.bodytext {float: left; } .floatimg-left-hort { float:left; margin-top:10px; margin-right: 10px; width:300px; clear:left;} .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 12px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 12px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 12px; } .floatimgright-sidebar { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} tr.d0 td { background-color: #ccccff; color: black; }
Dear Mr. Berko:

B.R., Vancouver, Wash.

Dear B.R.:

Thank you for your two letters and this e-mail. Please understand that I receive about 400 letters a week, and last year it cost me more than $8,000 to mail those answers. Some readers enclose a stamped, self-addressed envelope, and my reply is zipped back quick as a bunny.

Circuit City Stores Inc. (CC-$3.69), a $12.5 billion retailer of consumer electronics, video and audio equipment and office electronics, is run by Phil Schoonover, chairman of the board, the big cheese, chief executive officer and president. This is the same man who, with board approval in May of last year, fired the company’s top 3,800 salespeople because they were earning too much money. Brian Dunn, president of the enormously profitable Best Buy Co. Inc. (BBY-$40.21), quietly commented that Schoonover “should have fired 3,800 of his lowest-earning salespeople.”

CC and BBY are in the same business; they retail identical products in many of the same cities at similar prices through nearly the same number of outlets. Last year, BBY had $39 billion in revenues from 1,100 locations and earned about $3 a share with net profit margins of 3.7 percent. Best Buy is going to be around for a long, long time. CC lost money last year on $12.5 billion in revenues from 800 locations, and the suits on the Street tell us that CC will lose money again this year. Considering the questionable quality of CC’s management team and board of directors, I’m not sanguine about Circuit City’s long-term staying power.

The real difference between CC and BBY is management; Schoonover and his team of slobbering sycophants couldn’t make a dime selling cold, $10 Cokes to thirsty trekkers in the Sahara. Certainly proof of the pudding is in the income statement numbers. CC’s net profit margins since 2002 have averaged less than 0.5 percent. BBY’s margins exceed 3.5 percent. In other words Best Buy, with $1.2 billion in debt, earns seven times more per $1 of revenue than does Circuit City, which has almost zero debt.

Last year, BBY increased its quarterly dividend and announced a $5.5 billion share-repurchase program. And last year, CC’s dissolute, effete management team pink-slipped 3,800 of its best sales associates and began a nationwide cost-cutting program, all of which makes as much sense as putting perfume on a hog.

According to Value Line, Goldman Sachs, CIBC World Markets and Standard & Poor’s, CC’s business model is seriously flawed and so out of touch with the market that the company is in danger of slow-motion implosion. The survival of Circuit City is at stake because of Schoonover’s mulish attitude and his board’s refusal to admit that their business model is a catastrophe. Even the analysts at Goldman Sachs (it owns 14.4 percent) and Fidelity (owns 12 percent) can’t overcome Schoonover’s stubbornness or CC’s wrongheaded and overly prideful board of directors.

Here are some possible scenarios for this company.

1. A possible stockholders’ revolt to remove the mold and rot from the executive suite and boardroom.

2. Circuit City might just muddle along, molt, wither and shrivel like Cost Plus Inc. (CPWM-$3.42) and eventually fade away into the ethers.

3. A gallant white knight could canter to the rescue, shovel the stink and stench from the boardroom and executive suite, then install a new management team.

4. The company could dissolve itself, sell various locations to competitors, pay off its lease obligations and accounts payable and share the remaining cash with stockholders — which could be between $7 and $10 a share.

Because I think management has left its pancakes on the griddle too long, option No. 4 may be the most likely scenario. I suggest that you purchase another 1,000 shares at the current price and 31 days later sell the 1,000 you bought at $21 for a tax loss. The 1,000 shares at today’s price are backed by a book value between $8 and $11, which could accrue to you in the next two years if the white knight has courage, a sharp sword and a good shield.