Circuit City's Rough Road
This certainly has been a busy couple of weeks for Circuit City, the #2 retail outlet for consumer electronics in the U.S. No less than three separate events are bound to have an major impact on the company.
First, it was reported on February 15 that the Boston investment firm Highfields Capital Management made an unsolicited offer to buy the company for $3.25 billion with the express purpose of converting it to a privately held enterprise. Highfields, which held 7.8 percent of Circuit City's shares as of February 11, expressed dissatisfaction with the retailer's lagging performance, citing the fact that it lost $89.3 million on $9.75 billion in sales in its fiscal year ended Feb. 29, 2004. More recently, the company reported disappointing holiday sales.
As Highfields fund managers Jonathon S. Jacobson and Richard L. Grubman wrote in a letter to the store's directors, "Though some steps have been taken to address the company's operating performance and suboptimal capital structure, we are nevertheless disappointed that management has been unable to move more aggressively. We attribute this partially to the demands and scrutiny that come with being a public company…and partially to the company's historical inability to react to the increasing competitive nature of the business." As a private company, they wrote, the company "will be able to effect change more rapidly with fewer constraints." Circuit City said it will carefully evaluate the offer.
Meanwhile, the company announced that vice president and chief operating officer John W. Froman will resign effective March 1, 2005. Froman, 51, was appointed COO in November, 2001, and was responsible for all store operations, real estate, construction, service, and distribution. "I will miss many things about Circuit City and the associates most of all, but I feel that now is the right time for me to step aside and pursue other challenges," said Froman. "The company has undergone a remarkable transformation over the years and I have been proud to have been a part of the Circuit City family." One can't help but wonder if part of the company's "remarkable transformation" is its lagging performance, and whether that had something to do with his departure.
On the other hand, it seems that Circuit City's online business seems to be booming—so much so that the company decided to terminate its agreement with Amazon.com, which enabled Circuit City to offer its products and services, including in-store product pickup, to Amazon's customers. "Circuitcity.com has grown tremendously since August 2001 when the agreement was announced," said Fiona Dias, president of Circuit City Direct. "We have been pleased with customer response to our own Web site and have elected to focus on growing the business through our own channel, rather than focus on the small amount of sales the relationship with Amazon.com has generated."
The redesigned circuitcity.com launched in September 2004 and offers more than one million items, including consumer electronics, music, movies, games, and downloadable content, and it features in-store pickup of most consumer electronics products. According to the plan established by Circuit City and Amazon.com, customers no longer will be able to purchase Circuit City products and services via Amazon.com after today.