Tag: CC

The devil is always in the details……..

Circuit City (CC) reported fiscal fourth quarter (Feb.) earnings of $0.10 per share, excluding non-recurring items, $0.17 better than the First Call consensus that called for a loss of $0.07. Revenues fell 7.7% year-over-year to $3.65 billion versus the $3.79 billion consensus estimate. GAAP EPS was $.03 a share vs a loss vs $.04 last year. Great right? Look closer….

I like to look at the results from “continuing operations”. It gives me the best snapshot as to the health of the operating business before the accountants and tax collectors get in there and muddle the picture. That being said, in 2007 CC posted a Q4 profit if $27 million from operations. But, in the same quarter of 2008, that plummeted to a LOSS of $2.7 million. So, how did CC then post a profit in its press release?

“For the fourth quarter of fiscal 2008, the company recorded an income tax benefit of $7.3 million. For the fourth quarter of fiscal 2007, income tax expense was $34.3 million.”

There you have it, the reason for both the loss last years and this years gains. The illusion is that last year was worse than this but the reality is the opposite. Operations have deteriorated markedly with same store sales plummeting 11%, margins shrinking and results from operations decimated. Yet, due to a nifty tax benefit, results look nice to the naked eye…

The bottom line is despite what management may say, operationally, the company is deteriorating, fast.

Here is a pdf of the full release:

Disclosure (“none” means no position):None

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The devil is always in the details……..

Circuit City (CC) reported fiscal fourth quarter (Feb.) earnings of $0.10 per share, excluding non-recurring items, $0.17 better than the First Call consensus that called for a loss of $0.07. Revenues fell 7.7% year-over-year to $3.65 billion versus the $3.79 billion consensus estimate. GAAP EPS was $.03 a share vs a loss vs $.04 last year. Great right? Look closer….

I like to look at the results from “continuing operations”. It gives me the best snapshot as to the health of the operating business before the accountants and tax collectors get in there and muddle the picture. That being said, in 2007 CC posted a Q4 profit if $27 million from operations. But, in the same quarter of 2008, that plummeted to a LOSS of $2.7 million. So, how did CC then post a profit in its press release?

“For the fourth quarter of fiscal 2008, the company recorded an income tax benefit of $7.3 million. For the fourth quarter of fiscal 2007, income tax expense was $34.3 million.”

There you have it, the reason for both the loss last years and this years gains. The illusion is that last year was worse than this but the reality is the opposite. Operations have deteriorated markedly with same store sales plummeting 11%, margins shrinking and results from operations decimated. Yet, due to a nifty tax benefit, results look nice to the naked eye…

The bottom line is despite what management may say, operationally, the company is deteriorating, fast.

Here is a pdf of the full release:

Disclosure (“none” means no position):None

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Circuit City’s (CC) Board responded to Mark Wattles demands today.

In said letter they said (letter below):

April 4, 2008

Mark J. Wattles
Wattles Capital Management, LLC
7945 W. Sahara Avenue, Suite 205
Las Vegas, NV 89117

Dear Mark:

We have received your letter of April 2, 2008, in which you indicate that you would like to meet with the Circuit City Board of Directors or with its lead director to discuss your views regarding Circuit City. I will contact you to set a mutually agreeable time.

It appears to me from your letter and certain other statements that you may not have a full understanding of the Company’s current strategy and challenges, and I think a conversation will help provide a better picture of those efforts and possibly facilitate a more productive dialogue between the Company and your firm. I also want to note that the company had previously reached out to you to set up a meeting following the year-end management quiet period or to listen to your concerns prior to our reporting date.

It was a surprise to read that you would not permit the individuals you have proposed as nominees to the Company’s Board of Directors to meet with the Nominating and Governance Committee of the Board without imposing an unusual and unreasonable condition for such a meeting. Our practice is for the Committee to evaluate director nominees proposed by shareholders in the same manner it evaluates other prospective nominees. We believe this is a very standard and appropriate process. The Board strives to select for its membership highly qualified individuals who are dedicated to advancing the interests of the Company’s shareholders and actively seeks nominees who will bring diverse talents, experiences and perspectives to the Board’s deliberations. Certainly you would agree the Board has an obligation to its shareholders to thoroughly research and personally interview potential members. This is even more true given that your proposal to remove the entire Circuit City Board would, if adopted, give your nominees absolute control of the entire Board.

I trust that we can resolve this point in a personal conversation, so that the Nominating and Governance Committee can meet the individuals you have nominated to the board, and separately look forward to the opportunity to meet with you.
Sincerely,

/s/ Mikael Salovaara
[JT]

Here is the “between the lines” on this one. Wattles is attacking both the Board and CEO Schoonover. What the board is going to do is offer up Schoonover as a sacrificial lamb to get Wattles to back off his demand to remake the Board.

Defending Schoonover is an exercise in futility as the “conditions” the company now facing are of his creation and even those who are his closest allies must realize this. If they do not, CC’s problems are deeper than anyone thinks.

They are going to go through the public pronouncements necessary to save face but when all is said and done, Schoonover is out.
That being said, we can now officially beginning the “Schoonover Reign Death Watch”

My guess is that before the month is out CC has a new CEO.

Disclosure (“none” means no position):None

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Activist Mark Wattles has had the best line to date on Circuit City’s (CC) turnaround effort.

Wattles said management “has repeatedly touted the fact that they have cut $200 million of annualized selling, general and administrative expenses while ignoring the fact that approximately $500 million of gross profit has been wiped-out in the process.”

Beautiful…

He has also nominated 5 people to the Board of Directors and a proxy fight is on.

I first wrote about CC almost a year ago now and speculated it may be a good buy-out candidate. Not soon after that I backed off that claim after watching Schoonover & Crew’s various missteps and have since said that the company is still a good buy-out candidate, but not until current management is gone.

The WJS ran a piece Thursday that said “The company has a lot of financial commitments to stores in sub-par locations. Many retailers have gone the way of all flesh. It’s a precarious industry. Their former big box stores litter the landscape like giant ruins. Circuit City could certainly follow suit. The advantage of a $4.65 share price, as speculators are wont to joke, is that you know your downside. That’s even more true of the options. There is nothing wrong with taking a flyer, so long as you know that’s what you’re doing.”

Now, to a point the author is correct in that at $4.50 a share, the downside is minimal. But, unless you buy a bunch, so is the upside. Your profit or loss is based on what your total investment is, regardless of share price.

Whether a stock is $100 or $2, really does not matter, it is the dollar amount you buy that matters. If I by 2 shares at $100 or 100 shares at $2, my investment is the same.

All that being said, I may buy the day Schoonover leaves, but not a second before. Given the current economy and his track record, $4.50 is much more likely to become $2.50 than $6.50 in the near future.

If shareholders are lucky, Wattles gets his wish….

Disclosure (“none” means no position):None

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Activist Mark Wattles has had the best line to date on Circuit City’s (CC) turnaround effort.

Wattles said management “has repeatedly touted the fact that they have cut $200 million of annualized selling, general and administrative expenses while ignoring the fact that approximately $500 million of gross profit has been wiped-out in the process.”

Beautiful…

He has also nominated 5 people to the Board of Directors and a proxy fight is on.

I first wrote about CC almost a year ago now and speculated it may be a good buy-out candidate. Not soon after that I backed off that claim after watching Schoonover & Crew’s various missteps and have since said that the company is still a good buy-out candidate, but not until current management is gone.

The WJS ran a piece Thursday that said “The company has a lot of financial commitments to stores in sub-par locations. Many retailers have gone the way of all flesh. It’s a precarious industry. Their former big box stores litter the landscape like giant ruins. Circuit City could certainly follow suit. The advantage of a $4.65 share price, as speculators are wont to joke, is that you know your downside. That’s even more true of the options. There is nothing wrong with taking a flyer, so long as you know that’s what you’re doing.”

Now, to a point the author is correct in that at $4.50 a share, the downside is minimal. But, unless you buy a bunch, so is the upside. Your profit or loss is based on what your total investment is, regardless of share price.

Whether a stock is $100 or $2, really does not matter, it is the dollar amount you buy that matters. If I by 2 shares at $100 or 100 shares at $2, my investment is the same.

All that being said, I may buy the day Schoonover leaves, but not a second before. Given the current economy and his track record, $4.50 is much more likely to become $2.50 than $6.50 in the near future.

If shareholders are lucky, Wattles gets his wish….

Disclosure (“none” means no position):None

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LeapFrog (LF) snuck this one under my radar. Thanks to Brooks for the heads up.

Leapfrog has filed for an Employee Option Exchange.

From the SEC Filing”
“On March 26, 2008, our Board of Directors approved a voluntary one-time only stock option exchange program, subject to stockholder approval. The opportunity to participate in the stock option exchange program will be offered to domestic and certain foreign employees, including our executive officers, and directors holding eligible options granted under either our 2002 Equity Incentive Plan or 2002 Non-Employee Director Stock Award Plan or under two special inducement grants awarded to our Chief Executive Officer upon his joining us. The new options granted in exchange for surrendered options will have an exercise price per share equal to the higher of (a) $7.50 or (b) $0.25 above the closing price of our Class A common stock as reported on the NYSE for the business day prior to the date the new options are granted (the “Exchange Price”). Under the program, outstanding stock options with an exercise price greater than the Exchange Price will be eligible to participate.”

While I am normally against this stuff, at least LeapFrog has the courtesy to let shareholders approve it. Again from the Proxy, “This proposal must receive a “For” vote from the holders of a majority of votes cast either in person or by proxy on the proposal, provided that the total vote cast on the proposal represents over 50% of the votes of holders entitled to vote at the annual meeting. If you “Abstain” from voting, it will have the same effect as an “Against” vote. Broker non-votes will have no effect.”

That is a good bar because essentially a no-vote is a “no vote”.

Here is the reasoning:
“Many of our employees now hold stock options with exercise prices significantly higher than the current market price of our Class A common stock. For example, on March 14, 2008, the closing price of our Class A common stock on the NYSE was $6.53 per share and the weighted average exercise price of outstanding options held by Eligible Participants was $12.74.

Consequently, as of March 14, 2008, approximately 7.1 million shares of outstanding stock options held by Eligible Participants were “underwater,” meaning that the exercise price of the outstanding stock option was less than the market price for our stock. Although we continue to believe that stock options are an important component of our employees’ total compensation, many of our employees view their existing options as having little or no value due to the difference between the exercise prices and the current market price of our common stock. As a result, for many employees, these options are ineffective at providing the incentives and retention value that our board believes are necessary to motivate our management and our employees to complete and deliver the important strategic and operational initiatives that we began implementing in late 2006 to increase long-term stockholder value.

In addition to providing key incentives to our employees, the Option Exchange Program is also designed to benefit our stockholders by reducing the potential dilution from stock option exercises in the future and by providing us better retention tools for our key contributors due to the extended vesting terms for certain of the New Options. We estimate a reduction in our overhang of outstanding stock options of approximately 2.8 million shares, assuming full participation in the Option Exchange Program, market price of $7.00 per share, an exercise price of the New Options of $7.50 per share and exchange ratios that result in the fair value of the New Options being equal to the fair value of the Eligible Options surrendered based on valuation assumptions made as of the close of the Option Exchange Program.

The actual reduction in our overhang that could result from the Option Exchange Program could vary significantly and is dependent upon a number of factors, including the actual level of participation in the Option Exchange Program.”

Now, in this case, unlike Circuit City (CC) the change does make sense. When Katz announced the restructuring plan, it was clear sales and profits would suffer in the short term. That would then, assuming the turnaround went as planned would be followed by appreciation to higher levels.

The turnaround, based on all evidence I have seen it on track to date.

All this being said, since the “plan” seems to be working, shareholders have the ultimate say and potential dilution from new hires is diminished, I do not have a problem with the way LeapFrog has structured the exchange.

Disclosure (“none” means no position):Long LF, None

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LeapFrog (LF) snuck this one under my radar. Thanks to Brooks for the heads up.

Leapfrog has filed for an Employee Option Exchange.

From the SEC Filing”
“On March 26, 2008, our Board of Directors approved a voluntary one-time only stock option exchange program, subject to stockholder approval. The opportunity to participate in the stock option exchange program will be offered to domestic and certain foreign employees, including our executive officers, and directors holding eligible options granted under either our 2002 Equity Incentive Plan or 2002 Non-Employee Director Stock Award Plan or under two special inducement grants awarded to our Chief Executive Officer upon his joining us. The new options granted in exchange for surrendered options will have an exercise price per share equal to the higher of (a) $7.50 or (b) $0.25 above the closing price of our Class A common stock as reported on the NYSE for the business day prior to the date the new options are granted (the “Exchange Price”). Under the program, outstanding stock options with an exercise price greater than the Exchange Price will be eligible to participate.”

While I am normally against this stuff, at least LeapFrog has the courtesy to let shareholders approve it. Again from the Proxy, “This proposal must receive a “For” vote from the holders of a majority of votes cast either in person or by proxy on the proposal, provided that the total vote cast on the proposal represents over 50% of the votes of holders entitled to vote at the annual meeting. If you “Abstain” from voting, it will have the same effect as an “Against” vote. Broker non-votes will have no effect.”

That is a good bar because essentially a no-vote is a “no vote”.

Here is the reasoning:
“Many of our employees now hold stock options with exercise prices significantly higher than the current market price of our Class A common stock. For example, on March 14, 2008, the closing price of our Class A common stock on the NYSE was $6.53 per share and the weighted average exercise price of outstanding options held by Eligible Participants was $12.74.

Consequently, as of March 14, 2008, approximately 7.1 million shares of outstanding stock options held by Eligible Participants were “underwater,” meaning that the exercise price of the outstanding stock option was less than the market price for our stock. Although we continue to believe that stock options are an important component of our employees’ total compensation, many of our employees view their existing options as having little or no value due to the difference between the exercise prices and the current market price of our common stock. As a result, for many employees, these options are ineffective at providing the incentives and retention value that our board believes are necessary to motivate our management and our employees to complete and deliver the important strategic and operational initiatives that we began implementing in late 2006 to increase long-term stockholder value.

In addition to providing key incentives to our employees, the Option Exchange Program is also designed to benefit our stockholders by reducing the potential dilution from stock option exercises in the future and by providing us better retention tools for our key contributors due to the extended vesting terms for certain of the New Options. We estimate a reduction in our overhang of outstanding stock options of approximately 2.8 million shares, assuming full participation in the Option Exchange Program, market price of $7.00 per share, an exercise price of the New Options of $7.50 per share and exchange ratios that result in the fair value of the New Options being equal to the fair value of the Eligible Options surrendered based on valuation assumptions made as of the close of the Option Exchange Program.

The actual reduction in our overhang that could result from the Option Exchange Program could vary significantly and is dependent upon a number of factors, including the actual level of participation in the Option Exchange Program.”

Now, in this case, unlike Circuit City (CC) the change does make sense. When Katz announced the restructuring plan, it was clear sales and profits would suffer in the short term. That would then, assuming the turnaround went as planned would be followed by appreciation to higher levels.

The turnaround, based on all evidence I have seen it on track to date.

All this being said, since the “plan” seems to be working, shareholders have the ultimate say and potential dilution from new hires is diminished, I do not have a problem with the way LeapFrog has structured the exchange.

Disclosure (“none” means no position):Long LF, None

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On March 11th Goldman Sachs (GS) made an announcement that may give light into the future of Circuit City (CC).

An analyst note removed price targets for CC’s stock saying Goldman is “acting as a financial adviser in connection with a strategic transaction that is fundamental to the reasonable analysis” of Circuit City’s stock price.

Hmm

But, Circuit City spokesman Bill Cimino said yesterday the “strategic transaction” referenced is an ongoing effort to sell the company’s InterTan unit, a Canadian electronics retailer purchased from RadioShack (RSK) in 2004.

He continued..”Last year, [the process] was put on hold for the holidays, then it started back up.” Goldman’s withdrawal of its stock rating “is really in connection with that.”

Well, if that is true, why didn’t Goldman withdraw its price targets from CC’s stock then? Shouldn’t they have done so? Why wait 6 months? It does not make sense.

The timing of investor Mark Wattles’ recent agitation and the Goldman change must leave one to think this has nothing to do with the Canadian unit. We can assume this if for no other reason than CC says it is so.

We can assume that something is in the works……

Disclosure (“none” means no position):None

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Ever see the cop shows where the crazy guy sits there with a gun to his head and shouts “take one step closer and I’ll shoot”? We now know what Circuit City (CC) CEO Phil “The Shill” Schoonover watched as a kid.

Back in February when Mark Wattles disclosed a 5% stake in the company, rumors abounded he may make a play for it. Schoonver responded by expanding the company’s credit line by $800 million to $1.3 billion with an option to add another $300 million at their convenience. It does not seem like much until you consider prior to this they had $49.7 million outstanding against the current credit facility and have total sales of a paltry $2.9 billion. Quite an increase for no apparent reason.

Clearly Schoonover was trying to protect his job by making the company unattractive as a potential investment. It should be noted here that the now almost 80% drop in the stock price had done that for scores of current investors.

Wattles then called for the a new Board of Directors and nominated his own slate.

Schoonover responded by chopping off his own feet and fired Steven Pappas the Company’s “Small Store President,” and Peter Weedfald the Chief Marketing Officer. An important note here is the $6 million bonuses approved in December to retain 10 Vice Presidents and $3 million more to retain Executive Vice presidents, including the now unemployed Pappas and Weedfald. At the time Schoonover defended the bonuses saying it was important to retain “instrumental executives”. OK

Now word is that Schoonover is seeking to pacify irate investors with a $0.04 dividend. Is he thinking that makes up for the $16 collapse in the stock price?

Now the company is being removed from the S&P 500 and index funds are dumping the stock by the truck load. Schoonover’s moves have backfired as activist funds D.E. Shaw, Royal Capital Management & HBK Investments LP, have scooped up over 15% of the shares.

I cannot wait to see Schoonover’s next move… maybe random rolling store closings until Wattles “goes away”?

Disclosure (“none” means no position):None (Thank God)

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