Several firms are commenting on Circuit City (NYSE:CC) after the CE player slashed its FQ108 guidance and withdraw its previously issued guidance for FY08. We have at least one firm taking their rating down with several firms issuing cautious comments on competitor Best Buy (NYSE:BBY).
- Bear Stearns CC experienced below plan sales in April primarily related to a fall off in unit demand for large flat panel and projection TVs. CC admitted that BBY is taking share, as the firm expected it would in 1H. However, CC would not attribute the slowdown to the replacement of 3,400 employees. But, the falloff is far too coincidental. While they expected top line volatility, they did not foresee such a steep decline; lowering 1Q comp to (8%) from (4%).
Nonetheless, the firm believes that there is a broader consumer trend at work (maybe 60% macro, 40% co-specific).Indeed, CC's announcement fits with similar sentiment from TGT, WMT, and ODP. They are in the process of looking at their BBY comp. Firm expects consumer stocks to face continued headwinds in the near term.
Bear believes that CC has more positive catalysts than negative, particularly at $16, where it was indicated after hours. These include: 1) the announcement of a new CFO; 2) the details of the next wave of restructuring; and 3) the potential sale of InterTAN. Finally, they believe that CC remains a viable target for private equity and believe that the board will feel increased pressure to explore its alternatives.
At $16, CC will be trading at 5.9x on an EV/EBITDA basis; it will have a 0.16x EV/sales ratio, a 7.5% FCF yield, and cash will represent an estimated 25% of its mkt cap. While the firm would not be surprised to see some downgrades, they find it difficult to do so after considering these factors. Maintains Outperform.
Notablecalls: CC looks to be caught between the rock and a hard place. On one hand there's the weakening macro situation, on other hand there's strong competition from BBY, liquidations of CompUSA and Tweeter and the apparent internal turmoil (labor changes). Let's review these:
- Macro probably accounts for 40-50% of the shortfall. That's something already echoed by TGT, ODP over the past couple of weeks.
- Competition from BBY is certainly not news. There had been some analyst chatter of CC losing significant share in the critical large screen TV category. In fact, weakness in large screen flat panels was cited as one of the main reasons for the shortfall by the management.
- CompUSA and Tweeter liquidations? Known already.
- The internal turmoil. CC is in the proccess of replacing 3000 of its highest paid associates. This is bound to have an impact on the general customer service levels, thus providing BBY to capture some additional market share.
So, most of the problems were already known. With the stock down 50% from its peak in 2006 and cash representing 25-30% of its market cap, one could argue most of the problems are already priced in. Note that the last time CC made drastic changes to store labor compensation in February 2003, the stock wasn't far from its bottom.
I suspect the stock will open around $15.50 today and will take another quick $0.50 haircut. That's when it becomes buyable for a bounce.
The situation in BBY is also an interesting one. The stock is likely to get hit today (as down $0.50 in after hours action) as fears of general CE retail slowdown spread. Note that it was only April 4 when CC guided for FY08. 26 days later they warn. This indicates that most of the problems are company/competition specific as trends in demand do not change that quickly. This may mean BBY actually took business from CC.
Note that BBY is expected to file its 10-K during the week of May 6. They are likely to update their guidance and if they reiterate the guidance given on April 4, there will likely be a nice short squeeze. Citigroup's Retailing team called BBY after CC's announcement and was informed by BBY that BBY had not seen material changes from their expectation, and they will not revise their guidance.
All in all, I expect BBY to get hit today but would be bidding it around $45 for a bounce.
- Bear Stearns CC experienced below plan sales in April primarily related to a fall off in unit demand for large flat panel and projection TVs. CC admitted that BBY is taking share, as the firm expected it would in 1H. However, CC would not attribute the slowdown to the replacement of 3,400 employees. But, the falloff is far too coincidental. While they expected top line volatility, they did not foresee such a steep decline; lowering 1Q comp to (8%) from (4%).
Nonetheless, the firm believes that there is a broader consumer trend at work (maybe 60% macro, 40% co-specific).Indeed, CC's announcement fits with similar sentiment from TGT, WMT, and ODP. They are in the process of looking at their BBY comp. Firm expects consumer stocks to face continued headwinds in the near term.
Bear believes that CC has more positive catalysts than negative, particularly at $16, where it was indicated after hours. These include: 1) the announcement of a new CFO; 2) the details of the next wave of restructuring; and 3) the potential sale of InterTAN. Finally, they believe that CC remains a viable target for private equity and believe that the board will feel increased pressure to explore its alternatives.
At $16, CC will be trading at 5.9x on an EV/EBITDA basis; it will have a 0.16x EV/sales ratio, a 7.5% FCF yield, and cash will represent an estimated 25% of its mkt cap. While the firm would not be surprised to see some downgrades, they find it difficult to do so after considering these factors. Maintains Outperform.
Notablecalls: CC looks to be caught between the rock and a hard place. On one hand there's the weakening macro situation, on other hand there's strong competition from BBY, liquidations of CompUSA and Tweeter and the apparent internal turmoil (labor changes). Let's review these:
- Macro probably accounts for 40-50% of the shortfall. That's something already echoed by TGT, ODP over the past couple of weeks.
- Competition from BBY is certainly not news. There had been some analyst chatter of CC losing significant share in the critical large screen TV category. In fact, weakness in large screen flat panels was cited as one of the main reasons for the shortfall by the management.
- CompUSA and Tweeter liquidations? Known already.
- The internal turmoil. CC is in the proccess of replacing 3000 of its highest paid associates. This is bound to have an impact on the general customer service levels, thus providing BBY to capture some additional market share.
So, most of the problems were already known. With the stock down 50% from its peak in 2006 and cash representing 25-30% of its market cap, one could argue most of the problems are already priced in. Note that the last time CC made drastic changes to store labor compensation in February 2003, the stock wasn't far from its bottom.
I suspect the stock will open around $15.50 today and will take another quick $0.50 haircut. That's when it becomes buyable for a bounce.
The situation in BBY is also an interesting one. The stock is likely to get hit today (as down $0.50 in after hours action) as fears of general CE retail slowdown spread. Note that it was only April 4 when CC guided for FY08. 26 days later they warn. This indicates that most of the problems are company/competition specific as trends in demand do not change that quickly. This may mean BBY actually took business from CC.
Note that BBY is expected to file its 10-K during the week of May 6. They are likely to update their guidance and if they reiterate the guidance given on April 4, there will likely be a nice short squeeze. Citigroup's Retailing team called BBY after CC's announcement and was informed by BBY that BBY had not seen material changes from their expectation, and they will not revise their guidance.
All in all, I expect BBY to get hit today but would be bidding it around $45 for a bounce.
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