What’s Wattles Have Up His Sleeve? Can A New Management Team Attract A Suitor For Circuit City?

Mark Wattles knows his way around retail. So when he acquired a 6.5% stake in Circuit City last year, he clearly saw an opportunity to cash in on the consumer electronics retailer either turning its business around or at least becoming a takeover candidate. Now that Wattles has been successful in campaigning to drive out Philip Schoonover from the CEO seat, there are still some big questions and hurdles in the way of Wattles and other stockholders cashing in on a buyout.

Industry analysts have been quick to hang Schoonover out to dry over his controversial decision to lay off 10% of the chain’s highest-paid salespeople. However, it’s important to keep in mind that James Marcum, Wattles hand-picked successor for the CEO spot, inherits a lot of the same issues that were holding back the chain’s turnaround. While the layoffs of senior salespeople sent a terrible message to staff, customers and even Wall Street, insiders say the bigger issues for Circuit City are:

• Bad Locations & Leases: Most current and former employees from Circuit City report that chain’s new locations, particularly those opened under “the city” banner, are meeting or beating their sales forecasts. However, Circuit City’s total sales numbers are dragged down by older, underperforming stores in bad locations. The only way to get out of these bad leases would be for Circuit City to file for bankruptcy at some point, but that clearly would not help the company’s current share value.
• Competitive Squeeze: Let’s face it Best Buy is no slouch to have to square off with on a daily basis, so grabbing share from the top player in the category is not going to be an easy task. Circuit City is also feeling pressure at the low end from discount giants Wal-Mart and Target, who have increased their presence in key categories such as games, and flat-panel TVs. Wattles knows this all too well through his experience in running the Ultimate Electronics chain.
• Category Softening: A lot of the core product categories in the consumer electronics industry flat to down in terms of overall sales growth. Sales of CDs and DVDs are getting squeezed by the growth of digital platforms, while other growth sectors such as video games are dominated by specialty chains like GameStop.

Given all of these realities, it will be interesting to see what James Marcum and Mark Wattles can do to speed up Circuit City’s turnaround or make the chain a more attractive acquisition target. After Blockbuster dropped its purchase bid, Best Buy is the only other retailer in the category with the synergies and cash to consider some kind of merger. The recent acquisition of Napster probably means the folks in MN will have their hands full and are probably more interested in digital growth.

Of course, there is always the possibility of a financial player moving in to acquire and remodel Circuit City, the current credit crunch makes that option appear less likely, especially since no venture players have made a play for the retailer while its share price has hovered down between $1 and $2.

To Schoonover’s credit, he has improved Circuit City’s positioning by making the shopping experience more customer friendly across all channels. In addition the success of ‘the city’ format could serve as a nice platform for a future owner.

Circuit City is scheduled to announce second quarter results on Monday of next week, which could either be a stepping stone toward future momentum for Marcum or further consideration for the company’s Board to consider taking some more drastic measures.

Stay tuned.