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Circuit City Shares Not a Best Buy; Verizon Payoff on Horizon

August 22, 2000|JAMES PELTZ and MICHAEL HILTZIK | Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks

Circuit City Stores (CC)

Jim: Don't buy

Mike: Don't buy

Mike: This company reminds me of those old commercials where they'd ask: "Is this a breath mint or a candy mint?"

Jim: I can't wait to see where this goes. Your meaning?

Mike: Well, the ads used to say "both," but to me Circuit City might be neither. The merchandising strategy at this company seems to be a mystery to its own management. Is it an appliance retailer or an electronics store or something completely different? I'm referring, for starters, to its recent decision to stop selling major appliances and focus on its core electronics goods.

Jim: Right, plus Circuit City now plans to change how its people actually sell the products to customers when they walk in.

Mike: We'll get to that. Let me also note that this company had the brainstorm one day that since it sells TVs and stereos and refrigerators to people, what would make more sense than selling them used cars?

Jim: We'll get to that too.

Mike: Boy, we've got a lot to get to. Where do we start?

Jim: Well, Circuit City was one of the original "big box" retailers for consumer electronics . . .

Mike: Except all the boxes were someplace out in back.

Jim: We'll get to that too! Anyway, the chain now has more than 600 stores, but for the past three years this outfit and its stock have been short-circuiting all over the place. I attribute much of that to a competitor called Best Buy, which stole a lot of Circuit City's thunder.

Mike: That's right. The stocks of these two retailers have diverged the way a muon particle diverges from an atomic nucleus.

Jim: Took the words right out of my mouth. In the last three years, Circuit City's stock is up about 50%, but Best Buy's stock has skyrocketed 22-fold.

Mike: And what's mystifying is that these companies basically sell the same stuff, so on the surface the stores should be interchangeable. Yet I would go to Best Buy even though there's a Circuit City just three paces away.

Jim: Why?

Mike: Best Buy seems to have more merchandise, the prices are better and it's a much easier shopping experience. Which brings us to one of those things we promised to get to.

Jim: You're referring to how Circuit City kept most of its products in the back, with the stuff up front just for display. So if you bought, say, a portable telephone, you had to stand there while one of the salespeople went to fetch it.

Mike: Well, first you had to track down a salesperson, wrestle him to the floor, drag him by the ear to the stand where your product was displayed, send him out back to get it and then wait while you tapped your foot in frustration. What is this?

Jim: It's ridiculous, that's what. So now Circuit City says it's doing away with all that nonsense, and it's getting out of big appliances. That business accounted for about 14% of Circuit City's total sales, but it was getting ripped by the likes of Home Depot, Lowe's and Sears, Roebuck.

Mike: Circuit City was also shyer about offering those aggressive promotional deals on appliances that are so common elsewhere--you know, no payments for 18 months, and so on. Yes, they're costly, but they move merchandise. Circuit City decided it was above all that, and so its sales languished. Now guess what? It's doing the same promotions, I guess to clear out what appliance inventory it has left.

Jim: Circuit City also is remodeling a lot of its stores, which won't come cheap. And there's that other division we promised we'd get to: CarMax. It's a chain of some 40 superstores that sells used cars, and it's majority owned by Circuit City. The minority interest is held by the public, and CarMax's stock symbol is KMX. But I don't see this operation as a big growth engine for Circuit City.

Mike: No. Although CarMax is modestly profitable--I use modest with a lowercase "m"--I'm wondering if the used-car business is much good these days in any case, given how much money people have and how aggressively new cars are being marketed.

Jim: The other day CarMax actually raised its earnings and sales forecast, which gave its stock a bump. In fact, it's climbed all the way to $4.50 a share from a paltry $2 or so. But as for Circuit City's stock, it ran up nicely after the holiday selling season and then dropped like a stone. At $26 or so, it's lost more than a third of its value so far this year. And I wouldn't buy it.

Mike: Me neither. There's reason to be nervous going forward, because this sort of retailing isn't only seasonal, it's cyclical.

Jim: Meaning it varies with the state of the economy.

Mike: Right, and it's not a bad bet to say we're closer to the end of our strong economic cycle than to the beginning. The star of this group is Best Buy, which we've recommended. Circuit City has been a laggard, and unless you believe lightning is going to strike and it's going to get a fast turnaround, I wouldn't buy the stock.

Verizon Communications (VZ)

Jim: Buy

Mike: Buy

Jim: Now, Mike, here's a telecommunications colossus that seems to be tripping all over itself.

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