CarMax 2002 Annual Report Download - page 31

29 CIRCUIT CITY STORES, INC. ANNUAL REPORT 2002
CIRCUIT CITY STORES, INC.
than total net earnings and net earnings per outstanding CarMax
Group share because of the impact of the public offering of
CarMax Group shares during the second quarter of fiscal 2002.
Loss from Discontinued Operations
On June 16, 1999, Digital Video Express announced that it
would cease marketing of the Divx home video system and dis-
continue operations, but existing, registered customers would
be able to view discs during a two-year phase-out period. The
operating results of Divx and the loss on disposal of the Divx
business have been segregated from continuing operations and
reported as separate line items, after tax, on the Company’s con-
solidated statement of earnings for fiscal 2000.
In fiscal 2000, the loss from the discontinued Divx opera-
tions totaled $16.2 million after an income tax benefit of $9.9
million. 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 disposal included a provision for operating
losses to be incurred during the phase-out period. It also
included provisions for commitments under licensing agree-
ments 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.
As of February 28, 2002, entities comprising the discontinued
Divx operations have been dissolved. The remaining liabilities,
totaling $18.5 million, have been assumed by the Company and
are included in the consolidated balance sheet.
Net Earnings
Net earnings for the Company were $218.8 million in fiscal 2002,
$160.8 million in fiscal 2001 and $197.6 million in fiscal 2000.
Operations Outlook
THE CIRCUIT CITY GROUP. We believe that increased consumer
interest in products and services such as big-screen televisions,
including digital televisions, plasma televisions and liquid-crys-
tal display panels; multi-channel video programming devices;
digital imaging; wireless communications; and Broadband
Internet access will drive profitability in the consumer electron-
ics business during this decade. For that reason, we are focusing
significant resources on store remodeling, sales counselor train-
ing, customer service enhancements, marketing programs and
supply chain initiatives to take advantage of the growth oppor-
tunities these products provide and thus improve the sales and
profitability of the Circuit City business.
Over the past two years, we have experimented with several
remodel designs and product category tests to expand the benefits
of the new Circuit City store design to the existing store base. In
fiscal 2003, we plan to draw on these remodel and product cate-
gory tests to roll out a remodeled video department and lighting
upgrade to approximately 300 Circuit City Superstores, spending
an average of $325,000 to $350,000 per store. We believe that
rolling out this remodeled department will enable us to increase
Circuit City’s market share in the growing and highly profitable
big-screen television category and further solidify our position in
the overall video category. The Consumer Electronics Association
projects that big-screen television sales will grow at a double-digit
rate in calendar 2002. The fiscal 2003 remodeling plan will allow
us to touch a large number of Circuit City Superstores in a man-
ner that has significant potential for incremental benefit, while
minimizing the disruptive impact of the remodeling process. We
expect the remodeling activities will take approximately two weeks
to complete in each store. We will continue testing design ideas
for other departments in the Circuit City Superstores. We also
plan to relocate approximately 10 Circuit City Superstores in fiscal
2003. In fiscal 2003, we expect Circuit City expenditures for
remodeling and relocations to total approximately $130 million,
of which we expect to capitalize approximately $70 million and
expense approximately $60 million, or 18 cents per Circuit City
Group share. We plan to continue improving the Circuit City
store base in fiscal 2004 and fiscal 2005 by completing the
remodel of these 300 stores and by relocating additional stores to
provide a shopping experience that we believe is more consistent
with the preferences of today’s consumer.
With existing Circuit City initiatives, additional efforts to
enhance the business and a relatively stable economy, we believe
Circuit City can achieve comparable store sales growth in the
mid-single digits for fiscal 2003. We expect that categories where
we expanded selections following the exit from the appliance
business and categories, such as big-screen televisions, that are
benefiting from digital product innovation, will contribute to this
growth. We plan to open approximately 10 Superstores in fiscal
2003. Given our presence in virtually all of the nation’s top
metropolitan markets, new Superstores are being added in one-
or two-store markets or to increase our presence in existing major
markets. Because of the limited planned geographic expansion,
we expect total Circuit City sales growth to only slightly exceed
comparable store sales growth. We expect relatively stable Circuit
City gross profit margins in fiscal 2003. We also expect a modest
increase in the Circuit City expense ratio in fiscal 2003, despite
the anticipated increase in comparable store sales. Planned
increases in remodeling and relocation expenses, advertising and
systems enhancements are among the anticipated contributors to
the higher expense ratio. For the full year, we expect the fiscal
2003 profit contribution from Circuit City’s finance operation to
be similar to the contribution in fiscal 2002.
We currently expect the Circuit City business will contribute
75 cents per share to 85 cents per share to the earnings of the
Circuit City Group in fiscal 2003, before remodeling and relo-
cation expenses. Including these expenses, we expect the Circuit
City business will contribute 57 cents per share to 67 cents per
share to the earnings of the Circuit City Group.
THE CARMAX GROUP. Over the past two years, CarMax has
demonstrated that its consumer offer and business model can
produce strong sales and earnings growth. Given its solid finan-
cial performance, we believe CarMax is able to support its
growth independently.
In fiscal 2003, CarMax’s geographic expansion will continue to
focus on entries into mid-sized markets and satellite store oppor-
tunities in existing markets. We have identified more than 30
additional markets that could support a standard superstore, the
principal CarMax store size going forward. We also believe that we
can add approximately 10 satellite stores in CarMax’s existing
markets. In fiscal 2003, CarMax plans to open four to six stores,
approximately one half of which are expected to be satellite stores.