar purchase orders totaled approximately $19.6 million. A 10
percent decline in the value of the Canadian dollar would result in an increase
in product cost of approximately $2.0 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 and chief financial officer, the company
has evaluated the effectiveness of its "disclosure controls and procedures," as
that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934,
as amended, as of the end of the period covered by this Quarterly Report on Form
10-Q. Based upon their evaluation, the chief executive officer and chief
financial officer concluded that the company's disclosure controls and
procedures are effective.
Changes in Internal Control over Financial Reporting
There were no changes in the company's internal control over financial reporting
in the quarter ended August 31, 2006, that have materially affected, or are
reasonably likely to materially affect, the company's internal control over
financial reporting.
Page 29 of 33
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the company's Annual Report on Form 10-K for the year
ended February 28, 2006, the company was involved in litigation with RadioShack
Corporation ("RadioShack") related to various agreements between InterTAN and
RadioShack and its subsidiaries. In September 2006, RadioShack and Circuit City
reached an agreement that settles the litigation between the two companies.
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, 2006, 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 2006
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, 2006:
Approximate
Total Number Dollar Value of
of Shares Shares that
Average Purchased as May Yet Be
Total Number Price Part of Publicly Purchased
of Shares Paid Announced Under
(Amounts in millions except per share data) Purchased per Share Program the Program(a)
------------------------------------------------------------------------------------------------------------------------------------
June 1 - June 30, 2006........................... 0.8 $27.80 0.8 $445.6
July 1 - July 31, 2006........................... 1.8 $25.35 1.8 $400.3
August 1 - August 31, 2006....................... - $ - - $400.3
----------------- -----------------
Total fiscal 2007 second quarter................. 2.6 $26.10 2.6
================= =================
(a) 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, 2006, $400.3 million
remained available for stock repurchases under the $1.2 billion stock repurchase
authorization.
Page 30 of 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the company's shareholders was held June 27,
2006.
(b) At the annual meeting, the shareholders of the company elected
Ronald M. Brill, Michael E. Foss, Mikael Salovaara and Philip J.
Schoonover as directors for a three-year term and Barbara S.
Feigin as director for a one-year term. The elections were
approved by the following votes:
Directors For Withheld
------------------------- ---------------- -------------
Ronald M. Brill 158,346,745 1,330,344
Michael E. Foss 154,945,883 4,731,206
Mikael Salovaara 149,084,233 10,592,856
Philip J. Schoonover 158,393,940 1,283,149
Barbara S. Feigin 155,036,924 4,640,165
(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 2007. This ratification was approved by
the following votes:
Broker
For Against Abstain Non-Vote
-------------- -------------- ------------ --------
157,426,109 1,519,287 731,693 0
ITEM 6. EXHIBITS
Articles of Incorporation and Bylaws
3.1 Circuit City Stores, Inc. Amended and Restated Articles of
Incorporation, effective February 3, 1997, as amended through August
16, 2005, filed as Exhibit 3.1 to the company's Form 8-A/A filed
September 13, 2005 (File No. 1-5767), are expressly incorporated herein
by this reference.
3.2 Circuit City Stores, Inc. Bylaws, as amended December 17, 2005, filed
as Exhibit 3.1 to the company's Current Report on Form 8-K filed
December 22, 2005 (File No. 1-5767), are expressly incorporated herein
by this reference.
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of CEO under Rule 13a-14(a) of the Securities Exchange
Act of 1934
31.2 Certification of CFO under Rule 13a-14(a) of the Securities Exchange
Act of 1934
Section 1350 Certifications
32.1 Certification of CEO under Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of CFO under Section 906 of the Sarbanes-Oxley Act of
2002
Page 31 of 33
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
By: /s/ Michael E. Foss
--------------------------------------
Michael E. Foss
Executive Vice President and
Chief Financial Officer
By: /s/ Philip J. Dunn
--------------------------------------
Philip J. Dunn
Senior Vice President, Treasurer,
Controller and
Chief Accounting Officer
October 10, 2006
Page 32 of 33
EXHIBIT INDEX
Articles of Incorporation and Bylaws
3.1 Circuit City Stores, Inc. Amended and Restated Articles of
Incorporation, effective February 3, 1997, as amended through
August 16, 2005, filed as Exhibit 3.1 to the company's Form 8-A/A
filed September 13, 2005 (File No. 1-5767), are expressly
incorporated herein by this reference.
3.2 Circuit City Stores, Inc. Bylaws, as amended December 17, 2005,
filed as Exhibit 3.1 to the company's Current Report on Form 8-K
filed December 22, 2005 (File No. 1-5767), are expressly
incorporated herein by this reference.
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of CEO under Rule 13a-14(a) of the Securities
Exchange Act of 1934
31.2 Certification of CFO under Rule 13a-14(a) of the Securities
Exchange Act of 1934
Section 1350 Certifications
32.1 Certification of CEO under Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification of CFO under Section 906 of the Sarbanes-Oxley Act
of 2002
Page 33 of 33