- The Washington Times - Wednesday, March 28, 2007

Circuit City Stores Inc. said yesterday it plans to lay off 3,400 employees to replace them with lower-paid workers in an attempt to turn around lagging profit margins.

The Richmond company, second to Best Buy in consumer electronics sales, reported its first loss in six quarters in December, despite a 7 percent increase in sales from a year ago. Its expenses rose 8 percent.

Circuit City said the 3,400 employees — who represents about 7 percent of the work force — were “paid well above the market-based salary range.” They will be replaced with people “compensated at the current market range.”

Circuit City pays about $10 to $11 per hour, on average, analyst Rick Weinhart told Bloomberg News. The BMO Capital Markets Corp. analyst said entry-level pay is probably about $8 for inexperienced employees.

The company also said it will outsource its information technology operations to IBM, reducing information technology expenses by more than 16 percent. About 80 employees will be laid off and another 50 will remain as IBM employees.

Analysts said this could signal the start of Circuit City’s turnaround.

“The first thing they had to do is get rid of some of the costs so they didn’t go into negative cash flow,” said Andy Hargreaves, an analyst at Pacific Crest Securities in Portland, Ore. “They had to make sure they were as lean as they should be — as lean as their competitors are.”

Mr. Hargreaves does not own stock in Circuit City.

The moves announced yesterday and 70 store closings announced last month are expected to save the company $110 million next year and $140 million in later years.

Retailers are always looking to cut costs, but large layoffs like this — with the announced intention to bring in lower-paid workers — aren’t common, Mr. Hargreaves said. But when it happens, it’s often from retailers struggling to bounce back from lagging sales or a cost structure that has gone out of control.

RadioShack is a recent example. It fired about 400 employees — through e-mail — in August to cut expenses.

Circuit City’s layoff is the largest by any retailer since Ahold, the Dutch company that owns Giant Food, fired 4,100 employees at its Tops Market chain in Ohio, according to Challenger, Gray and Christmas, a Chicago outplacement firm.

Analysts said yesterday that Circuit City’s moves were long overdue after a series of executive missteps.

“I certainly think they should be applauded for aggressively implementing turnaround initiatives,” said R. Scott Tilghman, an analyst at Soleil Securities in Elkridge, Md. “That said, I think the rationale for the bulk of those layoffs could damage morale in some of the stores.”

If the employees facing pink slips have been with the company for years, staff morale and the overall knowledge base would suffer, Mr. Tilghman said.

“If they’re new hires, it raises the question why they were hired at that [wage] in the first place,” he said.

Mr. Tilghman does not own stock in the company, and Soleil does not have an investment banking relationship with Circuit City.

Circuit City warned that sales could be volatile during the first half of the fiscal year, which began March 1, because of the “significant nature of the changes being implemented,” but expects to improve execution before the important holiday shopping season.

The electronics retailer also hired Goldman Sachs to study “strategic options” in regard to InterTan Inc., its Canadian chain. Circuit City plans to announce results for fiscal 2007, the year ended Feb. 28, next week.

The retailer’s stock rose 1.7 percent to close at $19.20 on the New York Stock Exchange.

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