It Is A Bad Sign When The Boss Blames It On The Real Estate

Implications: As a veteran of 40 years at the highest levels of the corporate retail real estate industry and as a close observer of Circuit City's real estate efforts since their inception, it is my opinion that Mr. Schoonover is simply using the real estate as a coverup for his bad decisions. Mr. Schoonover has said that one of their biggest challenges is that "400 of their 654 stores are too big, outdated, or in suboptimal locations, or all of the above".  He has said some other equally ridiculous things about other parts of his operation but since this writer's credentials are primarily based in real estate, I will leave the merchandizing and financial comments to others. 

Analysis: Let's take a look at each part of Mr. Schoonover's attempt to blame his operational problems and bad decision making on Circuit City's real estate.

First of all he says "the stores are too big". As the CEO of the second largest appliance and electronics retailer in the world, he should be aware of the constant changes in prototypes that both Best Buy and Circuit City (as well as most other retailers of every type) have gone through over the past 25 years.

Most good merchants are clamoring for MORE SPACE and always have ideas about how they could make more money if they just had the room to display more merchandize. Over the years Circuit City's size has varied both up and down with each new technological advance or merchandizing whim. Trust me when I tell you that I have sat in endless meetings listening to merchants argue with the CFO over store size and which departments will stay and which will go.

Next he says they are "outdated". I submit that this is a meaningless term that could be used to mean anything from being in need of a paint job to a complete overhaul.  Either way it is a problem that can easily be solved by increasing the capital expenditure budget.

Finally he says they are in "suboptimal locations". This is probably the silliest remark of the whole bunch.  Circuit City has long held the reputation of having one of the smartest bunch of real estate people in the industry. When the Wurtzel family fan it, Sam's son took particular interest in making sure each new location was the best it could be. The fact that Best Buy has now entered every market that Circuit City formerly had pretty much to themselves and located stores in equally prominent, but obviously newer strip centers, is the real culprit.  

It is also interesting to note that neither the "size" argument or "location" argument are capable of near term solutions so if these are truly the reasons for the sudden drop in profits,  the likelihood of a turnaround within the next 5 to 10 years is highly unlikely. Either Mr. Schoonover is correct in his assessment and the matter is hopeless, or Mr. Wattles is correct in demanding his ouster.

I suspect the latter is the case.