Circuit City’s Drop in Profit Signals Troubles in General at Electronics Stores

Call it static that’s marring the financial picture for consumer electronics stores.

Circuit City Stores Inc. on Tuesday provided the latest evidence that sellers of stereos, CD players and home computers continue to struggle in the face of lackluster consumer spending and their own price-cutting habits.

The Richmond, Va.-based chain of more than 400 stores said profit for its second quarter ending Aug. 31 will probably plunge more than 30% from a year earlier, just as it did in the first quarter.

Circuit City made its prediction after noting that its July “same-store” sales--sales at outlets open at least a year, and the retail industry’s key gauge of revenue trends--had tumbled 11% from a year earlier.

Circuit City Chairman Richard L. Sharp said the “soft sales and intense promotions” that led to the declines “have remained relatively unchanged” since early March.

“No matter how you slice it, the sales are disappointing,” added Scott Emerman, retail analyst with Dean Witter Reynolds Inc. in New York.

It’s a problem that has troubled the retail electronics industry for several months.

Consider:

* Good Guys, a San Francisco-based operator of 75 stores, two weeks ago posted a $3.4-million loss for its fiscal third quarter, contrasted with a year-earlier profit of $2.2 million.

* Best Buy, a rapidly growing chain based in Minneapolis, eked out a $409,000 profit in its first quarter ended June 1, compared with $4.7 million a year earlier. Also, Standard & Poor’s downgraded its rating of Best Buy’s debt last month, citing the “high business risk” of consumer electronics.

* The stocks of Circuit City, Good Guys and Best Buy have all fallen sharply during the last two months.

* In March, Encino-based L.A. Tronics shut down, saying its five Southern California stores could not compete against Circuit City and the others.

* Adray’s, an electronics retailer in Southern California for three decades, has closed five of its 10 stores and stopped selling personal computers.

All of which reflects two main problems troubling the retailers. First, consumer spending on electronics is sluggish, particularly for such items as audio components, which haven’t had any “gee-whiz” product innovations lately--such as the CD player--that would help bring shoppers into stores, analysts said. Also, overall spending is weak in large part “because consumers are pretty tapped out credit-wise,” said Cody McGarraugh, an analyst with the brokerage firm Scott & Stringfellow Inc. in Richmond, Va.

Second, retailers are slashing prices or offering promotions to grab what sales they can from their rivals. The idea is to protect their market share, but such actions erode their profits. It’s a practice often used by airlines, computer makers and others when sales taper off.

“You have a lot of retailers chasing the same amount of consumer electronics dollars,” McGarraugh said.

And it’s not just the “pure” electronics retailers that are fighting each other. Mass merchandisers such as Sears, Roebuck & Co. also are big purveyors of consumer electronics, and specialty chains such as CompUSA are battling for personal computer sales.

Circuit City acknowledged that price cuts damage its earnings, but spokeswoman Ann Collier said the company will keep discounting items or offering promotions “to be highly competitive.”

Nor does Circuit City have plans to scale back new-store openings, she said, even though the additional stores add to the company’s fixed costs.

With more stores, “they think they can take business away from each other,” McGarraugh said.

And analysts said that although big chains like Circuit City might be suffering profit declines now, the chains’ expansion plans and their ability to better absorb price cuts means that the small, regional stores will be the ultimate victims.

“You’ll continue to see consolidation and a shakeout,” Emerman said.

“The better operators like Circuit City and Best Buy with a national scope . . . will continue to gain market share at the expense of mom-and-pop stores.”