UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
|
(Mark
One)
|
|
x Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
|
For the quarterly period ended
August 31, 2008
|
|
or
|
|
□ Transition report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
|
|
For the transition period from
_______ to _______
|
Commission File Number: 1-5767
CIRCUIT
CITY STORES, INC.
(Exact name of registrant as specified
in its charter)
|
Virginia
|
54-0493875
|
|
(State or other jurisdiction
of
|
(I.R.S.
Employer
|
|
incorporation or
organization)
|
Identification
No.)
|
|
9950 Mayland
Drive
|
|
|
Richmond, Virginia
|
23233
|
|
(Address of principal executive
offices)
|
(Zip
Code)
|
(804) 486 - 4000
(Registrant's telephone number,
including area code)
N/A
(Former name, former address and former
fiscal year, if changed since last report)
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 by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
|
Large accelerated filer
x
|
Accelerated filer
□
|
Non-accelerated filer
□
|
Smaller reporting company
□
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes □
No x
Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date.
|
Class
|
Outstanding at August 31,
2008
|
|
Common Stock, par value
$0.50
|
168,125,359
|
CIRCUIT CITY STORES,
INC.
FORM 10-Q
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
Item
1.
|
||
|
3
|
||
|
4
|
||
|
5
|
||
|
6
|
||
|
Item
2.
|
14
|
|
|
Item
3.
|
27
|
|
|
Item
4.
|
27
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
Item
1.
|
28
|
|
|
Item
1A.
|
28
|
|
|
Item
2.
|
28
|
|
|
Item
4.
|
28
|
|
|
Item
6.
|
29
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|
|
SIGNATURES
|
30
|
|
|
EXHIBIT
INDEX
|
31
|
|
PART
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
Circuit City Stores,
Inc.
(Amounts in thousands except per share
data)
|
Three Months Ended
August 31
|
Six Months Ended
August 31
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Net
sales
|
$
|
2,391,402
|
$
|
2,643,968
|
$
|
4,692,476
|
$
|
5,129,505
|
||||||||
|
Cost of sales, buying and
warehousing
|
1,882,404
|
2,097,957
|
3,704,804
|
4,023,309
|
||||||||||||
|
Gross
profit
|
508,998
|
546,011
|
987,672
|
1,106,196
|
||||||||||||
|
Selling, general and
administrative expenses
|
668,042
|
677,909
|
1,308,051
|
1,326,263
|
||||||||||||
|
Asset impairment
charges
|
73,000
|
–
|
73,000
|
–
|
||||||||||||
|
Operating
loss
|
(232,044
|
)
|
(131,898
|
)
|
(393,379
|
)
|
(220,067
|
)
|
||||||||
|
Interest
income
|
822
|
3,858
|
1,990
|
9,595
|
||||||||||||
|
Interest
expense
|
4,434
|
124
|
6,116
|
167
|
||||||||||||
|
Loss from continuing operations
before income taxes
|
(235,656
|
)
|
(128,164
|
)
|
(397,505
|
)
|
(210,639
|
)
|
||||||||
|
Income tax expense
(benefit)
|
3,518
|
(65,110
|
)
|
6,484
|
(92,773
|
)
|
||||||||||
|
Net loss from continuing
operations
|
(239,174
|
)
|
(63,054
|
)
|
(403,989
|
)
|
(117,866
|
)
|
||||||||
|
Earnings from discontinued
operations, net of tax
|
–
|
218
|
–
|
464
|
||||||||||||
|
Net
loss
|
$
|
(239,174
|
)
|
$
|
(62,836
|
)
|
$
|
(403,989
|
)
|
$
|
(117,402
|
)
|
||||
|
Weighted average common
shares:
|
||||||||||||||||
|
Basic
|
165,353
|
164,837
|
165,151
|
165,340
|
||||||||||||
|
Diluted
|
165,353
|
164,837
|
165,151
|
165,340
|
||||||||||||
|
Loss per
share:
|
||||||||||||||||
|
Basic:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(1.45
|
)
|
$
|
(0.38
|
)
|
$
|
(2.45
|
)
|
$
|
(0.71
|
)
|
||||
|
Discontinued
operations
|
$
|
–
|
$
|
0.00
|
$
|
–
|
$
|
0.00
|
||||||||
|
Basic loss per
share
|
$
|
(1.45
|
)
|
$
|
(0.38
|
)
|
$
|
(2.45
|
)
|
$
|
(0.71
|
)
|
||||
|
Diluted:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(1.45
|
)
|
$
|
(0.38
|
)
|
$
|
(2.45
|
)
|
$
|
(0.71
|
)
|
||||
|
Discontinued
operations
|
$
|
–
|
$
|
0.00
|
$
|
–
|
$
|
0.00
|
||||||||
|
Diluted loss per
share
|
$
|
(1.45
|
)
|
$
|
(0.38
|
)
|
$
|
(2.45
|
)
|
$
|
(0.71
|
)
|
||||
|
Cash dividends paid per
share
|
$
|
–
|
$
|
0.04
|
$
|
0.04
|
$
|
0.08
|
||||||||
See accompanying notes to consolidated
financial statements.
Circuit City Stores,
Inc.
(Amounts in thousands except share
data)
|
August 31, 2008
|
February 29, 2008
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash and cash
equivalents
|
$
|
91,235
|
$
|
296,055
|
||||
|
Short-term
investments
|
1,268
|
1,366
|
||||||
|
Accounts receivable, net of
allowance for doubtful accounts
|
329,516
|
330,599
|
||||||
|
Merchandise
inventory
|
1,508,944
|
1,573,560
|
||||||
|
Deferred income taxes, net of
valuation allowance
|
32,466
|
38,672
|
||||||
|
Income tax
receivable
|
161,389
|
158,116
|
||||||
|
Prepaid expenses and other current
assets
|
43,868
|
41,352
|
||||||
|
Total current
assets
|
2,168,686
|
2,439,720
|
||||||
|
Property and equipment, net of
accumulated depreciation of $1,574,546 and
$1,448,250
|
966,707
|
1,037,321
|
||||||
|
Goodwill
|
113,928
|
118,031
|
||||||
|
Other intangible assets, net of
accumulated amortization of $7,974 and $7,224
|
15,802
|
18,400
|
||||||
|
Other
assets
|
134,957
|
132,458
|
||||||
|
TOTAL
ASSETS
|
$
|
3,400,080
|
$
|
3,745,930
|
||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Merchandise
payable
|
$
|
754,521
|
$
|
912,094
|
||||
|
Expenses
payable
|
268,107
|
232,386
|
||||||
|
Accrued expenses and other current
liabilities
|
343,525
|
346,818
|
||||||
|
Accrued
compensation
|
74,729
|
85,127
|
||||||
|
Accrued income
taxes
|
17,165
|
17,680
|
||||||
|
Short-term
debt
|
215,000
|
–
|
||||||
|
Current installments of long-term
debt
|
14,203
|
11,582
|
||||||
|
Total current
liabilities
|
1,687,250
|
1,605,687
|
||||||
|
Long-term debt, excluding current
installments
|
52,566
|
57,050
|
||||||
|
Accrued straight-line
rent
|
152,369
|
145,960
|
||||||
|
Deferred rent
credits
|
168,578
|
163,662
|
||||||
|
Accrued lease termination
costs
|
78,564
|
82,900
|
||||||
|
Deferred income taxes, net of
valuation allowance
|
31,281
|
35,586
|
||||||
|
Other
liabilities
|
152,720
|
151,910
|
||||||
|
TOTAL
LIABILITIES
|
2,323,328
|
2,242,755
|
||||||
|
Commitments and contingent
liabilities
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Common stock, $0.50 par value;
525,000,000 shares authorized; 168,125,359 shares issued and outstanding
at August 31, 2008 (168,859,462 at February 29,
2008)
|
84,063
|
84,430
|
||||||
|
Additional paid-in
capital
|
327,739
|
319,573
|
||||||
|
Retained
earnings
|
570,462
|
981,112
|
||||||
|
Accumulated other comprehensive
income
|
94,488
|
118,060
|
||||||
|
TOTAL STOCKHOLDERS’
EQUITY
|
1,076,752
|
1,503,175
|
||||||
|
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
$
|
3,400,080
|
$
|
3,745,930
|
||||
See accompanying notes to consolidated
financial statements.
Circuit City Stores,
Inc.
(Amounts in
thousands)
|
|
Six Months
Ended
August 31
|
|||||||
|
|
2008
|
2007
|
||||||
|
Operating
Activities:
|
|
|||||||
|
Net
loss
|
|
$
|
(403,989
|
)
|
$
|
(117,402
|
)
|
|
|
Adjustments to reconcile net loss
to net cash used in operating activities of continuing
operations:
|
|
|||||||
|
Net earnings from discontinued
operations
|
|
–
|
(464
|
)
|
||||
|
Depreciation
expense
|
|
90,554
|
96,089
|
|||||
|
Amortization
expense
|
|
1,328
|
2,403
|
|||||
|
Asset impairment
charges
|
73,000
|
–
|
||||||
|
Stock-based compensation
expense
|
|
8,604
|
12,290
|
|||||
|
Loss on dispositions of property
and equipment
|
|
2,203
|
483
|
|||||
|
Provision for deferred income
taxes
|
|
114
|
(72,478
|
)
|
||||
|
Other
|
|
(2,601
|
)
|
1,018
|
||||
|
Changes in operating assets and
liabilities:
|
|
|||||||
|
Accounts receivable,
net
|
|
(22,536
|
)
|
55,785
|
||||
|
Merchandise
inventory
|
|
53,742
|
(185,180
|
)
|
||||
|
Prepaid expenses and other current
assets
|
|
1,120
|
(26,835
|
)
|
||||
|
Other
assets
|
|
1,734
|
1,144
|
|||||
|
Merchandise
payable
|
|
(154,023
|
)
|
182,887
|
||||
|
Expenses
payable
|
|
18,304
|
19,158
|
|||||
|
Accrued expenses, other current
liabilities and income taxes
|
|
(14,834
|
)
|
(131,279
|
)
|
|||
|
Other long-term
liabilities
|
|
937
|
29,067
|
|||||
|
Net cash used in operating
activities of continuing operations
|
|
(346,343
|
)
|
(133,314
|
)
|
|||
|
|
||||||||
|
Investing
Activities:
|
|
|||||||
|
Purchases of property and
equipment
|
|
(110,502
|
)
|
(148,161
|
)
|
|||
|
Proceeds from sales of property
and equipment
|
|
36,904
|
23,407
|
|||||
|
Purchases of investment
securities
|
|
–
|
(1,169,510
|
)
|
||||
|
Sales and maturities of investment
securities
|
|
–
|
1,474,360
|
|||||
|
Other investing
activities
|
|
356
|
(1,691
|
)
|
||||
|
Net cash (used in) provided by
investing activities of continuing operations
|
|
(73,242
|
)
|
178,405
|
||||
|
|
||||||||
|
Financing
Activities:
|
|
|||||||
|
Proceeds from short-term
borrowings
|
|
1,557,685
|
4,515
|
|||||
|
Principal payments on short-term
borrowings
|
|
(1,342,711
|
)
|
(4,747
|
)
|
|||
|
Principal payments on long-term
debt
|
|
(9,212
|
)
|
(3,756
|
)
|
|||
|
Changes in overdraft
balances
|
|
17,185
|
(9,340
|
)
|
||||
|
Excess tax benefit from
stock-based compensation
|
|
–
|
928
|
|||||
|
Repurchases of common
stock
|
|
–
|
(46,757
|
)
|
||||
|
Issuances of common
stock
|
|
–
|
4,722
|
|||||
|
Dividends
paid
|
|
(6,650
|
)
|
(13,490
|
)
|
|||
|
Other financing
activities
|
|
(814
|
)
|
(1,127
|
)
|
|||
|
Net cash provided by (used in)
financing activities of continuing operations
|
|
215,483
|
(69,052
|
)
|
||||
|
|
||||||||
|
Discontinued
Operations:
|
|
|||||||
|
Operating cash
flows
|
|
–
|
12,233
|
|||||
|
Investing cash
flows
|
|
–
|
–
|
|||||
|
Financing cash
flows
|
|
–
|
(58
|
)
|
||||
|
Net cash provided by discontinued
operations
|
|
–
|
12,175
|
|||||
|
|
||||||||
|
Effect of exchange rate changes on
cash
|
|
(718
|
)
|
1,544
|
||||
|
|
||||||||
|
Decrease in cash and cash
equivalents
|
|
(204,820
|
)
|
(10,242
|
)
|
|||
|
Cash and cash equivalents at
beginning of year
|
|
296,055
|
141,141
|
|||||
|
|
||||||||
|
Cash and cash equivalents at end
of period
|
|
$
|
91,235
|
$
|
130,899
|
|||
See accompanying notes to consolidated
financial statements.
CIRCUIT CITY STORES,
INC.
(Unaudited)
|
1.
|
Basis
of Presentation
|
Circuit City Stores, Inc. is a leading
specialty retailer of consumer electronics, home office products, entertainment
software, and related services. The company has two reportable
segments: its domestic segment and its international
segment.
The domestic segment is engaged in the
business of selling brand-name and private-label consumer electronics, personal
computers, entertainment software, and related services in its stores in the
United States and via the Web at www.circuitcity.com
and www.firedog.com. At August 31, 2008, the domestic segment
operated 705 Superstores and 9 outlet stores in 158 U.S. media markets.
The international segment, which is
comprised of the operations of InterTAN, Inc., is engaged in the business of
selling private-label and brand-name consumer electronics in Canada. The international segment’s
headquarters are located in Barrie, Ontario, Canada, and it operates through retail stores
and dealer outlets in Canada, primarily under the trade name The
Source By Circuit CitySM. At August 31, 2008, the
international segment conducted business through 772 retail stores and dealer
outlets, which consisted of 502 company-owned stores and 270 dealer
outlets. The international segment also operates a Web site at
www.thesource.ca. In February 2007, the board of directors authorized
management to explore strategic alternatives for InterTAN, Inc., which could
include the sale of the operation.
Effective January 28, 2007, the company
returned the management of 92 Rogers Plus® stores to Rogers Wireless Inc. Results
from the Rogers Plus® stores are presented as results from
discontinued operations for the three months and six months ended August 31,
2007.
In May 2008, the company retained
Goldman, Sachs & Co. to assist the company in exploring strategic
alternatives to enhance shareholder value. Management and the
board of directors have thus far concluded that, while strategic options will
always be explored as part of their fiduciary responsibility, given current
market conditions, it is prudent to focus internally on improving the company’s
performance in order to operate as a standalone business.
The preparation of financial statements
in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and the
disclosure of contingent assets and liabilities. Actual results may
differ from these estimates. The accompanying unaudited financial
statements contain all adjustments of a normal, recurring nature, except as
otherwise disclosed herein, which are, in the opinion of management, necessary
for a fair presentation. Due to the seasonal nature of the company’s
business, interim results are not necessarily indicative of results for the
entire fiscal year. The company’s consolidated financial statements
included in this report should be read in conjunction with the notes to the
audited financial statements in the company’s fiscal 2008 annual report on Form
10-K.
Within the financial tables in this
quarterly report on Form 10-Q, certain columns and rows may not sum due to the
use of rounded numbers for disclosure purposes. Percentages presented
are calculated from the underlying whole-dollar amounts.
|
2.
|
Recent
Accounting Pronouncements
|
As permitted under transition rules by
the Financial Accounting Standards Board (“FASB”), the company partially adopted
the provisions of Statement of Financial Accounting Standards (“SFAS”)
No. 157, “Fair Value Measurements,” as of March 1, 2008, on a
prospective basis. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
This Statement does not require any new fair value measurements, but applies to
existing accounting pronouncements that require or permit fair value measurement
as the relevant measurement attribute. As permitted by FASB Staff Position No.
FAS 157-2, “Effective Date of FASB Statement No. 157,” the company delayed the
adoption of SFAS No. 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually), until
March 1, 2009. The partial adoption of SFAS No. 157 did not have an impact
on the company’s financial position, results of operations or cash flows. The
full adoption of SFAS No. 157 is not expected to have a material effect on
the company’s financial position, results of operations or cash
flows.
In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities.” SFAS No. 159 permits entities to choose to measure
many financial instruments and certain assets and liabilities at fair
value. The company adopted SFAS No. 159 as of March 1,
2008. As the company did not elect the fair value option for any of
its financial instruments or other assets and liabilities, the adoption of this
standard did not have an impact on its financial position, results of operations
or cash flows.
On March 1, 2008, the company adopted
Emerging Issues Task Force Issue 06-11, “Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Awards” (“EITF 06-11”), on a prospective basis.
This Issue requires income tax benefits from dividends or dividend equivalents
that are charged to retained earnings and are paid to employees for
equity-classified nonvested equity shares, nonvested equity share units, and
outstanding equity share options to be recognized as an increase to additional
paid-in capital. During the first six months of fiscal 2009, the
income tax benefit of these dividends could not be recognized because the
company has recorded a full valuation allowance against the net deferred tax
assets of its U.S. operations. Thus, the
adoption of EITF 06-11 did not have an impact on the company’s financial
position, results of operations or cash flows.
In December 2007, the FASB issued SFAS
No. 141(R), “Business Combinations,” and SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No.
51.” These new standards significantly change the accounting for and
reporting of business combination transactions and noncontrolling interests
(previously referred to as minority interests) in consolidated financial
statements. Both standards will be effective for the company
beginning with the first quarter of fiscal 2010 and will be applied
prospectively to future business combinations.
In April 2008, the FASB issued FASB
Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP No. 142-3”). This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and
Other Intangible Assets.” The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141(R) and other U.S. generally accepted accounting
principles. This FSP is effective for the company as of March 1,
2009, and will be applied prospectively to future business
combinations.
In June 2008, the FASB issued FSP EITF
03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities” (“FSP EITF 03-6-1”). This
FSP addresses whether instruments granted in share-based payment transactions
are participating securities prior to vesting and, therefore, need to be
included in computing earnings per share under the two-class method described in
SFAS No. 128, “Earnings Per Share.” This FSP will be effective for the
company beginning with the first quarter of fiscal 2010 and will be applied
retrospectively. The company is currently evaluating the impact of
adopting FSP EITF 03-6-1.
|
3.
|
Loss
per Share
|
For the three months and six months
ended August 31, 2008, and August 31, 2007, no options or nonvested stock were
included in the computation of diluted loss per share because the company
reported a net loss from continuing operations. Shares excluded were as
follows:
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
August 31
|
August 31
|
|||||||||||||||
|
(Shares in
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Options
|
8.2
|
7.7
|
9.0
|
8.1
|
||||||||||||
|
Nonvested
stock
|
3.3
|
4.0
|
3.7
|
4.0
|
||||||||||||
|
4.
|
Income
Taxes
|
Quarterly, the company evaluates its
deferred income taxes to determine if any adjustments to its valuation allowances are
required under the guidance
of SFAS No. 109, “Accounting for Income Taxes.” During the third quarter of
fiscal 2008, the company determined that its U.S. operations had generated a cumulative
three-year loss. Based on this and taking into account all future
sources of taxable income and other available objective evidence, management
concluded that a full valuation allowance should be recorded against the net
deferred tax assets of the U.S. operations. As of August 31,
2008, the net deferred tax assets of the U.S. operations continue to be reduced by a
full valuation allowance.
During the six months ended August 31,
2008, the company recorded income tax expense of $6.5 million on a loss from
continuing operations before income taxes of $397.5 million. Due to
the valuation allowance, the company did not record an income tax benefit for
the loss of its U.S. operations. The income tax expense is comprised
primarily of state and foreign income tax expense as well as discrete
items. The discrete items are comprised primarily of an adjustment to
a previously-filed tax position related to leases.
|
5.
|
Exit
and Other Activities
|
At a location’s cease-use date,
estimated lease termination costs to close a store, distribution center or
repair center are recorded in selling, general and administrative expenses on
the consolidated statements of operations. Accrued lease termination costs
include future minimum lease payments, taxes, insurance and maintenance costs
from the date of closure to the end of the remaining lease term less estimated
sublease rental income, net of tenant improvement allowances and broker
fees. The company evaluates these assumptions each quarter and
adjusts the liability accordingly. The liability for lease
termination costs is discounted using a credit-adjusted risk-free rate of
interest.
The accrual for lease termination costs
for the domestic segment includes the following activity:
|
Six Months Ended
|
||||||||
|
August 31
|
||||||||
|
(Amounts in
millions)
|
2008
|
2007
|
||||||
|
Accrued lease termination costs at
beginning of period
|
$
|
115.5
|
$
|
105.6
|
||||
|
Provisions for closed
locations
|
5.9
|
4.2
|
||||||
|
Changes in assumptions about
future sublease income
|
7.1
|
5.3
|
||||||
|
Interest
accretion
|
5.2
|
4.0
|
||||||
|
Cash payments, net of cash
received on subleased locations
|
(18.0
|
)
|
(19.9
|
)
|
||||
|
Accrued lease termination costs at
end of period
|
115.7
|
99.2
|
||||||
|
Less current portion of accrued
lease termination costs
|
37.2
|
30.2
|
||||||
|
Non-current portion of accrued
lease termination costs
|
$
|
78.6
|
$
|
69.0
|
||||
At August 31, 2008, accrued lease
termination costs of $115.7 million consisted of 98 locations, of which 37 were
subleased. The provision for closed locations included in the table
above represents the initial estimate of lease termination costs for locations
at the cease-use date. The current portion of accrued lease termination costs is
included in accrued expenses and other current liabilities, and the non-current
portion is presented separately, on the consolidated balance
sheets.
At February 29, 2008, accrued severance
totaled $10.0 million and was included in accrued compensation on the
consolidated balance sheet. During the first six months of fiscal
2009, the company made cash payments of $6.1 million and recorded an additional
accrual of $3.2 million related to severance arrangements. The
additional charge is recorded in cost of sales, buying and warehousing or
in selling, general and administrative
expenses depending on the classification of the related employee’s payroll
expense. At August 31, 2008, accrued severance totaled $7.1 million
and is included in accrued compensation on the consolidated balance
sheet.
|
6.
|
Stock-Based
Compensation
|
Under the company’s stock-based
incentive plans, stock options, nonvested stock, nonvested stock units and other
equity-based awards may be granted to employees and non-employee directors. At
August 31, 2008, 1.8 million shares of common stock were available for future
grants. Common shares are issued from authorized and unissued shares upon the
exercise of stock options, the grant of nonvested stock or the vesting of or
lapse of deferral restrictions on nonvested stock units.
Compensation expense for stock-based
incentive plans is summarized in the table below.
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
August 31
|
August 31
|
|||||||||||||||
|
(Amounts in
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Compensation expense
recognized:
|
||||||||||||||||
|
Stock
options
|
$
|
2.4
|
$
|
2.3
|
$
|
4.4
|
$
|
5.0
|
||||||||
|
Nonvested stock and nonvested
stock units
|
3.0
|
5.0
|
4.2
|
7.3
|
||||||||||||
|
Phantom stock
units
|
(0.6
|
)
|
(0.5
|
)
|
0.2
|
(0.6
|
)
|
|||||||||
|
Employee stock purchase
plan
|
0.1
|
0.1
|
0.2
|
0.3
|
||||||||||||
|
Other
|
0.0
|
0.1
|
0.1
|
0.1
|
||||||||||||
|
Total compensation expense
recognized
|
$
|
4.9
|
$
|
7.0
|
$
|
9.2
|
$
|
12.1
|
||||||||
|
Tax benefit recognized, before
valuation allowance
|
$
|
1.8
|
$
|
2.5
|
$
|
3.4
|
$
|
4.4
|
||||||||
Stock-based compensation expense is
recorded in cost of sales, buying and warehousing or in selling, general and
administrative expenses depending on the classification of the related
employee’s payroll cost. The classification of stock-based
compensation expense is summarized in the table below.
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
August 31
|
August 31
|
|||||||||||||||
|
(Amounts in
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Cost of sales, buying, and
warehousing
|
$
|
0.4
|
$
|
1.3
|
$
|
1.0
|
$
|
1.9
|
||||||||
|
Selling, general and
administrative expenses
|
4.5
|
5.7
|
8.1
|
10.2
|
||||||||||||
|
Total compensation expense
recognized
|
$
|
4.9
|
$
|
7.0
|
$
|
9.2
|
$
|
12.1
|
||||||||
The company recognizes stock-based
compensation expense net of an estimated forfeiture rate based on historical
forfeiture activity. During the six months ended August 31, 2008, and the six
months ended August 31, 2007, the company increased the estimated forfeiture
rate on certain nonvested stock awards to reflect changes in expectations
regarding the number of instruments that will vest. These changes were the
result of higher than anticipated actual forfeitures.
The value of each phantom stock unit is
based on the market value of one share of common stock on the vesting date. The
units, which will be settled in cash upon vesting, are remeasured at each
reporting date. Due to the decrease in the market value of the company’s common
stock, the company recorded a benefit of $0.6 million related to phantom stock
units in the three months ended August 31, 2008, and a benefit of $0.5 million
in the three months ended August 31, 2007.
The fair value of each option granted is
estimated on the grant date using the Black-Scholes option valuation model with
the following weighted average assumptions:
|
Six Months Ended
August 31
|
||||||||
|
2008
|
2007
|
|||||||
|
Expected dividend
yield
|
0.3
|
%
|
1.3
|
%
|
||||
|
Expected stock
volatility
|
54
|
%
|
44
|
%
|
||||
|
Risk-free interest
rate
|
3
|
%
|
5
|
%
|
||||
|
Expected term (in
years)
|
4
|
5
|
||||||
Using these assumptions in the
Black-Scholes model, the weighted average grant date fair value of options
granted was $0.91 per share for the six months ended August 31, 2008, and $5.20
per share for the six months ended August 31, 2007.
During the three months ended August 31,
2008, the company issued options with respect to 0.6 million shares of common
stock with a vesting period of three years and a contractual term of five years.
Due to a lack of historical exercise behavior for options with a similar
contractual term, the company used a simplified method to estimate the expected
term of the grant. An average of the award’s weighted average vesting period and
its contractual term was calculated and resulted in an expected term of 3.5
years.
The company’s stock option activity is
summarized in the table below.
|
Shares
(in thousands)
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
Aggregate
Intrinsic
Value
( in
millions)
|
|||||||||||||
|
Outstanding at February 29,
2008
|
10,101
|
$
|
13.38
|
|||||||||||||
|
Granted
|
957
|
$
|
2.13
|
|||||||||||||
|
Exercised
|
–
|
$
|
–
|
|||||||||||||
|
Forfeited
|
(436
|
)
|
$
|
8.34
|
||||||||||||
|
Expired
|
(2,103
|
)
|
$
|
21.52
|
||||||||||||
|
Outstanding at August 31,
2008
|
8,520
|
$
|
10.36
|
6.8
|
$
|
0.0
|
||||||||||
|
Vested and expected to vest at
August 31, 2008
|
7,651
|
$
|
10.94
|
6.6
|
$
|
0.0
|
||||||||||
|
Exercisable at August 31,
2008
|
3,349
|
$
|
12.76
|
4.4
|
$
|
–
|
||||||||||
As of August 31, 2008, the total
remaining unrecognized compensation expense related to unvested stock options
expected to vest was $13.3 million and is expected to be recognized over a
weighted average period of 2.2 years.
The company’s nonvested stock and
nonvested stock unit activity is summarized in the table
below.
|
Shares
(in thousands)
|
Weighted Average
Grant Date
Fair Value
|
Aggregate
Intrinsic Value
(in
millions)
|
||||||||||
|
Nonvested at February 29,
2008
|
4,319
|
$
|
16.15
|
|||||||||
|
Granted
|
11
|
$
|
2.63
|
|||||||||
|
Vested
|
(897
|
)
|
$
|
19.12
|
||||||||
|
Forfeited
|
(534
|
)
|
$
|
17.28
|
||||||||
|
Nonvested at August 31,
2008
|
2,899
|
$
|
14.95
|
$
|
5.2
|
|||||||
Total unrecognized compensation expense
related to nonvested stock and nonvested stock units at August 31, 2008, was
$14.4 million and is expected to be recognized over a weighted average period of
1.2 years.
The company issues phantom stock units
that are settled in cash at the end of the vesting period. At August 31, 2008,
2.7 million phantom stock units were outstanding. A total of
0.2 million phantom stock units with a three-year vesting period was
awarded during the six months ended August 31, 2008. Based on the market value
of the company’s common stock as of August 31, 2008, the total remaining
unrecognized compensation expense for 2.1 million units expected to vest
was $2.9 million and is expected to be recognized over a weighted average period
of 2.3 years.
|
7.
|
Comprehensive
Loss
|
Comprehensive loss consists of net loss
and certain other items that are recorded directly to stockholders’ equity, net
of deferred income taxes. In addition to net loss, comprehensive loss
includes foreign currency translation adjustments, adjustments to reflect the
funded status of the company’s pension plans on the consolidated balance sheets,
and unrealized gains and losses on available-for-sale
securities.
The components of comprehensive loss,
net of taxes, were as follows:
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
August 31
|
August 31
|
|||||||||||||||
|
(Amounts in
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Net
loss
|
$
|
(239.2
|
)
|
$
|
(62.8
|
)
|
$
|
(404.0
|
)
|
$
|
(117.4
|
)
|
||||
|
Foreign currency translation
adjustments
|
(21.3
|
)
|
2.6
|
(23.2
|
)
|
19.2
|
||||||||||
|
Other
|
(0.1
|
)
|
0.1
|
(0.3
|
)
|
0.1
|
||||||||||
|
Comprehensive
loss
|
$
|
(260.6
|
)
|
$
|
(60.1
|
)
|
$
|
(427.6
|
)
|
$
|
(98.1
|
)
|
||||
|
8.
|
Pension
Plans
|
The company’s domestic segment has a
noncontributory defined benefit pension plan and an unfunded nonqualified
benefit restoration plan that restored retirement benefits for domestic segment
senior executives who were affected by Internal Revenue Code limitations on
benefits provided under the company’s defined benefit pension
plan. Both plans were amended to freeze benefit accruals effective
February 28, 2005, except for select grandfathered participants who were at or
near their early or normal retirement date. Both plans were further
amended to freeze benefit accruals for the grandfathered participants as of
February 29, 2008. As a result, all participants in the plans are no
longer eligible to increase their benefits under the plans, but will retain any
benefits accrued through the effective date of the plan
amendments.
The components of net pension income for
the plans were as follows:
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
August 31
|
August 31
|
|||||||||||||||
|
(Amounts in
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Service
cost
|
$
|
–
|
$
|
0.6
|
$
|
–
|
$
|
1.2
|
||||||||
|
Interest
cost
|
4.0
|
4.0
|
8.1
|
8.0
|
||||||||||||
|
Expected return on plan
assets
|
(5.5
|
)
|
(5.2
|
)
|
(11.0
|
)
|
(10.4
|
)
|
||||||||
|
Recognized prior service
cost
|
–
|
0.1
|
–
|
0.1
|
||||||||||||
|
Recognized actuarial (gain)
loss
|
(0.1
|
)
|
0.4
|
(0.1
|
)
|
0.7
|
||||||||||
|
Net pension
income
|
$
|
(1.5
|
)
|
$
|
(0.1
|
)
|
$
|
(3.0
|
)
|
$
|
(0.3
|
)
|
||||
The company did not make any
contributions to the defined benefit pension plan during the six months ended
August 31, 2008. No contributions are required during fiscal 2009
under applicable law for this pension plan. The company intends to
make any contributions necessary to meet ERISA minimum funding standards and
intends to make additional contributions as needed to ensure that the fair value
of plan assets at February 28, 2009, is equal to or exceeds the accumulated
benefit obligation.
A contribution of $0.8 million, which is
equal to the expected benefit payments for fiscal 2009, is expected to be made
to the restoration plan during fiscal 2009. Benefit payments during
the six months ended August 31, 2008, were $0.4 million.
|
9.
|
Asset
Impairment Charges
|
Due to
the company’s financial performance and the initiation by management of a
comprehensive review of the business, the company evaluated its long-lived
assets for potential impairment as of August 31, 2008. The evaluation
considered information available at August 31, 2008, and resulted in the
determination that the carrying
value of the fixed assets of some of its domestic segment stores would likely
not be recovered through estimated future cash flows, considering assumptions
regarding the expected lives of those assets. As a result, in the
second quarter of fiscal
2009, the company recorded
impairment charges of $73.0 million to reduce the carrying value of the assets
to their estimated fair value.
|
10.
|
Discontinued
Operations
|
For the three months and six months
ended August 31, 2007, net earnings from discontinued operations totaled $0.2
million and $0.5 million, which are net of $0.1 million and $0.3 million of
income taxes, respectively. These amounts primarily relate to the
operations of the Rogers Plus® stores, of which the management was
returned to Rogers Wireless Inc. in January 2007.
|
11.
|
Segment
Information
|
The company has two reportable segments:
its domestic segment and its international segment. The company identified these
segments based on its management reporting structure and the nature of the
products and services offered by each segment. The domestic segment
is primarily engaged in the business of selling brand-name and private-label
consumer electronics, personal computers, entertainment software, and related
services in the United
States. The
international segment is primarily engaged in the business of selling
private-label and brand-name consumer electronics in Canada.
Net sales by reportable segment were as
follows:
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
August 31
|
August 31
|
|||||||||||||||
|
(Amounts in
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Domestic
segment
|
$
|
2,244.1
|
$
|
2,511.4
|
$
|
4,410.9
|
$
|
4,888.3
|
||||||||
|
International
segment
|
147.3
|
132.5
|
281.6
|
241.2
|
||||||||||||
|
Net
sales
|
$
|
2,391.4
|
$
|
2,644.0
|
$
|
4,692.5
|
$
|
5,129.5
|
||||||||
The (loss) earnings from continuing
operations before income taxes by reportable segment were as
follows:
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
August 31
|
August 31
|
|||||||||||||||
|
(Amounts in
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Domestic
segment
|
$
|
(240.5
|
)
|
$
|
(130.2
|
)
|
$
|
(400.4
|
)
|
$
|
(216.6
|
)
|
||||
|
International
segment
|
4.9
|
2.1
|
2.9
|
6.0
|
||||||||||||
|
Loss from continuing operations
before income taxes
|
$
|
(235.7
|
)
|
$
|
(128.2
|
)
|
$
|
(397.5
|
)
|
$
|
(210.6
|
)
|
||||
The international segment’s earnings
from continuing operations before income taxes for the three months and six
months ended August 31, 2008, include a benefit of $4.3 million due to a correction of an immaterial
amount related to goodwill impairment charges
recorded in prior periods.
The international segment’s earnings
from continuing operations before income taxes for the six months ended August
31, 2007, include a recovery of $7.5 million related to a former
subsidiary.
Total assets by reportable segment were
as follows:
|
August 31,
|
February
29,
|
|||||||
|
(Amounts in
millions)
|
2008
|
2008
|
||||||
|
Domestic
segment
|
$
|
3,012.7
|
$
|
3,335.7
|
||||
|
International
segment
|
387.4
|
410.3
|
||||||
|
Total
assets
|
$
|
3,400.1
|
$
|
3,745.9
|
||||
The domestic segment net sales by category were as follows:
|
Three Months Ended August
31
|
Six Months Ended August
31
|
|||||||||||||||||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||||||||||||
|
(Dollar amounts in
millions)
|
$
|
% of
Sales
|
$
|
% of
Sales
|
$
|
% of
Sales
|
$
|
% of
Sales
|
||||||||||||||||||||||||
|
Video
|
$
|
925.6
|
41.2
|
%
|
$
|
948.2
|
37.8
|
%
|
$
|
1,815.0
|
41.2
|
%
|
$
|
1,882.2
|
38.5
|
%
|
||||||||||||||||
|
Information
technology
|
649.4
|
28.9
|
774.7
|
30.8
|
1,240.8
|
28.1
|
1,403.3
|
28.7
|
||||||||||||||||||||||||
|
Audio
|
268.3
|
12.0
|
325.8
|
13.0
|
530.9
|
12.0
|
660.7
|
13.5
|
||||||||||||||||||||||||
|
Entertainment
|
233.8
|
10.4
|
267.1
|
10.6
|
495.9
|
11.2
|
539.7
|
11.1
|
||||||||||||||||||||||||
|
Warranty, services and
other(a)
|
167.1
|
7.5
|
195.6
|
7.8
|
328.4
|
7.5
|
402.5
|
8.2
|
||||||||||||||||||||||||
|
Net
sales
|
$
|
2,244.1
|
100.0
|
%
|
$
|
2,511.4
|
100.0
|
%
|
$
|
4,410.9
|
100.0
|
%
|
$
|
4,888.3
|
100.0
|
%
|
||||||||||||||||
(a) Warranty, services and other includes
extended warranty net sales; revenues from PC services, mobile installations,
home theater installations and product repairs; net financing; and revenues from
third parties for services subscriptions.
The international segment net sales by
category were as follows:
|
Three Months Ended August
31
|
Six Months Ended August
31
|
|||||||||||||||||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||||||||||||
|
(Dollar amounts in
millions)
|
$
|
% of
Sales
|
$
|
% of
Sales
|
$
|
% of
Sales
|
$
|
% of
Sales
|
||||||||||||||||||||||||
|
Video
|
$
|
27.6
|
18.7
|
%
|
$
|
26.2
|
19.7
|
%
|
$
|
53.1
|
18.9
|
%
|
$
|
46.2
|
19.2
|
%
|
||||||||||||||||
|
Information
technology
|
50.4
|
34.2
|
46.6
|
35.2
|
97.7
|
34.7
|
86.4
|
35.7
|
||||||||||||||||||||||||
|
Audio
|
51.5
|
35.0
|
45.2
|
34.1
|
95.5
|
33.9
|
81.7
|
33.9
|
||||||||||||||||||||||||
|
Entertainment
|
10.2
|
6.9
|
6.2
|
4.7
|
19.5
|
6.9
|
11.2
|
4.7
|
||||||||||||||||||||||||
|
Warranty, services and
other(a)
|
7.7
|
5.2
|
8.3
|
6.3
|
15.7
|
5.6
|
15.6
|
6.5
|
||||||||||||||||||||||||
|
Net
sales
|
$
|
147.3
|
100.0
|
%
|
$
|
132.5
|
100.0
|
%
|
$
|
281.6
|
100.0
|
%
|
$
|
241.2
|
100.0
|
%
|
||||||||||||||||
(a) Warranty, services and other includes
extended warranty sales and product repair revenue.
|
12.
|
Supplemental
Consolidated Statements of Cash Flows
Information
|
The following table summarizes
supplemental cash flow information.
|
Six Months Ended
|
||||||||
|
August 31
|
||||||||
|
(Amounts in
millions)
|
2008
|
2007
|
||||||
|
Supplemental schedule of non-cash
investing and financing activities:
|
||||||||
|
Non-cash capital
expenditures(a)
|
$
|
22.6
|
$
|
35.6
|
||||
|
Capital lease
obligations
|
$
|
7.4
|
$
|
5.2
|
||||
|
Sale-leaseback
receivables(a)
|
$
|
8.5
|
$
|
6.7
|
||||
(a) Amounts disclosed in prior quarters
reflected the change in the accrual and receivable balances rather than the
balances related to non-cash transactions arising during the
period. Prior year amounts have been corrected to reflect the
non-cash transactions for the period. The correction did not impact
the statements of cash flows in any period.
|
13.
|
Liquidity
|
For the six months ended August 31,
2008, the net loss from continuing operations was $404.0
million, which includes non-cash asset impairment
charges of $73.0 million. Cash, cash equivalents and short-term
investments declined from $297.4 million at February 29, 2008, to $92.5 million
at August 31, 2008, and
borrowings under the company’s asset-based credit facility increased from $0 at
February 29, 2008, to $215.0 million at August 31, 2008. The decline in the
company’s cash position was primarily driven by cash used to fund losses from
operations, an increase in
net-owned inventory and
net cash used to purchase property and
equipment, partially offset by net proceeds from short-term
borrowings.
The company’s plans to manage its
liquidity position in the remainder of fiscal 2009 include improving
traffic, close rates and attachment rates, which
would have a positive impact on both sales and margin; reducing projected capital expenditures
below prior year levels; maintaining an intense focus on controlling expenses;
and maintaining strong relationships with its vendors to ensure continued
availability of vendor credit. During the second quarter of fiscal
2009, the board of directors suspended the
declaration and payment of quarterly cash dividends on the company’s common
stock as part of its focus on conserving capital. Additionally, the
company is evaluating
capital-related projects that have been planned for the second half of fiscal
2009 and for fiscal 2010. Other than existing commitments,
the company intends to suspend store openings beginning
with fiscal 2010 in order to focus on improving the execution of the company’s business.
The company continuously reviews the relationships with its vendors in order to address issues that may
arise from general macroeconomic conditions or from the company’s financial
condition. The company understands that the decisions that its vendors make with
respect to the company may depend on factors that include their specific economic
situations, the company’s risk profile and other factors, such as
the availability of
adequate credit insurance or their ability to factor their receivables from the company. At any time, a vendor could change either the availability of vendor credit
to the company or other terms under which it sells to the company, or both. The company similarly reviews its cash requirements, working capital
changes, capital expenditures and borrowing availability under its credit facility. While some vendors have
modified terms as a result of their specific decisions, based on the company’s current relationships and expectations with respect to future events,
the company anticipates that its sources of liquidity will be sufficient
to meet its obligations without the disposition of
assets outside of the ordinary course of business or significant revisions of
its planned operations through the
remainder of fiscal 2009. Significant changes in the credit limits or payment terms that the company has with its vendors or the incurrence of additional
losses beyond its current expectations, however, could
adversely impact the
company’s
liquidity.
|
14.
|
Subsequent
Event
|
On
September 22, 2008, the company and Philip J. Schoonover, chairman of the board,
president and chief executive officer, terminated their employment relationship,
effective immediately. In connection with the termination of the
employment relationship, the company has enforced the employment agreement
between the parties that was effective as of October 4, 2004. As
provided in the employment agreement, Mr. Schoonover will forfeit stock options
with respect to 1.1 million shares of common stock. As of August 31,
2008, the unrecognized compensation expense associated with these forfeitures
was $8.3 million.
GENERAL
We are a leading specialty retailer of
consumer electronics, home office products, entertainment software, and related
services. We have two reportable segments: our domestic segment and our
international segment.
Our domestic segment is engaged in the
business of selling brand-name and private-label consumer electronics, personal
computers, entertainment software, and related services in our stores in the
United States and via the Web at www.circuitcity.com
and www.firedog.com. At August 31, 2008, the domestic segment
operated 705 Superstores and 9 outlet stores in 158 U.S. media markets.
Our international segment, which is
comprised of the operations of InterTAN, Inc., is engaged in the business of
selling private-label and brand-name consumer electronics in Canada. The international segment’s
headquarters are located in Barrie, Ontario, Canada, and it operates through retail stores
and dealer outlets in Canada, primarily under the trade name The
Source By Circuit CitySM. At August 31, 2008, the international
segment conducted business through 772 retail stores and dealer outlets, which
consisted of 502 company-owned stores and 270 dealer outlets. The
international segment also operates a Web site at
www.thesource.ca. In February 2007, the board of directors authorized
management to explore strategic alternatives for InterTAN, Inc., which could
include the sale of the operation.
Effective January 28, 2007, we returned
the management of 92 Rogers Plus® stores to Rogers Wireless Inc. Results
from the Rogers Plus® stores are presented as results from
discontinued operations for the three months and six months ended August 31,
2007.
In May 2008, we retained Goldman, Sachs
& Co. to assist us in exploring strategic alternatives to enhance
shareholder value. Management and the board of
directors have thus far concluded that, while strategic options will always be
explored as part of our fiduciary responsibility, given current market
conditions, it is prudent to focus internally on improving our performance in
order to operate as a standalone business.
Management’s Discussion and Analysis
(MD&A) is designed to provide the reader of financial statements with a
narrative discussion of our results of operations; financial position, liquidity
and capital resources; critical accounting policies and significant estimates;
and the impact of recently issued accounting standards. Our MD&A is
presented in seven sections:
|
·
|
Executive
Summary
|
|
·
|
Critical Accounting
Policies
|
|
·
|
Results of
Operations
|
|
·
|
Recent Accounting
Pronouncements
|
|
·
|
Financial
Condition
|
|
·
|
Financial
Outlook
|
|
·
|
Forward-Looking
Statements
|
This discussion should be read in
conjunction with our Consolidated Financial Statements and accompanying Notes
included in this report and in the fiscal 2008 annual report on Form 10-K,
as well as our reports on Form 8-K and other SEC filings.
Within the financial tables in this
quarterly report on Form 10-Q, certain columns and rows may not sum due to the
use of rounded numbers for disclosure purposes. Percentages presented
are calculated from the underlying whole-dollar amounts. All per
share amounts are presented on a fully diluted basis.
EXECUTIVE SUMMARY
Fiscal 2009 Second Quarter
Performance
|
·
|
Net sales declined 9.6 percent to
$2.39 billion from $2.64 billion in the same period last fiscal year
driven by a comparable store sales decline in the domestic
segment.
|
|
·
|
In the domestic segment, direct
channel sales, which include Web- and call center-originated sales, grew 1
percent, and firedogSM PC services and home theater
installation revenues decreased 5 percent from the same period last fiscal
year. In the second quarter of last fiscal year, we posted
direct channel sales growth of 20 percent, and firedogSM PC services and home theater
installation revenues increased 22
percent.
|
|
·
|
Gross profit margin increased 63
basis points to 21.3 percent due primarily to higher merchandise margins
as well as favorable mix shifts among product categories in the domestic
segment.
|
|
·
|
SG&A expenses as a percentage
of net sales increased 230 basis points from the same period last fiscal
year, which primarily reflects the overall de-leveraging impact of lower
sales in the domestic
segment.
|
|
·
|
Asset impairment charges were
$73.0 million, or 3.1 percent of net sales, for the second quarter of
fiscal 2009.
|
|
·
|
The loss from continuing
operations before income taxes was 9.9 percent of net sales compared with
a loss from continuing operations before income taxes of 4.8 percent of
net sales in the same period last
year.
|
|
·
|
We reported a net loss from
continuing operations of $239.2 million, or $1.45 per share, for the
second quarter of fiscal 2009, compared with a net loss from continuing
operations of $63.1 million, or $0.38 per share, in the same period last
fiscal year.
|
Our results of operations may be
sensitive to changes in general economic conditions that impact consumer
spending, including discretionary spending for our products and
services. The economic turmoil that has arisen in the credit markets
and in the housing markets during and following the second quarter of fiscal
2009 may suppress discretionary spending and other consumer purchasing habits
and, as a result, adversely affect our results of
operations.
CRITICAL ACCOUNTING
POLICIES
See the discussion of critical
accounting policies in Management’s Discussion and Analysis of Financial
Condition and Results of Operations in our fiscal 2008 annual report on Form
10-K. These policies relate to inventory valuation, goodwill, income
taxes, accrued lease termination costs, stock-based compensation and pension
plans. During
the second quarter of fiscal 2009, we recognized asset impairment charges
related to our fixed assets and have concluded that asset impairment charges should be considered a
critical accounting policy.
Asset Impairment
Charges
We test long-lived assets for impairment
when circumstances indicate the carrying amount of the asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the asset group to the estimated
future undiscounted cash flows of the related asset group over its remaining
life. If the carrying amount of an asset group exceeds its estimated
future undiscounted cash flows, an impairment charge is recognized to write the
asset group down to estimated fair value. Application of the
impairment test for long-lived assets requires judgments, including the
identification of the asset group, assessment of the probable remaining life of
an asset and the determination of fair value of the asset
group.
We estimate the fair value of an asset
group using a discounted cash flows approach. Applying this
methodology requires significant management judgments, including estimation of
future cash flows and selection of an appropriate discount
rate. Changes in these assumptions could materially affect the
determination of fair value.
Due to
our financial performance and our initiation of a comprehensive review of the
business, we evaluated our long-lived assets for potential impairment as of
August 31, 2008. The
evaluation considered information available at August 31, 2008, and resulted in
the determination that