Embattled Circuit City embroiled in another ugly proxy battle

A very interesting story is unfolding at troubled consumer electronics retailer Circuit City (NYSE: CC), where a shareholder group is publicly stating its desire to have Chairman and Chief Executive Officer Phil Schoonover oustered.
Circuit City LogoAs reported by the Wall Street Journal, the dissident shareholder group, Wattles Capital Management (led by Mark Wattles), has a 6.5% share in the corporation (which, at the current depressed share value, is worth 50.8 million dollars. 12 months ago it was worth over $200 million. I’d be upset too!)
6.5% doesn’t sound like much, certainly less than a controlling interest, but in the way of publicly traded companies, Wattles is bringing its proxy battle to the annual Circuit City shareholder’s meeting and not only is pushing for a replacement for Phil Schoonover, but also has a proposed new lineup of five Directors for the corporation.
What I find interesting about this story is that I share the concerns and criticisms of Schoonover. In fact, I wrote on this very blog quite a while ago about Circuit City downgrades employees, guarantees eventual demise. The Journal reporting in this latest story parallels exactly:

“Wattles said Mr. Schoonover and his senior management team appear to have focused on cost-cutting measures with little or no consideration for their negative impact on revenue and gross profit, referring to the company’s year-ago layoff of 3,400 workers. To much criticism, Circuit City replaced them with lower-paid staff.”

During this same time period, industry publication Twice has been reporting recently that competitor Best Buy (NYSE: BBY) has been retaining its strong industry lead in the consumer electronics market.
On the other hand… a recent report in Twice shares the result of a consumer survey that notes “price was the leading factor [in consumer preference for one store over another], cited by 70.8 percent of respondents. Selection was cited by 55.6 percent, followed by location (45.9 percent), “quality” (36.5 percent) and service (26.4 percent).” Most important to this discussion of Circuit City: “Knowledgeable salespeople were the least important factor, cited by 20.2 percent of respondents.”
Savvy consumer electronics industry watchers have seen this coming for years, but the same report also indicates that more people would rather buy their CE at Wal*Mart (NYSE: WMT) than Circuit City, which is a death knell if I ever heard one. I mean, Wal*Mart? Have you gone into a Wal*Mart and tried to buy any electronics? Target (NYSE: TGT) maybe, but Wal*Mart?
Wattles is right in being unhappy with the performance of Schoonover and his Board of Directors. Circuit City has reacted stupidly to the challenges of the current consumer electronics industry. But what I haven’t seen mentioned in any of the stories I’ve read about the proposed changes to the Board is the threat of online retailers like Amazon.com (Nasdaq: AMZN), where the lack of physical storefronts means that they can have a significantly lower overhead. If indeed almost 71% of people consider price the most important factor in a consumer electronics purchase, I suggest that the cost of physical stores — and stores that aren’t well run and efficient — is far more of a problem than anything else.
Overhead, that’s what can kill a retail company in this new century, and even a comparison of Circuit City and Best Buy is revealing: Circuit City’s overhead (sales, general and administrative expenses) is $25 per $100 in sales while more nimble competitor Best Buy pays $15 per $100 in sales. That’s a massive difference!
There are two reasons I find this situation interesting, obviously. The first is that I like Circuit City and have been distressed to see the obvious mismanagement by the executive team, but the other reason is the demonstration of how a vocal minority can have a significant effect on a corporation. Think about it: this is all coming to pass because a shareholder with less than 10% of the stock is, in the immortal words of Peter Finch, “mad as hell and not going to take it any more!”

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