Circuit City Stores, Inc. Jonathan Murphy ACG2021 SECTION 004

1
Circuit City Stores, Inc.Jonathan Murphy
ACG2021 SECTION 004
2
Executive Summary

• I believe that Circuit City has a great future.
  Sales of digital televisions is expected to grow
  33 percent in the next year. This is mainly due
  to flat-panel technologies and lower prices on
  rear-projection televisions. Circuit City
  leaders are planning to make vast improvements in
  order to receive better returns to their
  shareholders. For instance, cost and expense
  reductions are definitely needed to achieve
  reasonable profitability along with maximizing
  their gross profit margin. I believe the
  expansion of the company on the world wide web
  and the decrease in prices is going to help
  against competitors. Overall, Circuit City is
  doing well as long as they can continue to
  increase their total sales.
• http//www.irin.com/ (Annual Report Resource
  Center)

3
Introduction

• Chief executive officer W. Alan McCollough
• Home office9950 Maryland Drive
• Richmond, VA 23233-1464
• Ending date of latest fiscal year Feb. 29, 2004
• Products Electronics (computers, home audio
  video, car audio, digital audio, video, and
  recording) and electronic accessories.
• Circuit City has locations all over the United
  States.

4
Audit Report

• Independent Auditors
• Ronald M. Brill
• Carolyn H. Byrd
• Richard N. Cooper
• Barbara S. Feigin
• Allen B. King
• Mikael Salovaara
• The consolidated financial statements seem to
  fairly represent the financial position of
  Circuit City Stores, Inc. and subsidiaries as of
  Feb. 29, 2004. The results of their operations
  and cash flows follow the generally accepted
  accounting principles.

5
Stock Market Information

• Companys most recent stock price 16.25
• 52wk Range 8.69 16.36
• Dividend per share .0175
• Company stock price as of Feb. 29, 2004
• I would probably hold or sell stock because the
  price is at a high for the year and still seems
  to be increasing.

6
Industry Situation and Company Plans

• Overall, the industry seems to be in pretty good
  shape. Major accomplishments in this past year
  include Superstore openings, sale of the
  finance operations, an increase in sales
  originating from circuitcity.com, and focusing on
  cost and expense reductions. Future plans of the
  company are to build stores that can support an
  industry-leading shopping experience and to work
  towards improving operating margins.

7
Income Statement

• The Income Statement has appears to have a
  multi-step format.
• PERIOD ENDING
  31-Aug-04 31-May-04 29-Feb-04 30-Nov-03
• Total Revenue
  2,345,026   2,066,588  
  3,249,001   2,407,424  
• Cost of Revenue
  1,767,491   1,586,153  
  2,492,185   1,872,600  
• Gross Profit5
  77,535   480,435  
  756,816   534,824  
•  Selling General and Administrative
  594,620   493,899   636,792  
  578,867  
• Operating Income or Loss
  (17,085) (13,464) 120,024 
   (44,043)
• Income from Continuing OperationsTotal
  - 5,564   10,275  
  177,833  
• Earnings Before Interest And Taxes
  (17,085) (7,900) 130,299  
  133,790  
• Interest Expense
  799  
  350   325   169  
• Income Before Tax
  (17,884) (8,250)
  129,974   133,621  
• Income Tax Expense
  (6,468) (3,016)
  47,440   48,773   
• Net Income From Continuing Ops
  (11,416) (5,234) 82,534  
  84,848  
• Non-recurring EventsDiscontinued Operations
  (507) (707) (5,107)
  (83,375)
• Net Income
  (11,923) (5,941)
  77,427   1,473  
• Net Income Applicable To Common Shares
  (11,923) (5,941) 77,427  
  1,473  
• There has been a considerable decrease in profit
  causing an overall decrease in net income.

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Balance Sheet

• At February 29 or 28
• (Amounts in thousands except share data) 2004
  2003
• ASSETS
• CURRENT ASSETS
• Cash and cash equivalents NOTE
  2................................................
  .................... 783,471 884,670
• Accounts receivable, net of allowance for
  doubtful accounts of 547 and 1,075..154,039
  140,385
• Retained interests in securitized receivables
  NOTES 2 AND 6............................425,678
  239,141
• Merchandise inventory NOTE 2 ...................
  ..................................................
  ..................................................
  .............1,517,256 1,409,736
• Prepaid expenses and other current
  assets............................................
  ..........................38,617 18,165
• Assets of discontinued operations NOTE
  3................................................
  ................... 395,813
• TOTAL CURRENT ASSETS .............................
  ..................................................
  ..2,919,061 3,087,910
• Property and equipment, net NOTES 2, 8 AND
  9................................................
  ......585,903 649,593
• Deferred income taxes NOTES 2 AND
  10...............................................
  ....................98,934 64,509
• Other assets NOTE 15 ...........................
  ..................................................
  .....................29,102 39,252
• TOTAL ASSETS .....................................
  ..................................................
  ..............3,633,000 3,841,264
• Liabilities of discontinued operations shows a
  significant decrease. Retained interests in
  receivables and deferred income tax accounts show
  the largest increase.

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• LIABILITIES AND STOCKHOLDERS EQUITY
• CURRENT LIABILITIES
• Accounts payable NOTE 2 ........................
  ..................................................
  ..................................... 879,635
  963,701
• Accrued expenses and other current liabilities
  NOTES 3 AND 15 .................................
  ....................131,512 113,878
• Accrued income taxes..............................
  ..................................................
  ...............................................71,
  163 44,453
• Deferred income taxes NOTES 2 AND
  10...............................................
  ..............................................90,2
  10 1,403
• Current installments of long-term debt NOTES 9
  AND 11...........................................
  ........................ ..1,115 1,410
• Liabilities of discontinued operations NOTE
  3................................................
  .................................. ..3,068
  60,180
• TOTAL CURRENT LIABILITIES ........................
  ..................................................
  ........................1,176,703 1,275,025
• Long-term debt, excluding current installments
  NOTES 9 AND 11..................................
  .................... 22,691 11,254
• Accrued straight-line rent NOTE
  2................................................
  ..................................................
  ....... 98,470 97,427
• Other liabilities NOTE 11.......................
  ..................................................
  .........................................
  111,175 83,690
• TOTAL LIABILITIES ................................
  ..................................................
  ..................................... 1,409,039
  1,467,396
• STOCKHOLDERS EQUITY NOTES 1, 2, 13 AND 14
• Common stock, 0.50 par value 525,000,000 shares
  authorized
• 203,899,395 shares issued and outstanding
  (209,954,840 in 2003) ............................
  .................... 101,950 104,977
• Capital in excess of par value ...................
  ..................................................
  ......................................
  ...922,600 965,551
• Retained earnings.................................
  ..................................................
  .........................................
  ...1,199,411 1,303,340
• TOTAL STOCKHOLDERS EQUITY .......................
  ..................................................
  .................... 2,223,961 2,373,868

10
Statement of Cash Flows

• Cash flows from operations are less than net
  income for the past two years.
• In fiscal 2005, Circuit City expects to open 60
  to 70 superstores, with a relatively even split
  between new stores and relocations.
• Common stock is Circuit Citys primary source of
  financing.
• Cash has decreased over the past two years.

11
Accounting Policies

• The company recognizes revenue when the earnings
  process is complete, generally either at the time
  of sale to a customer or upon delivery.
• Cash and cash equivalents held by the companys
  regulated subsidiaries was 61.6 million at Feb.
  29, 2004.
• Highly liquid debt securities with original
  maturities of 3 months or less totaled 699.6
  million at Feb. 29, 2004.
• Inventory is comprised of finished goods held
  for sale and is stated at the lower of cost or
  market. Cost is determined by the average cost
  method.
• Property equipment is stated at cost less
  accumulated depreciation and amortization.
  Depreciation and amortization are calculated
  using the straight-line method over the assets
  estimated useful lives.
• Notes
• Basis of presentation, summary of significant
  accounting policies, discontinued operations,
  finance income, net (loss) earnings per share,
  securitizations, financial derivatives, property
  equipment, debt, income taxes, lease
  commitments, contingent liabilities, capital
  stock, stock-based incentive plans, pension
  plans, recent accounting pronouncements, segment
  information, subsequent event, quarterly
  financial data (unaudited).

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Financial AnalysisLiquidity Ratios

• Working Capital 1,742,358 (04) Current assets
  exceed current liabilities.
• Current Ratio 2.48 (04) Circuit City has
  2.48 of current assets for each 1.00 of current
  liabilities.
• Receivable turnover 66.2 (04) May have longer
  credit terms.
• Average days sales uncollected 5.5 days
  -Circuit City turns its receivables 66.2 times a
  year, for an average of every 5.5 days.
• Inventory turnover 5.1 times
• Average days inventory on hand 71.6 days
  Circuit City turned its inventory over 5.1 times
  in 2004, or, on average, every 71.6 days.

13
Financial AnalysisProfitability Ratios

• Profit margin .007 (.7) -On each dollar of net
  sales, Circuit City made .7 cents.
• Asset turnover 2.6 times Circuit City produces
  2.60 in sales for each 1 invested in average
  total assets.
• Return on assets .024 (2.4) For each dollar
  invested, Circuit Citys assets generated 2.4
  cents of net income.
• Return on equity .034 (3.4) In 2004 Circuit
  City earned 3.4 cents for every dollar invested
  by stockholders.

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Financial AnalysisSolvency Ratio

• Debt to equity .634 (63.4)
• -A debt to equity ratio of 63.4 means that
  Circuit City receives less than half its
  financing from creditors and more than half
  from its investors.

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Financial AnalysisMarket Strength Ratios

• Price/earnings per share .236
• Dividend yield .07 (0.43)
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