Circuit City CEO Gets Unplugged

Philip Schoonover quits under pressure from major investor Mark Wattles and other shareholders who are tired of waiting for a turnaround

by Pallavi Gogoi

Finally bowing to pressure from activist shareholders, Philip Schoonover stepped down as Circuit City (CC) chief executive officer on Monday, Sept 22. Schoonover is being replaced by James Marcum, who will be acting president and CEO.

Marcum was elected to Circuit City's board of directors in June, after being nominated by activist investor Mark Wattles, who controls a 6.5% stake in the beleaguered electronics store chain. Marcum has some experience in retail turnarounds, having worked at Ultimate Electronics, a retailer specializing in home and auto electronics. In a statement, Marcum said: "We believe that by fine-tuning our focus and strategies we will be able to leverage this history and build a stronger future for the company."

While Schoonover's resignation might be considered a victory for Wattles, it is still unclear as to what fate awaits Circuit City. After all, Wattles has said in the past that he wants the company sold (BusinessWeek.com, 6/24/08) as soon as possible. And in May Circuit City had said that it had hired Goldman Sachs (GS) to explore strategic alternatives.

Falling Shares

A $1 billion acquisition proposed by Blockbuster (BBI) fell apart in July as the economy weakened. Circuit City management had initially resisted the bid, but later relented. It doesn't appear that any serious would-be buyers have emerged since then.

Wattles didn't return a call for comment by deadline.

Circuit City shares have dropped precipitously in the last 12 months. They are now down 80% from a year ago, to 1.70, and Wattles and other large shareholders such as HBK Capital Management, which bought 9% of the company's shares, haven't fared well.

Circuit City never recovered from a price war that erupted two years ago over flat-panel TVs, when prices plummeted 40% to 50% (BusinessWeek.com, 4/23/07). Competitors such as warehouse club Costco (COST) and discounter Wal-Mart (WMT) began aggressively promoting their electronics goods and Circuit City could not keep up. Worse still was the onslaught of the current economic downturn as consumers have closed their wallets to discretionary spending.

Bad Move

Schoonover was slammed for his cost-cutting decision in early 2007 to fire 3,400 of Circuit City's most experienced employees. The company said at the time that they were earning too much money and could be replaced with cheaper workers. But analysts said the move devastated morale and led to a decline in service.

In its most recent quarter, ended May 31, Circuit City lost a net $164.8 million, triple its loss in the same period a year earlier. Sales at stores open at least a year fell by 11%, the company reported.

Whether Marcum decides to sell the company or turn it around, he has his work cut out. He's taking over amid a contracting economy and credit crunch, when retailers are filing for bankruptcy left and right. "There's deceleration in all key consumer electronic products," says Andy Hargreaves, an analyst at investment bank Pacific Crest Securities in Portland, Ore. "With all these headwinds, Marcum doesn't have an easy job."

Gogoi is a contributing writer for BusinessWeek.com.