FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 31, 1996
Commission File Number 1-5767
CIRCUIT CITY STORES, INC.
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 54-0493875
(State of Incorporation) (I.R.S. Employer
Identification No.)
9950 MAYLAND DRIVE, RICHMOND, VIRGINIA 23233
(Address of Principal Executive Offices and Zip Code)
(804) 527-4000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 1996
Common Stock, par value $0.50 97,911,986 Shares
An Index is included on Page 2 and a separate Index for Exhibits is
included on Page 11.
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
August 31, 1996 and February 29, 1996 3
Consolidated Statements of Earnings -
Three Months and Six Months Ended
August 31, 1996 and 1995 4
Consolidated Statements of Cash Flows -
Six Months Ended August 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7
PART II.OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share data)
<CAPTION>
Aug. 31, 1996 Feb. 29, 1996
------------- -------------
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 34,224 $ 43,704
Net accounts and notes receivable 421,789 324,395
Merchandise inventory 1,388,658 1,323,183
Deferred income taxes 10,667 26,996
Prepaid expenses and other current assets 28,826 17,399
------------- -------------
Total current assets 1,884,164 1,735,677
Property and equipment, net 828,697 774,265
Other assets 17,881 16,080
------------- -------------
TOTAL ASSETS $2,730,742 $2,526,022
---========== ---==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,462 $ 1,436
Accounts payable 714,997 604,488
Short-term debt 175,461 92,087
Accrued expenses and other current liabilities 91,864 133,164
------------- ------------
Total current liabilities 983,784 831,175
Long-term debt, excluding current installments 429,501 399,161
Deferred revenue and other liabilities 184,054 214,001
Deferred income taxes 19,194 17,764
------------- -------------
TOTAL LIABILITIES 1,616,533 1,462,101
------------- -------------
Stockholders' equity:
Common stock, $0.50 par value; 250,000,000 shares authorized;
97,910,000 shares issued and outstanding, August 31, 1996 48,955 48,690
Capital in excess of par value 98,433 90,432
Retained earnings 966,821 924,799
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,114,209 1,063,921
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $2,730,742 $2,526,022
---========== ---==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings (Unaudited)
(Amounts in thousands except per share data)
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
1996 1995 1996 1995
------------ ----------- ------------ -----------
<S> <C>
Net sales and operating revenues $1,767,043 $1,600,805 $3,382,309 $2,992,463
Cost of sales, buying and warehousing 1,370,715 1,232,513 2,623,711 2,304,285
---------- ---------- ---------- ----------
Gross profit 396,328 368,292 758,598 688,178
---------- ---------- ---------- ----------
Selling, general and administrative expenses 340,871 298,158 669,386 574,808
Interest expense 4,557 4,174 11,226 8,017
---------- ---------- ---------- ----------
Total expenses 345,428 302,332 680,612 582,825
---------- ---------- ---------- ----------
Earnings before income taxes 50,900 65,960 77,986 105,353
Provision for income taxes 19,317 24,714 29,620 39,489
---------- ---------- ---------- ----------
Net earnings $ 31,583 $ 41,246 $ 48,366 $ 65,864
=========== ============ ============ ============
Weighted average common shares
and common share equivalents 99,403 98,814 99,292 98,672
=========== ============ ============ ============
Net earnings per share $ 0.32 $ 0.42 $ 0.49 $ 0.67
=========== ============ ============ ============
Dividends paid per common share $ 0.035 $ 0.030 $ 0.065 $ 0.055
=========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
<CAPTION>
Six Months Ended
August 31,
1996 1995
---------- ---------
<S> <C>
Operating Activities:
Net earnings $ 48,366 $ 65,864
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 48,797 38,296
(Gain) loss on sales of property and equipment (2,088) 2,732
Provision for deferred income taxes 17,759 8,845
Decrease in deferred revenue and other liabilities (29,947) (31,012)
Increase in net accounts and notes receivable (97,394) (160,359)
Increase in merchandise inventory, prepaid expenses
and other current assets (76,902) (261,405)
Increase in other assets (1,801) (3,136)
Increase in accounts payable, accrued expenses
and other current liabilities 69,209 120,342
---------- ---------
Net cash used in operating activities (24,001) (219,833)
---------- ---------
Investing Activities:
Purchases of property and equipment (227,182) (245,409)
Proceeds from sales of property and equipment 126,041 81,784
---------- ---------
Net cash used in investing activities (101,141) (163,625)
---------- ---------
Financing Activities:
Proceeds from issuance of short-term debt 83,374 260,000
Proceeds from issuance of long-term debt 31,311 122,000
Principal payments on long-term debt (945) (978)
Proceeds from issuance of common stock, net 8,266 7,392
Dividends paid (6,344) (5,329)
---------- ---------
Net cash provided by financing activities 115,662 383,085
---------- ---------
Decrease in cash and cash equivalents (9,480) (373)
Cash and cash equivalents at beginning of year 43,704 46,962
---------- ---------
Cash and cash equivalents at end of period $ 34,224 $ 46,589
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Consolidated Financial Statements
The consolidated financial statements of Circuit City Stores, Inc.
and its subsidiaries (the Company) conform to generally accepted
accounting principles. The interim period financial statements are
unaudited; however, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair presentation of the interim consolidated financial statements
have been included. The fiscal year-end balance sheet data was
derived from audited financial statements. The consolidated financial
statements included herein should be read in conjunction with the
notes to consolidated financial statements included in the Company's
1996 annual report to stockholders.
2. Debt
On June 14, 1996, the Company completed a five-year $130 million
senior unsecured term loan agreement with a group of banks. Principal
is due in full at maturity with interest payable periodically at
LIBOR plus 0.35 percent.
On August 31, 1996, the Company entered into a multi-year, $150
million unsecured revolving credit agreement with a group of banks.
This facility replaced a similar $100 million facility.
3. Interest Rate Swaps
Recording the Company's interest rate swaps at fair value at August
31, 1996, would result in a gain of approximately $13.9 million
compared to a gain of $16.6 million at February 29, 1996. The
notional amount of the swaps was approximately $539 million at August
31, 1996, and $550 million at February 29, 1996.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales and Operating Revenues and General Comments
Sales for the second quarter of fiscal 1997 were $1.77 billion, an
increase of 10 percent from $1.60 billion in the same period last year.
Sales for the first half of fiscal 1997 were $3.38 billion, an increase of
13 percent from sales of $2.99 billion in the same period last year. The
total sales increase reflects the continued growth of the Company's
Circuit City and CarMax concepts, partly offset by a Circuit City
comparable store sales decrease.
Circuit City comparable store sales increases (decreases) for the second
quarter and first six months of fiscal years 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
FY '97 2nd Quarter Six Months
------------------------------------- ----------------------------------- -----------------------------------
JUN JUL AUG FY '97 FY '96 FY '97 FY '96
----------- ----------- ------------- ------------------ ---------------- ------------------ ----------------
<S> <C>
(3%) (11%) (6%) (7%) 10% (6%) 10%
----------- ----------- ------------- ------------------ ---------------- ------------------ ----------------
</TABLE>
The second quarter comparable store sales results were below Management's
expectations and reflected the slowing in industry sales that began in
last year's second half, the resulting intensity in the competitive
climate and strong prior year comparisons. Management expects that lower
prior year comparable store sales results will produce improved sales
comparisons during the second half of fiscal 1997, but slow industry sales
and competitive pricing are likely to constrain growth for all retailers
in the segment.
During the quarter, the Company opened seven new Circuit City Superstores
and replaced three stores with larger locations. The Company opened stores
in Denver and Colorado Springs, Colo.; Atlanta, Ga.; Los Angeles, Calif.;
Salt Lake City, Utah; Seattle, Wash.; and Greenville, N.C. By the end of
the first half, the Company had opened 15 Superstores and replaced or
expanded eight. By fiscal year-end, the Company plans to have opened 65
Superstores and replaced 15 to 20 existing stores.
The table below details Circuit City retail units:
<TABLE>
<CAPTION>
Stores Open At End of Quarter Estimate
--------------------------------------------
Aug. 31, 1996 Aug. 31, 1995 Feb. 28, 1997 Feb. 29, 1996
----------------------------------------------------------------------------------------------------------
Superstore
<S> <C>
"D" Superstore 76 29 93 61
-------------- --------------- ------------- -------------
"C" Superstore 258 260 279 259
-------------- --------------- ------------- -------------
"B" Superstore 47 39 54 46
-------------- --------------- ------------- -------------
"A" Superstore 12 7 17 12
-------------- --------------- ------------- -------------
Electronics-Only 5 5 5 5
-------------- --------------- ------------- -------------
Circuit City Express 41 32 47 36
-------------- --------------- ------------- -------------
TOTAL 439 372 495 419
============== =============== ============= =============
</TABLE>
In mid-June, the Company announced a five-year expansion plan for CarMax, the
Company's automotive retail concept. The Company currently operates five CarMax
stores. By calendar year 2001, the Company expects to be operating 80 to 90
CarMax stores. In the current fiscal year, the Company expects to enter the
Orlando and Tampa, Fla., markets. In fiscal 1998, the Company plans to open
another eight to 10 CarMax locations and, thereafter, to accelerate the opening
program by adding 15 to 20 stores per year.
For the Company's Circuit City business, gross dollar sales from all extended
warranty programs rose to 6.2 percent of sales in the second quarter of fiscal
year 1997 from 6.0 percent in the same period last year. Third-party warranty
revenue rose to 3.7 percent of sales in this year's second quarter from 3.0
percent in the same period last year. The total extended warranty revenue that
is reported in total sales was 5.5 percent of sales in this year's second
quarter versus 5.4 percent in the second quarter of last year.
Total sales by merchandise categories are listed below:
<TABLE>
<CAPTION>
2nd Quarter Six Months
--------------------------------------------------------------------
Fiscal 1997 Fiscal 1996 Fiscal 1997 Fiscal 1996
--------------------------------------------------------------------------------------------------
<S> <C>
TV 17% 16% 17% 16%
--------------------------------------------------------------------------------------------------
VCR/Camcorders 14 13 14 14
--------------------------------------------------------------------------------------------------
Audio * 17 19 18 19
--------------------------------------------------------------------------------------------------
Home Office 23 24 23 24
--------------------------------------------------------------------------------------------------
Appliances 19 18 18 17
--------------------------------------------------------------------------------------------------
Other * 10 10 10 10
--------------------------------------------------------------------------------------------------
TOTAL 100% 100% 100% 100%
==================================================================================================
</TABLE>
*In the fourth quarter of fiscal 1996, the Company moved cellular
phones from the "Audio" category to the "Other" category and
moved certain audio products from the "Other" category to the
"Audio" category. Sales of these products have been reclassified
for the prior year quarters.
The Company's operations, in common with other retailers in general, are subject
to seasonal influences. Historically, the Company has realized more of its net
sales and net earnings in the final fiscal quarter, which includes the Christmas
season, than in any other fiscal quarter. The net earnings of any interim
quarter are seasonally disproportionate to net sales since administrative and
certain operating expenses remain relatively constant during the year.
Therefore, interim results should not be relied upon as necessarily indicative
of results for the entire fiscal year.
Cost of Sales, Buying and Warehousing
The gross profit margin decreased to 22.4 percent of sales in the second quarter
of fiscal 1997 from 23.0 percent in the same period last year. The gross margins
for the six months ended August 31, 1996 and 1995, were also 22.4 percent and
23.0 percent, respectively.
Partly in reaction to weak industry sales, the promotional climate has remained
intense. The lower margin reflects this promotional intensity and increased
CarMax sales. Management expects that these factors will continue to lower
margins on a year-over-year basis.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expense ratio increased from
18.6 percent of sales in the second quarter of last year to 19.3 percent for the
same period this year. For the six-month period ended August 31, 1996, the
expense ratio was 19.8 percent versus 19.2 percent in the same period last year.
The increase primarily reflects the impact of lower comparable store sales,
partly offset by the increased contribution from the credit card bank subsidiary
and the lower cost structure for CarMax.
Income Taxes
The effective income tax rate was 38.0 percent in the second quarter and first
six months of fiscal 1997 versus 37.5 percent in the same periods last year.
Management expects the effective rate to remain at 38.0 percent for the
remainder of fiscal 1997.
Net Earnings
Net earnings for the quarter ended August 31, 1996, decreased 23 percent to
$31.6 million from $41.2 million in the same period last year. Net earnings per
share declined 24 percent to 32 cents from 42 cents.
Net earnings for the six months ended August 31, 1996, were $48.4 million, a
decrease of 27 percent from $65.9 million in the same period last year. Net
earnings per share decreased 27 percent to 49 cents from 67 cents.
Because first half earnings were below expectations and the fourth fiscal
quarter is the largest contributor to the year's results, Management is cautious
in its current outlook for the second half. However, Management does anticipate
that earnings for the full fiscal year will be below initial expectations.
Liquidity and Capital Resources
Total assets at August 31, 1996, were $2,730.7 million, up $204.7 million or 8
percent since February 29, 1996. The largest contributor to the asset increase
was a $97.4 million increase in net accounts and notes receivable, primarily due
to an increase in credit card accounts generated by the Company's credit card
bank subsidiary. Inventory increased by $65.5 million to support new store
openings. Property and equipment has increased $54.4 million, largely because of
planned and completed store openings.
Accounts payable has increased $110.5 million and short-term debt has increased
$83.4 million since the end of fiscal 1996 to support new store expansion and
the purchase of inventory.
On June 14, 1996, the Company completed a five-year $130 million senior
unsecured term loan agreement with a group of banks. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.35 percent. The
proceeds will be used for general corporate purposes.
<PAGE>
The Company's credit card bank subsidiary has a master trust securitization
facility for its private-label credit card that allows the transfer of up to
$1.06 billion in receivables through private placement and the public market.
The master trust vehicle permits further expansion of the securitization program
to meet future needs. In addition, the Company's credit card bank subsidiary has
an asset securitization program that allows the transfer of up to $1.20 billion
in receivables related to its other bank card programs. The Company also has an
asset securitization program that allows the transfer of up to $150 million in
auto loan receivables. The Company anticipates that it will be able to expand
its securitization programs to meet future needs.
The Company expects to continue its existing long-term capitalization strategy
during fiscal 1997. Management anticipates that capital expenditures will be
funded through a combination of internally generated funds, sale-leaseback
transactions, operating leases and proceeds of the recent long-term debt
agreement and that securitization transactions will be used to finance the
growth in credit card and auto loan receivables. In addition, Management is
considering other capitalization alternatives related to CarMax expansion. On
August 31, 1996, the Company entered into a multi-year, $150 million unsecured
revolving credit agreement with a group of banks, replacing a similar $100
million facility, and held $410 million in seasonal lines that are renewed
annually with various banks.
Forward-Looking Statements
This report contains forward-looking statements, which are subject to risks and
uncertainties, including, but not limited to, risks associated with the
development of a new retail concept. Additional discussion of factors that could
cause actual results to differ materially from Management's projections,
forecasts, estimates and expectations is contained in the Company's 1996 Annual
Report on Form 10-K.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Index to Exhibits:
(4) $150,000,000 Credit Agreement dated August 31, 1996,
between the Company, Crestar Bank as agent, and the banks
named therein. Pursuant to Item 601(b)(4)(iii) of
Regulation S-K, in lieu of filing a copy of such
agreement, the Company agrees to furnish a copy of such
agreement to the Commission upon request.
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CIRCUIT CITY STORES, INC.
By: s/Richard L. Sharp
Richard L. Sharp
Chairman of the Board,
President and
Chief Executive Officer
By: s/Michael T. Chalifoux
Michael T. Chalifoux
Senior Vice President,
Chief Financial Officer and
Corporate Secretary
By: s/Philip J. Dunn
Philip J. Dunn
Vice President, Treasurer
and Chief Accounting Officer
October 11, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> AUG-31-1996
<CASH> 34,224
<SECURITIES> 0
<RECEIVABLES> 421,789
<ALLOWANCES> 0
<INVENTORY> 1,388,658
<CURRENT-ASSETS> 1,884,164
<PP&E> 1,138,367
<DEPRECIATION> 309,670
<TOTAL-ASSETS> 2,730,742
<CURRENT-LIABILITIES> 983,784
<BONDS> 429,501
0
0
<COMMON> 48,955
<OTHER-SE> 1,065,254
<TOTAL-LIABILITY-AND-EQUITY> 2,730,742
<SALES> 3,382,309
<TOTAL-REVENUES> 3,382,309
<CGS> 2,623,711
<TOTAL-COSTS> 2,623,711
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,226
<INCOME-PRETAX> 77,986
<INCOME-TAX> 29,620
<INCOME-CONTINUING> 48,366
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,366
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
</TABLE>
