Monday, December 24, 2007

Ahead of the Bell: Circuit City (AP)

Analysts said Monday that the next few years are likely to be hard for Circuit City Stores Inc., which plunged following a large third-quarter loss. On Friday, the electronics retailer reported a much larger loss than analysts expected, partly due to weak sales of accessories and warranties, and it forecast a small loss in the fourth quarter. Shares dove 28.7 percent on the day, closing at a four-year low of $4.75. Goldman Sachs analyst Matthew Fassler said Circuit City is opening new stores and taking on more debt. He did not approve of the risks involved in that strategy. "The company is betting that its new units will produce before its existing stores deteriorate to untenable levels, and, moreover, that its problems reflect poor real estate, as opposed to being endemic to the core of the organization," he said. "We view this as unwise." Fassler kept a "Neutral" rating on the stock, and cut his price target to $5.50 per share from $9. He now forecasts losses for Circuit City in 2008 and 2009. Analyst Mike Baker of Deutsche Bank differed, saying real estate is a major problem for Circuit City. He said the company suffers from bad floor plans at its 400 oldest stores, many of which are in unattractive locations. "These lead to weak sales per foot, necessitating a lower cost structure, meaning that Circuit City must sacrifice customer service," he said. "This then leads to share loss." Circuit City is moving its stores to better locations, he said, but that will happen slowly because it must wait for leases to expire. Baker cut his price target to $5 per share from $9.

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