CarMax 2000 Annual Report Download - page 50

CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT
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For fiscal 2000,the loss from the discontinued operations of Divx totaled
$16.2 million after an income tax benefit of $9.9 million. The loss from
the discontinued operations of Divx totaled $68.5 million after an income
tax benefit of $42.0 million in fiscal 1999 and $20.6 million after an
income tax benefit of $12.6 million in fiscal 1998.
In fiscal 2000,the loss on the disposal of the Divx business totaled $114.0
million after an income tax benefit of $69.9 million. The loss on the dis-
posal includes a provision for operating losses to be incurred during the
phase-out period. It also includes provisions for commitments under
licensing agreements with motion picture distributors,the write-down of
assets to net realizable value,lease termination costs,employee severance
and benefit costs and other contractual commitments.
Net Earnings
Net earnings for the Circuit City Group rose 33 percent to $197.3 million,
or 96 cents per share, in fiscal 2000. Net earnings for the Circuit City
Group increased 32 percent to $148.4 million,or 74 cents per share,in fis-
cal 1999,from $112.1 million,or 57 cents per share, in fiscal 1998.
Operations Outlook
Management expects that industry growth, primarily driven by the
introduction of better-featured products and new technologies,will be
the primary contributor to sales and earnings growth for the Circuit City
business during the coming decade. Management anticipates that growth
in the household penetration of products and services such as digital
television,direct broadcast satellite systems,wireless communications,
digital camcorders,DVD players,multi-function set-top boxes and broad-
band Internet access will contribute significantly to overall sales and
earnings growth.
During fiscal 2000,the Group undertook several significant merchandising
initiatives. Consistent with past practice,the Group added displays for new
products,which in fiscal 2000 included digital televisions,digital imaging
and high-speed broadband Internet access. The Group also announced
two significant vendor initiatives. Circuit City entered into a strategic
alliance with America Online,Inc.to provide in-store promotion of AOL
products and services and to increase Circuit City’s presence on the Inter-
net by featuring Circuit City as an anchor tenant on key Shop@ online des-
tinations across several America Online, Inc.brands. Circuit City and Sony
Electronics Inc.also announced plans to co-promote Memory Stick media
and hardware. In virtually all of the Circuit City Superstores opened since
the fall,the Group significantly expanded the number of self-service prod-
ucts. In July,the Group launched its electronic Superstore, circuitcity.com,
and it has continued to develop the site. The Group’s e-commerce business
is tightly integrated with its brick-and-mortar locations,allowing for
product pickup, returns and exchanges at the store.
In fiscal 2001,the Group will build on the initiatives begun in fiscal 2000.
The planned 25 new Superstores and all 571 existing Superstores will fea-
ture new displays designed to highlight the latest advances in technology.
These displays will include AOL Internet Centers; a Sony Memory Stick
Interactive Universe; significantly expanded displays highlighting digital
audio recording technology; redesigned wireless phone displays; more
prominent digital video displays; and additional digital television displays
and assortment. A full selection of video game hardware and software
will be added to all new stores and to a significant percentage of existing
stores. These enhancements will help ensure that Circuit City is in the best
position to capture the sales opportunity presented by the digital cycle.
The Group also will remodel 30 to 35 stores in the Richmond,Va.,and the
Miami,West Palm Beach,Tampa,Fort Myers and Orlando,Fla.,markets.
These remodeled Superstores will allow management to test a concept
dedicated to consumer electronics and home office products. These stores
will feature the technology displays discussed above; expanded assort-
ments of entertainment and computer software,peripherals and acces-
sories; and additional self-service areas. Superstores opened after the first
fiscal quarter also will be dedicated to consumer electronics and home
office products. In the remodel markets, Circuit City will test approxi-
mately six stand-alone major appliance stores to create better selling
space for the new technologies in the appliance business and to increase
consumer awareness of Circuit City’s appliance offering.
Circuit City has established its presence in virtually all of the nation’s
top 100 markets and will continue adding to the existing store base as
attractive market opportunities arise. Management believes that the
Group has the opportunity to operate approximately 800 Superstores
within the United States. In fiscal 2001, the Group will continue to expand
its Superstore concept into new trade areas, adding approximately 25
stores that are either new-market entries or fill-in locations in existing
Circuit City markets.
Management anticipates that the industry’s growth, geographic expan-
sion,Superstore remodeling and continued strong operating controls will
enable the Circuit City business to generate earnings growth of 20 percent
to 25 percent in fiscal 2001. Management believes that continued empha-
sis on revenue growth and operating margin enhancements at CarMax
will deliver solid profitability in fiscal 2001. The Circuit City Group’s
Inter-Group Interest in CarMax will partly reflect the CarMax results.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to the “Management’s Discussion and Analysis of Results of Opera-
tions and Financial Condition”for Circuit City Stores, Inc.for a review of
recent accounting pronouncements.
FINANCIAL CONDITION
In fiscal 2000, net cash provided by operating activities of continuing
operations was $618.6 million compared with $391.5 million in fiscal
1999 and $314.3 million in fiscal 1998. The fiscal 2000 increase reflects
a 51 percent increase in earnings from continuing operations for the
Circuit City Group and an increase in accounts payable,partly offset
by an increase in inventory. The fiscal 1999 increase primarily reflects a
decrease in net accounts receivable and improvements in net earnings for
the Circuit City business.
Most financial activities,including the investment of surplus cash and the
issuance and repayment of short-term and long-term debt,are managed
by the Company on a centralized basis. Allocated debt of the Circuit City
Group consists of (1) Company debt,if any, that has been allocated in its
entirety to the Circuit City Group and (2) a portion of the Company’s debt
that is allocated between the Groups. This pooled debt bears interest at a
rate based on the average pooled debt balance. Expenses related to