The benefits and drawbacks of rapid expansion in the fiercely competitive consumer electronics industry showed up in the first-quarter financial results reported Wednesday by Circuit City Stores and Federated Group.
Circuit City said it is enjoying the results of its expansion with a 32% sales increase and a 15% jump in earnings. But its competitor, Federated Group, said its growth program was primarily responsible for a 76% decline in net income.
"Superstores" such as those owned by Circuit City and Federated have become increasingly important in the consumer electronics business, forcing smaller competitors out of the market. For example, Pacific Stereo Corp. of Emeryville, Calif., filed for bankruptcy law protection in May.
For the three months ended May 31, Circuit City of Richmond, Va., had sales of $169.7 million, up from $128.2 million in the same quarter last year. Net income rose to a record $3.8 million from $3.3 million.
Pleased With Performance
Circuit City is bouncing back from three consecutive quarters of lower earnings in 1985 as it opened new stores, including 14 in Southern California, and closed 30 licensed electronics and appliance departments that it operated in Zodys discount stores.
"We remain extremely pleased with the performance of our Los Angeles superstores," President and Chief Executive Richard L. Sharp said. "Sales and profits have exceeded our projections."
Analysts said that competition from Circuit City coupled with too-rapid growth and sluggish sales in oil-shocked Texas caused the drop in Federated's earnings. For the three months ended June 1, Federated's net income dropped to $662,000 from $2.76 million during the same period in 1985. Sales rose 21% to $89.8 million from $74.3 million. Federated is based in the City of Commerce.
Federated Chairman Wilfred Schwartz said an accelerated expansion program during the last two years tripled the number of stores to 60 but hurt results during the last two quarters.
Schwartz added that the company is focusing on "restoring average volumes and increasing those volumes through internal growth." The company's new-store program has been scaled back, a Federated spokesman said.
"Real progress is being made, and the results of these efforts will become apparent during our next quarter and the balance of this current fiscal year," Schwartz said.
One analyst who follows both Circuit City and Federated said that Circuit City's new Southern California stores have much to do with Federated's lower earnings.
"There's no way they couldn't help but be hurt by Circuit City coming in, as much as Federated would like to deny it," said the analyst, who asked to remain anonymous.
Edward Weller, an analyst with E. F. Hutton, placed the blame on Federated rather than on competition from Circuit City.
Federated "expanded too fast. They didn't control their business," Weller said. "They shot themselves in the foot. They didn't need any help."
Federated Group is in the same position that Circuit City was last year because of rapid expansion, said Michael Via, an analyst with Anderson & Strudwick, a Richmond, Va., securities firm. "We tend to believe right now that Federated Group is turning the corner," he said.