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 November 30, 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 December 31, 1996
Common Stock, par value $0.50 98,008,841 Shares
An Index is included on Page 2 and a separate Index for Exhibits is
included on Page 11.
Page 1 of 12
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CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
INDEX
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Page
No.
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets -
November 30, 1996 and February 29, 1996 3
Consolidated Statements of Earnings -
Three Months and Nine Months Ended
November 30, 1996 and 1995 4
Consolidated Statements of Cash Flows -
Nine Months Ended November 30, 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
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Page 2 of 12
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<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share data)
Nov. 30, 1996 Feb. 29, 1996
------------- -------------
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,310 $ 43,704
Net accounts and notes receivable 437,514 324,395
Merchandise inventory 1,886,911 1,323,183
Deferred income taxes 12,926 26,996
Prepaid expenses and other current assets 36,112 17,399
-------------- -------------
Total current assets 2,414,773 1,735,677
Property and equipment, net 900,305 774,265
Other assets 18,452 16,080
-------------- -------------
TOTAL ASSETS $ 3,333,530 $ 2,526,022
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,466 $ 1,436
Accounts payable 904,398 604,488
Short-term debt 593,188 92,087
Accrued expenses and other current liabilities 75,296 123,789
Accrued income taxes 4,255 9,375
-------------- -------------
Total current liabilities 1,578,603 831,175
Long-term debt, excluding current installments 430,030 399,161
Deferred revenue and other liabilities 174,043 214,001
Deferred income taxes 18,389 17,764
-------------- -------------
TOTAL LIABILITIES 2,201,065 1,462,101
-------------- -------------
Stockholders' equity:
Common stock, $0.50 par value; 250,000,000 shares authorized;
97,960,000 shares issued and outstanding, November 30, 1996 48,980 48,690
Capital in excess of par value 100,303 90,432
Retained earnings 983,182 924,799
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,132,465 1,063,921
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,333,530 $ 2,526,022
============== =============
See accompanying notes to consolidated financial statements.
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Page 3 of 12
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<TABLE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings (Unaudited)
(Amounts in thousands except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
1996 1995 1996 1995
--------------- -------------- -------------- --------------
<S> <C>
Net sales and operating revenues $ 1,863,947 $ 1,783,446 $ 5,246,256 $ 4,775,909
Cost of sales, buying and warehousing 1,441,088 1,378,312 4,064,799 3,682,597
--------------- -------------- -------------- --------------
Gross profit 422,859 405,134 1,181,457 1,093,312
--------------- -------------- -------------- --------------
Selling, general and administrative expenses 381,804 346,264 1,051,190 921,072
Interest expense 9,122 8,582 20,348 16,599
--------------- -------------- -------------- --------------
Total expenses 390,926 354,846 1,071,538 937,671
--------------- -------------- -------------- --------------
Earnings before income taxes 31,933 50,288 109,919 155,641
Provision for income taxes 12,146 18,837 41,766 58,326
--------------- -------------- -------------- --------------
Net earnings $ 19,787 $ 31,451 $ 68,153 $ 97,315
=============== ============== ============== ==============
Weighted average common shares
and common share equivalents 99,489 98,750 99,335 98,549
=============== ============== ============== ==============
Net earnings per share $ 0.20 $ 0.32 $ 0.69 $ 0.99
=============== ============== ============== ==============
Dividends paid per common share $ 0.035 $ 0.030 $ 0.100 $ 0.085
=============== ============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 12
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<TABLE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Nine Months Ended
<CAPTION>
November 30,
1996 1995
------------ ------------
<S> <C>
Operating Activities:
Net Earnings $ 68,153 $ 97,315
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 74,614 60,277
(Gain) loss on sales of property and equipment (1,117) 3,856
Provision for deferred income taxes 14,695 5,211
Decrease in deferred revenue and other liabilities (39,958) (27,970)
Increase in net accounts and notes receivable (113,119) (62,982)
Increase in merchandise inventory, prepaid
expenses and other current assets (582,441) (936,021)
(Increase) decrease in other assets (2,372) 1,176
Increase in accounts payable, accrued expenses,
other current liabilities and accrued income taxes 246,297 418,997
------------ ------------
Net cash used in operating activities (335,248) (440,141)
------------ ------------
Investing Activities:
Purchases of property and equipment (400,408) (397,000)
Proceeds from sales of property and equipment 200,871 178,207
------------ ------------
Net cash used in investing activities (199,537) (218,793)
------------ ------------
Financing Activities:
Proceeds from issuance of short-term debt 501,101 435,000
Proceeds from issuance of long-term debt 32,088 222,000
Principal payments on long-term debt (1,189) (2,158)
Proceeds from issuance of common stock, net 10,161 11,335
Dividends paid (9,770) (8,244)
------------ ------------
Net cash provided by financing activities 532,391 657,933
------------ ------------
Decrease in cash and cash equivalents (2,394) (1,001)
Cash and cash equivalents at beginning of year 43,704 46,962
------------ ------------
Cash and cash equivalents at end of period $ 41,310 $ 45,961
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5 of 12
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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.
At November 30, 1996, $150 million was drawn on the unsecured
revolving bank credit facility and has been included in short-term
debt.
3. Interest Rate Swaps
The Company entered into a new 40-month amortizing swap relating to
the CarMax auto loan receivable securitization during the quarter
with a notional amount of approximately $63 million. Including this
new swap, recording the Company's interest rate swaps at fair value
at November 30, 1996, would result in a gain of approximately $13.0
million compared to a gain of $16.6 million at February 29, 1996. The
notional amount of the swaps was approximately $598 million at
November 30, 1996, and $550 million at February 29, 1996.
4. Other Events
On November 1, 1996, the Company announced that the board of
directors has approved a plan to redesignate the Company's existing
common stock and to create a new series of common stock intended to
track the separate performance of its Circuit City and CarMax retail
businesses, respectively. The plan includes a public offering of
CarMax Group stock, the proceeds from which are expected to be used
to finance part of the CarMax expansion and to repay the CarMax
business's allocated portion of Company indebtedness. Shareholders
will be asked to approve the plan at a special meeting on January 24,
1997. More information on this plan is contained in the proxy
statement for the special meeting and in a Registration Statement on
Form S-3, both filed with the Securities and Exchange Commission.
Page 6 of 12
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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 third quarter of fiscal 1997 were $1.86 billion, an increase
of 5 percent from $1.78 billion in the same period last year. Sales for
the first nine months of fiscal 1997 were $5.25 billion, an increase of 10
percent from sales of $4.78 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 third
quarter and first nine months of fiscal years 1997 and 1996 were as
follows:
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------------------------------------- ----------------------------------- -----------------------------------
FY '97 3rd Quarter Nine Months
------------------------------------- ----------------------------------- -----------------------------------
SEPT OCT NOV FY '97 FY '96 FY '97 FY '96
----------- ----------- ------------- ------------------ ---------------- ------------------ ----------------
(13%) (9%) (8%) (10%) 3% (7%) 7%
----------- ----------- ------------- ------------------ ---------------- ------------------ ----------------
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The third quarter comparable store sales results were below Management's
expectations and reflected the continuation of a challenging industry
climate in which personal computer sales weakened and the consumer
electronics sales pace remained soft. Management expects that comparable
store sales will remain soft as long as industry weakness continues.
However, the Company has experienced comparable store sales growth in
major appliances, digital satellite systems and big-screen televisions.
The Company expects to continue producing above-average results in product
segments where its selection and high-service strategy create significant
competitive advantages.
During the quarter, the Company opened 36 new Circuit City Superstores,
including its first three in Pittsburgh, Penn., entries into numerous
smaller markets and additions in existing markets. The Company also
replaced or expanded eight Superstores and opened six mall-based Circuit
City Express locations. By the end of the first nine months, the Company
had opened 51 Superstores and replaced or expanded 16. By fiscal year-end,
the Company plans to have opened approximately 65 Superstores and replaced
approximately 20 existing stores.
The table below details Circuit City retail units:
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Stores Open At End of Quarter Estimate
---------------------------------------------
Nov. 30, 1996 Nov. 30, 1995 Feb. 28, 1997 Feb. 29, 1996
------------------------------------------------------------------------------------------------------------------
Superstore
------------------------------------------------------------------------------------------------------------------
"D" Superstore 94 52 94 61
------------------------------------------------------------------------------------------------------------------
"C" Superstore 271 260 278 259
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"B" Superstore 51 43 54 46
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"A" Superstore 13 11 17 12
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Electronics-Only 5 5 5 5
------------------------------------------------------------------------------------------------------------------
Circuit City Express 47 37 47 36
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TOTAL 481 408 495 419
==================================================================================================================
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Page 7 of 12
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In mid-June, the Company announced a five-year expansion plan for CarMax: The
Auto Superstore(R). The Company began the first phase of its national roll out
of CarMax with the opening of its Orlando, Fla., location on November 6, 1996.
The Company currently operates six CarMax stores. By calendar year 2001, the
Company expects to be operating 80 to 90 CarMax stores. The Company expects to
enter the Tampa, Fla., market before the end of the current fiscal year. 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 were 6.1 percent of sales in the third quarter of both fiscal
years 1997 and 1996. Third-party warranty revenue rose to 3.7 percent of sales
in this year's third quarter from 3.1 percent in the same period last year. The
total extended warranty revenue that is reported in total sales was 5.2 percent
of sales in this year's third quarter versus 5.1 percent in the third quarter of
last year.
Total sales by merchandise categories are listed below:
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3rd Quarter Nine Months
------------------------------------------------------------------------
Fiscal 1997 Fiscal 1996 Fiscal 1997 Fiscal 1996
-------------------------------------------------------------------------------------------------
TV 20% 19% 18% 17%
-------------------------------------------------------------------------------------------------
VCR/Camcorders 13 13 14 14
-------------------------------------------------------------------------------------------------
Audio * 17 18 17 18
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Home Office 25 28 24 25
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Appliances 15 13 17 16
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Other * 10 9 10 10
-------------------------------------------------------------------------------------------------
TOTAL 100% 100% 100% 100%
=================================================================================================
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*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 was 22.7 percent of sales in the third quarter of both
fiscal years 1997 and 1996. The gross margins for the nine months ended November
30, 1996 and 1995, were 22.5 percent and 22.9 percent, respectively.
Page 8 of 12
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A more profitable merchandise mix for Circuit City offset lower gross margins
produced by an intense promotional climate and increased sales from CarMax. The
competitive climate in the electronics business will continue to put pressure on
gross margins, and the increased sales volume from CarMax, which is a lower
gross margin business, is expected to continue reducing consolidated margins.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expense ratio increased from
19.4 percent of sales in the third quarter of last year to 20.5 percent for the
same period this year. For the nine-month period ended November 30, 1996, the
expense ratio was 20.0 percent versus 19.3 percent in the same period last year.
The higher ratio 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 third quarter and first
nine 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 in the fourth
quarter.
Net Earnings
Net earnings for the quarter ended November 30, 1996, decreased 37 percent to
$19.8 million from $31.5 million in the same period last year. Net earnings per
share declined 38 percent to 20 cents from 32 cents.
Net earnings for the nine months ended November 30, 1996, were $68.2 million, a
decrease of 30 percent from $97.3 million in the same period last year. Net
earnings per share decreased 30 percent to 69 cents from 99 cents.
Impact of Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." The Company does not
expect the standard to have a material impact on the Company's financial
position or results of operations. The standard is effective for transactions
occurring after December 31, 1996.
Liquidity and Capital Resources
Total assets at November 30, 1996, were $3,333.5 million, up $807.5 million or
32 percent since February 29, 1996. The largest contributor to the asset
increase was a $563.7 million increase in inventory to support new store
openings and the holiday season sales volume. Net accounts and notes receivable
increased by $113.1 million, primarily due to an increase in credit card
accounts generated by the Company's credit card bank subsidiary. Property and
equipment increased $126.0 million, largely because of planned and completed
store openings.
Accounts payable increased $299.9 million and short-term debt has increased
$501.1 million since the end of fiscal 1996 to support new store expansion and
the purchase of inventory.
Page 9 of 12
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The Company's credit card bank subsidiary has a master trust securitization
facility for its private-label credit card that allows the transfer of
receivables through private placement and the public market. During the quarter
ended November 30, 1996, the credit card bank subsidiary issued an additional
$225 million to the public market or to private investors for a total program
capacity of $1.29 billion. 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 $1.45 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 $175 million in auto loan receivables. The Company anticipates
that it will be able to expand its securitization programs to meet future needs.
On November 1, 1996, the Company announced that the board of directors has
approved a plan to redesignate the Company's existing common stock and to create
a new series of common stock intended to track the separate performance of its
Circuit City and CarMax retail businesses, respectively. The plan includes a
public offering of CarMax Group stock, the proceeds from which are expected to
be used to finance part of the CarMax expansion and to repay the CarMax
business's allocated portion of Company indebtedness. Shareholders will be asked
to approve the redesignation at a special meeting on January 24, 1997. More
information on this plan is contained in the proxy statement and in a
Registration Statement on Form S-3, both filed with the Securities and Exchange
Commission.
In addition, the Company expects to continue its existing long-term
capitalization strategy. Management anticipates that capital expenditures will
be funded through a combination of internally generated funds, sale-leaseback
transactions, operating leases, proceeds of the recent long-term debt agreement
and the proposed equity offering and that securitization transactions will be
used to finance the growth in credit card and auto loan receivables. At November
30, 1996, $150 million was drawn on the unsecured revolving bank credit facility
and is included in short-term debt. As of January 9, 1997, the $150 million
drawn on the unsecured revolving bank credit facility had been repaid by the
Company. The Company also maintained $415 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 and the "Risk Factors" section of the Company's Registration
Statement on Form S-3 filed on November 13, 1996, relating to the Company's
proposed CarMax stock offering.
Page 10 of 12
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Index to Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated
November 1, 1996, in which it reported, under Item 5, that
the Company's board of directors had approved, subject to
a favorable vote of shareholders, a plan to create two
series of common stock intended to track the separate
performance of its Circuit City and CarMax retail
businesses.
Page 11 of 12
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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,
Corporate Controller and
Chief Accounting Officer
January 14, 1996
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Feb-28-1997
<PERIOD-END> Nov-30-1996
<CASH> 41,310
<SECURITIES> 0
<RECEIVABLES> 437,514
<ALLOWANCES> 0
<INVENTORY> 1,886,911
<CURRENT-ASSETS> 2,414,773
<PP&E> 1,233,544
<DEPRECIATION> 333,239
<TOTAL-ASSETS> 3,333,530
<CURRENT-LIABILITIES> 1,578,603
<BONDS> 430,030
0
0
<COMMON> 48,980
<OTHER-SE> 1,083,485
<TOTAL-LIABILITY-AND-EQUITY> 3,333,530
<SALES> 5,246,256
<TOTAL-REVENUES> 5,246,256
<CGS> 4,064,799
<TOTAL-COSTS> 4,064,799
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,348
<INCOME-PRETAX> 109,919
<INCOME-TAX> 41,766
<INCOME-CONTINUING> 68,153
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,153
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
</TABLE>
