車美仕 (KMX) 2001 Q4 法說會逐字稿

Good morning and welcome to the Circuit City fiscal 2002 results conference call.

hosting the call this morning are Alan McCollough, President and Chief Executive Officer of Circuit City Stores, Inc. and Austin Ligon, President of CarMax.

Mr. McCollough will open the call with a brief overview of the consolidated results for Circuit City Stores, Inc. before turning the call over to Mr. Ligon.

Mr. Ligon will begin by reviewing CarMax's fourth quarter and fiscal year results. following the CarMax Group review will be a question and answer period.

Mr. Ligon will then turn the call over to Mr. McCollough to review Circuit City's fourth quarter and fiscal year results followed by a question and answer period.

If you would like to ask a question during today's conference, please press star one.

To withdraw your question, please press star two. If you need assistance at any time please press star zero.

I will now turn the call over to Mr. McCollough.

Good morning and thank you for joining us.

Earlier this morning we announced fourth quarter and fiscal year 2002 results for both the Circuit City - for both Circuit City and CarMax. In both cases results were in line with our expectation as shared with you in February.

So I will start this call with a brief overview, a very brief overview of the consolidated results for Circuit City Stores, Incorporated. Austin will then provide you with a review of the CarMax results, a discussion of our fiscal 2003 outlook for this business and following Austin's remarks we'll take your questions about CarMax.

I will then proceed with a review of the Circuit City business results and comment on our fiscal 2003 outlook for this business following which we'll once again open the floor for questions on Circuit City.

Many of you by now have noted that we filed a registration statement with the SEC late on Friday afternoon.

The registration statement included a preliminary proxy prospectus with regard to our previously announced plans to separate CarMax from Circuit City. Given the timing of the filing, this document contains financial and

information for the nine months ended November 30th, 2001.

The final proxy prospectus will include full year 2002 financial and

information.

Given the time constraint of today's call we would appreciate it if you would limit your questions to our fiscal 2002 results and fiscal 2003 expectations.

A copy of the registration statement is available on

and can be found by searching

under the -

archives under CarMax.

Before starting, once again I would also remind you that both Austin's and my comments his morning will include forward-looking statements, which are subject to certain risks and uncertainties, and we would refer you to our SEC filings for a full discussion of those risks.

So again, briefly for the Circuit City Stores, Inc. fourth quarter and fiscal year 2000 sales and earnings, fourth quarter consolidated sales were up nine percent to $4.17 billion from 3.82 billion last year. Fourth quarter consolidated net earnings were up 54 percent to 159.3 million from 103.2 last year.

Fiscal '02 consolidated sales were actually down one percent to 12.79 billion from 12.96 last year and fiscal '02 consolidated net earnings were up 36 percent to 218.8 million from 160.8 million last year.

With that, I'm delighted to turn the call over to Austin to talk about the CarMax results and our outlook for 2003 --

Austin.

Thanks, Alan, and good morning.

Let me begin with fourth quarter sales. In the fourth quarter as in every quarter of fiscal 2002 CarMax produced exceptionally strong used car and new car sales growth, virtually all of which was comp store sales growth.

Total sales for the fourth quarter were up 22 percent compared to the fourth quarter of fiscal 2001.

In December both used and new car sales continued to benefit from the windfall addition sales, from customers drawn into the market by zero - by the zero percent financing incentives that were so common in the fall.

When new car manufacturers returned to more conventional incentives in January and February, used car comp unit sales returned to the roughly 20 percent levels we experienced in the first half of the year.

Our fourth quarter sales growth was also helped by a mild winter weather in all of our markets for the second year in a row. As a result, total dollar comps rose 23 percent and total unit comps 22 percent.

Most importantly, used unit comps which drive our profitability rose 23 percent, a very strong performance given the tough comparison of 19 percent used unit comps in last year's fourth quarter. Comp store new car unit sales in the fourth quarter rose 11 percent.

Turning to fourth quarter earnings, in the fourth quarter we once again met our targets for average gross margin dollars per used unit as we have throughout the year. The strong used unit comp growth generated considerable leverage of fixed expenses and corporate overhead so that for the quarter our expense ratio was nine percent compared to last year's 10.4 percent and fourth quarter net earnings rose 136 percent to 18.4 million.

Turning to the entire year, FY02, as far as sales go, total sales rose 28 percent reaching 3.2 billion with comp store units up 23 percent and comp store dollars up 28 percent reflecting a five percent rise in used car average retails and a two percent rise in new car average retails. Used unit comps for the year were up 24 percent.

The key drivers of our strong used unit comps throughout the year included, as we've mentioned before, first strong traffic increases driven by the strength of the CarMax consumer offer, the huge selection

, prices, guaranteed quality and customer friendly environment that we provide the consumer, strong continuing positive word of mouth which means that for every car we sell we generate word of mouth that generates more customers and continuing growth of

which has become our most effective marketing tool. In FY02 for example,

produced 15.1 million user sessions, up more than 60 percent from the 9.4 million user sessions in F.Y. '01 with no additional markets as well as in addition we had an - a continuing improvement in execution as our store teams matured and we focused on our continuing improvement programs in both sales execution and inventory management.

Turning to FY02 earnings, for the year used unit comps and the leverage of fixed expenses and corporate overhead that they provided to help strive net earnings growth. We benefited also from the excess yields that our finance operation, CarMax Auto Finance, experienced during the year as cost of funds moved down dramatically.

Net earnings rose 99 percent for the year to 90.8 million from 45.56 million in fiscal 2001 and net earnings per CarMax Group share rose 91 percent to 82 cents from 43 cents in fiscal 2001.

So let me turn now to fiscal 2003 expectations.

Fiscal '02 was an outstanding year for CarMax. The CarMax concept and associates delivered exceptionally strong core sales and earnings growth.

We also benefited from two windfalls that we don't expect to see repeated. We had unusually strong traffic and sales in the October through December period driven by the unprecedented zero percent financing programs post September the 11th and we had unusually high spreads in our finance operation driven by the Feds' aggressive anti-recession interest rate policy.

In fiscal 2003 we expect another strong year. We believe that even against last year's tough comparisons, we can deliver used unit comp growth in the low to mid teens in the first half of the year moderating to high to low double digit used unit comps in the second half.

We'll also add sales from our new store openings beginning with

and the Sacramento market later this month and continuing at four to five super stores during the second half of the year including new market entries in Knoxville and Las Vegas as well satellite super stores in the Chicago and Charleston market.

Overall we anticipate total used car sales growth in the 15 to 20 percent range.

Taken together, we believe this strong used car comp growth should produce earnings per CarMax Group share in the range of 95 cents to $1 for fiscal 2003.

Factors that affect our earnings outlook include lower excess yields from our finance operation as interest rise.

In fiscal 2003 we expect that this excess spread that we enjoyed in FY02 will diminish gradually during the course of the year approaching F.Y. '01 levels by year end. We already have seen interest rate increases in recent months.

We also expect additional employee expenses such as training and relocation as we deepen our management pool in preparation for future expansion. And finally we expect to see increases in our ongoing operating expenses in the second half assuming our proposes separation from Circuit City takes effect.

In summary, we expect operating earnings per share of 15 to 20 percent growth for fiscal 2003 despite some increases in our ongoing cost space and in comparison to a year with two unusual profit windfalls.

With that, I'd be happy to take some questions.

Thank you. At this time we are ready to begin the formal question and answer session.

If you would like to ask a question please press star one. You'll be announced prior to asking your question.

One moment please.

Our first question comes from

of

.

Good morning. I had a question on CarMax - on Circuit City so I apologize for

OK. Put

in line and make sure he gets a chance to talk to Alan.

By the way I have Keith Browning, our CFO, here as well to answer questions.

,

you may ask your question.

Thanks. I realized that you opened a couple of stores I think towards the tail end of the fourth quarter, kind of hard to back into a new store productivity number out of there but can you give a sense maybe since then and relative to plan how the new stores have opened up and followed through?

What I'd tell you is that the new stores opened well and we are pleased with how they've gone. You know it's obviously very early.

They've only been open more like exactly a month but they both got off to a real strong start and we're quite pleased with how they started and expect to see good results as we go forward opening new stores this year.

Thanks.

,

Company, you may ask your question.

Thanks.

Good morning and congratulations on a terrific year.

Thanks

.

Two questions, one can you just give us the cap ex number for fiscal '02 and what your expectation is for '03 and then secondly with regard to your expectation regarding your earnings contribution from the finance unit, I just want to be clear.

Does that include or exclude the commissions generated on loans that you originate for third party lenders?

I'm going to let Keith answer both of those for you.

Cap ex was the first question.

Cap ex for next year we expect to be in the range of $200 million.

And the second question was?

, you want to repeat your second question?

Sure. Your guidance for basically flat year over year contributions in the finance business, fiscal '03 versus '02, does that include or exclude commissions that you generate on loans originated for third party lenders?

That excludes the loans from third party lenders.

That excludes that.

Right.

OK.

Thank you.

of Morgan Stanley, you may ask your question.

Thanks and congratulations on a great quarter.

Thanks a lot

.

A quick question on your point on the rate spread for '02. Can you translate that into sort of an interest rate assumption for us?

What are you assuming the Fed does to keep that contribution - so that would, you know, be implied by the flat contribution year over year? And then also one follow up just on the real estate expansion, as you are ramping up the pipeline again here and you talked about some of the specifics in the press release, how are you progressing in terms of, you know, time table of finding stores, getting them open, et cetera, any surprises there or is that working as expected?

Thanks.

I'm going to answer the second question first and then I'll turn back to Keith to get to - let him be the interest rate forecaster for the marketplace. Who knows?

There may be a job at the Fed for him.

As far as - as far as real estate growth plans, as we said our goal this year is to open five to six stores and as we announced we're certainly going to be within that range.

Exactly how many we open we obviously won't know until we get a little further into the year because they're always permitting things but we think we'll be in the five to six store range and going forward, you always find surprises in real estate.

The surprising thing would be if you didn't.

You know, these are large complicated real estate deals.

They're not simply taking a slot in somebody's shopping center but in the scheme of things we know that we've doing it for some years and we have a pretty good pipeline of stores out there both satellite and single store markets that we believe will let us meet the sort of projections that we've given which is five to six stores for this year and then ramping up to the six to eight store range for the following couple of years and what the mix is in terms of which mid sized markets or which satellite stores we'll end up opening each year really kind of evolved as we work our way through the real estate process but we're pretty confident that we'll be able to get what we want just by maintaining an active pipeline there.

Keith, do you want to comment on the interest rate environment?

Well first of all I'd tell you that we can't predict what the Fed is going to do. However what we've projected is that the market will move in advance of what the Fed does which it has done already and that we expect that the rates will you know increase ratably throughout the year probably somewhere in the range of 35 to 50

for our cost of funds progressively per quarter as the year progresses.

OK. Keith, what's the best benchmark to use for your cost of funds?

Probably two year treasuries.

OK.

Great. Thank you.

Thanks

.

, Bank of America Securities, you may ask your question.

Good morning. Congratulations on a good quarter.

Thanks

.

I'm wondering if you can give us some insight into the costs in the back half of the year particularly costs, pre-opening costs per store, some of the costs associated to additional associates in training, et cetera, and as that relates to the spin off from Circuit City and distinguish that between the eight cent charge that we will see later in the year due to the spin off or you know those one time charges?

Let me start first with pre-opening. Pre-opening we typically talk about being in the range of $700,000 per store and this year the majority of the stores will open in the second half so most of that will hit in the second half of the year.

In terms of the one time costs that we talked about, those are - those are specific costs related to the separation as opposed to changes in our ongoing operating expenses, which we also referred to. So the $8 million is the one time cost of mostly lawyers and a few investment bankers, the lawyers and investment bankers, which is why it's so high.

Sorry. Lawyers and investment bankers, that's a one-time cost and then the ongoing costs are the ones that we've talked about, separating the advertising organizations, et cetera.

We didn't quantify that but we've built into our budget, you know, it's several million dollars but we didn't say exactly how many million dollars per year to operate separately from Circuit City.

As far as incremental employee costs, what we did note is because this is the first year that we are opening a significant number of stores, I mean we opened two at the very end of last year.

There are some one time costs of just getting our bench deepened that are not really pre-opening costs so much as they are beginning to deepen the bench at sort of a step function one time to add bench and start moving people around to be ready to open stores again.

So hopefully that answers the pieces for you.

Yeah. It's very helpful.

Thank you.

Thank you.

of

, you may ask your question.

Yes.

Thank you. I have two questions if I may.

First of all, can you talk about the magnitude of the upside that you saw to the numbers in 2001 or your fiscal 2002 from the declines in interest rates? In other words if you can talk about it, how much of the - how much of the - of the beating of expectation over the course of the year reflected that?

And then secondly, on the going forward basis, if you could just update us as to what you're seeing in terms of used car gross margins based on pricing and the new car market particularly some of the intensity of the new car promotions has begun to abate?

Yeah.

We have not given any specific guidance on how much extra we got out of spread last year. You can work through, based on the Internet note we gave you in the spring, you can work through and make your own estimate of it but we haven't given any specific guidance on that and are not going to at this time.

Fair enough.

As far as gross margin goes, in general I mean we - what's going on now in the new car market is similar to what's been going on for the last three years which is an all out no holds barred price war but is not what went on last fall which was, you know, General Motors making fiscal policy and the price war that we're experiencing now is really not different than the one that we've seen going on for the last several years and used car - used car pricing in the wholesale market has long ago adjusted to the expectation that there're going to be very aggressive incentives on new cars and so we're not really seeing any broad impact on used car gross margins.

If you get very specific on a specific make/model as we've discussed before, that's part of the key to being in this business is trying to monitor and stay ahead of who has too many of a specific car that's not selling and understand when they're going to cut the price or add a big incentive on that and make sure that you're thin in that inventory before they do it so that you can take advantage of the wholesale price fall that will result in the marketplace once they do add a big incentive and it cycles around but you can monitor that about as well as we do if you just looked at what's going on in the wholesale market and look at what the daily inventories are.

And so there are the specific make/model issues there as there always are in the marketplace but there's no broad impact on gross margins.

OK.

Thank you.

Sure.

of

, you may ask your question.

Hey Austin.

How are you doing?

Fine

.

Your same store sales estimate is somewhat higher than your previous outlook of about five percent. I was wondering if you might be able to explain how you arrived at that and what you're seeing so far or what you've seen so far in March?

Yeah. The answer is as you know I won't tell you what we're seeing so far in March because what we're talking about today is last year plus expectations for the coming year and so March falls in the range of expectation.

We arrived - we arrived at the embedded unit forecast - comp unit forecast based on history, based on trends, and based on the best analysis we can put together. It's not as conservative as the five percent we used last year.

It's - that's based on what we believe are the underlying trends in the business and what we think are the effectiveness of the components driving that,

, the maturation of our markets, the continuing maturation of the old

markets. As always any estimate like that is exactly.

It's our best estimate at this time based on run rates,

the year and looking forward and trying to understand based on everything that we've seen so far or what do we think it's going to come out as and that's all I can tell you. It's our best guess at this point.

We think it's a reasonable one but we'll see how the year comes out.

What are your expectations in terms of mix, you know, between later model used cars?

We actually don't focus a lot in terms of our forecasting on mix because in the scheme of things it doesn't matter to the profitability of our business and because the gross margin per used unit is about the same in dollars. So although mix changes can drive the dollars per car sold around and change some of the percentage numbers on our - on our P&L, we've given you guidance on used unit comps to get around that issue because that's really the focus of what drives our business.

So we don't really focus on mix.

OK.

Thank you.

of

and Company, you may ask your question.

Good morning guys and congratulations. I just had a quick question regarding the SG&A.

It looks like your core SG&A and that would be I guess your SG&A prior to the offset from the financing is going up about 20 percent this, I guess 20 percent last quarter according to my numbers as well and I was just wondering if you could give me some guidance as to how I should look at that for next year just when you have the additional expenses coming in from the new stores, whether some of that's being factored in right now and I guess just, you know, what I should think there in general.

The - I think the SG&A you've got to look at is being in the range you'd expect from comps plus some added costs and we wouldn't give you a specific forecast of how that's going to sort out over the year.

I mean you can - you can back into a forecast if you want from the earnings but it's - obviously there're going to be some added costs over the year and we haven't given a specific forecast of how

going to increase.

Sure.

I understand that. Just I mean does the - it seems like the 20 percent right now is - I'm just confused as to where that ramp up is occurring right now since you haven't actually added any of the stores this year and I mean should I expect it to go higher next year or ...

We did actually add two stores in the fourth quarter of this year.

Well right.

Yeah. And all of the pre-opening and all of the grand opening expenses associated with those stores.

OK.

And we also had some of the pre-opening expenses for our

store in Sacramento hit in the fourth quarter of this year as well as some of the broader bench building costs that we talked about which is adding management for those six stores that we're going to be opening later in the year, just deepening our management bench and moving people around to have them positioned to open those stores.

So all of those costs were hitting in the fourth quarter of this year.

OK.

OK.

OK.

So it sounds like then that next year once you really start to ramp up the new stores then probably that mid to high teens growth in SG&A in the core SG&A again, does that sound kind of reasonable?

Mid to high teens growth in core SG&A.

Again core SG&A the way I'm looking at it is just ...

Yeah.

And the - what I was going to say is the best thing for you to do I mean I think we've given you enough numbers that you can - I'm not sure what you're calling core SG&A but I think we've given you enough that you can make an estimate of that.

Sure.

Well just to clarify it so you sort of understand where I'm coming from I guess, the core SG&A the way I'm looking at it is just your reported SG&A plus the offset from the financing.

So it's just your total SG&A prior to the offset from financing.

Yeah.

We haven't given you an offset from financing. You have - you had the component of

.

Sure. Yeah.

Exactly. It would be the cash SG&A.

So the answer is I understand that you have some numbers. You don't have all of the numbers you need to do this.

We haven't put a forecast out there and I can't really respond to or don't want to respond to sort of forecasting that particular way of subtracting one piece from the other piece. OK.

I mean it's - you need to - you can certainly do your own forecast from what we've given you but we don't break it out that way.

Sure.

No. Yup.

I understand. OK.

OK.

Thank you very much.

Sure. OK.

One more question.

of

Capital, you may ask your question.

Good morning guys. congratulations.

Thanks.

If I make the assumption that 2002 would be a year - a peak year, that's my assumption about the excesses you could earn from financing, what would be the other end of - what would be the book end from that calculation then in terms of a depressed year if we go back and look?

Did you hear what he asked? He said if 2002 was a peak year, what we could earn above what's some sort of normalized year might be, what would be the book end of a depressed year?

What's the - how much could you lose on spread?

I'm not sure I know how to answer.

Yeah. OK.

I think Keith's answer is that it's not clear - you know, we know exactly what the best way to answer that would be because I'm not sure ...

You know I'm just -

.

I mean I understand that it's all going to be driven off the ...

Yeah. The ...

but I'm just trying to think back on in terms of a percentage of the offset that you could get on SG&A.

Our experience so far is that this - that the upside offset was somewhat asymmetrical to the historical experience and it's just out historical experience over the period in time that we've been in business I think is probably the best way to put it that this was a - this was a very unusual year and I'm not sure that we've seen something similar to it either on the upside or the downside previously so I don't really know how to compare this year to another year either direction.

I'm sorry that's not more helpful but it - you understand how unusual a year this was in Fed policy and I think that created some of this and that there's not necessarily a symmetrical book end to this particular year.

OK.

OK. And with that, let me turn it over to Alan to talk about the Circuit City business.

Thank you Austin.

Again, in case some of you joined us in the middle of the call, I'd remind you that my comments include some forward-looking statements which are subject to risks and uncertainties and again refer you to our SEC filings for a full disclosure and discussion of those risks.

For the fourth quarter for the Circuit City Group and if you'll bear with me as I go between Circuit City Group and the contribution from CarMax.

Total sales for the Circuit City Group were up seven percent to $3.39 billion from 3.18 billion last year. Comp store sales for the quarter up six percent.

For the Circuit City business earnings were up 48 percent to 140.9 million from 95.4 million last year. Earnings including the Circuit City Group contribution from CarMax were up 51 percent to 152.7 million from 101.2 last year.

On an earnings per share basis, again for the Circuit City business earnings per share were up 46 percent to 67 cents from 46 cents last year. The CarMax contribution was six cents this year versus three cents in the prior year and so the total earnings for the group including the CarMax contribution were 73 cents versus 49 cents in the prior year.

For the full year sales were down eight percent to 9.59 billion from 10.46 in the prior year and comparable store sales were down 10 percent. Earnings for the Circuit City business were up 11 percent at the same time to $128 million, up from 115.2 in the prior year.

Earnings including the contribution from CarMax were up 28 percent to 190.8 million, up from 149.2 in the prior year. And on an earnings per share basis, again for the Circuit City business earnings per share were up 11 percent to 62 cents from 56 cents in the prior year.

The CarMax contribution was 30 cents this year versus 17 in the prior year for a total Circuit City group earnings per share of 92 cents versus 73 cents in the prior year.

And with that behind us, I'll move on and talk about some of the components of the prior year.

Looking at gross margin, for the fourth quarter gross margin actually was unchanged from the prior year at 24.4 percent in both years. For the full year it was up 30 basis points.

Gross margin in F.Y. '02 coming in at 24.4, up from 24.1 in the prior year. I think margins are generally consistent with recent trends and near term expectations, which we've said, would be in the 24 and a half plus or minus 50 basis points largely based on shifts in mix of the various merchandising categories that we have.

The improvement in full year margins I think does reflect some strength in higher margin categories like big screen televisions, satellite systems, wireless phones and so forth and decline relatively in the sales of personal computers which do have lower than average margins.

On the expense side, excluding partial and full remodels and appliances and so forth, for the fourth quarter of this year our expense ratio was 17.4 percent versus 19.3 percent. it actually declined in dollar terms $29 million from the prior year.

For the full year - actually in spite of $150 million decline in actual dollars, the rate was up. That's the 21.9 percent from 20.9 percent the prior year, an increase of 100 points.

As you look at the primary factors driving the fourth quarter expense ratio improvement, you really saw the leverage from the effect of the sales growth that came on so strong in the fourth quarter, continued efficiencies in our advertising and marketing programs and some higher contribution from our finance operations.

For the full year the benefits of the lower advertising spending and the higher finance contribution just weren't sufficient, again in spite of $150 million decline to offset the de-leveraging effect of the relatively large first half sales declines.

For the full year advertising spending actually declined approximately 15 percent principally from efficiency gains in newspaper insert distribution and some advertising buying efficiencies. I would point out that we achieve these efficiencies while also launching our new branding initiatives, advertising campaign, expanding our media vehicles, and conducting expo in October of last year, altogether I think an extraordinary job by the folks in our advertising and marketing group.

Inventory and working capital, our payables to inventory ratio increased to 83 percent at the end of this year from 58 percent last year, I think a great movement in that direction, also up from 78 percent at the end of the third quarter. In stocks which we've commented about on several occasions, overall our inventory conditions have been steadily improving each week but there are still some select inventory issues that remain including audio, particularly portable audio and within that particularly products like MP3 players.

MP3 players I would - are at some better level than they have been earlier in the year but they're still probably the end of this month before they're back to planned levels. The other area that we've commented and see that inventory remains relatively tight and probably will although not having the same effect is in the laptop computer business, which continues to be stronger, I think than most folks had predicted.

What I'd like to do now is take the majority of the time to talk further about remodels to make sure we give you as much disclosure as possible about what our plans and what's driving those plans and I think we tried to share some of that in February and again today I would hope to share some additional insight. We have completed what we believe is a thorough analysis of the post-remodel performance of the 24 stores that we remodeled last summer.

Those include 10 fully remodeled stores in the Chicago area, two fully remodeled stores in Virginia and 12 re-merchandised stores or much lesser ...

In both cases the stores - we compared the stores and the performance of the remodeled stores to a control group of stores located in the same markets, which were not remodeled to the same extent or at all.

In our February call I did note that our fiscal 2002 remodeled stores were on average outperforming their control group and that the

in the Chicago version of the full remodels was significantly greater. As you look through the analysis including the results for the most recent three months, they demonstrate that the return on the investment in the full remodel stores, the 10 in Chicago and two stores in Virginia easily exceed what we would consider to be the long term cost of capital which would be in the 10 to 12 percent range for cost of capital.

So we are - we are pleased - let me - let me make it clear that we are pleased with the success that we've seen from the full remodeled stores. On the other hand, the Washington/Baltimore test, the return there did not meet our remodel investment or did not meet our hurdles for remodel and therefore we would not go forward with that style of remodel.

So we do remain committed, as I pointed out in February, to what I would consider a multi-year multi-phase broad remodeling program but the end game is still the version of remodel that you see - that you see in Chicago. That is where we're headed.

We have elected to start with what will end up being a full remodel with a focus on video department and improvement in lighting throughout the store. We do believe that those were two of the key elements in the performance of the full remodels in Chicago and certainly video was a significant contributor to the results that we saw there.

We also know that these are two areas that we can do in the greatest number of stores with the least impact on store operations. I point out lighting for example will take approximately a week to get done in the store and will all be done at night when the store does not operate so it should have essentially no effect on the customers.

Video department will have some effect over the course of a couple of weeks during the process but relatively modest to the extent it's fully contained in the video department. It doesn't require moving between departments.

So again, this process of doing it this way allows us to touch what we believe are two key elements with the minimum impact on the stores and get the most stores done in the first year but again it remains our intention to circle back to these stores in the future years and complete the balance to get us to the full remodel as you saw in Chicago.

So we plan to do approximately 300 stores in this - in this way in fiscal year 2003.

We'll begin the video department process rollout in the spring. Actually it began Monday of this week.

So it is underway. It begins with five stores so the first five stores get done in phase one and essentially this is a process of handing over the plans and the specs and so forth to the contractors and essentially testing these under live fire to see how

We'll take a quick calibration at the end of those five stores and then move into May and do 15 stores which is essentially three of each of the designs to make sure once again that we verify the process, the cost, and the timeline and that all of those are under control and we only get what's expected when we begin the full rollout which would start in June with completion to be done by the end of September of this year.

I would point out that while we clearly expect to be able to do approximately 300, the reason for going through this test is to look for any problems along the way. Should we encounter any unforeseen difficulties that were unacceptable then it is possible that we could reduce the store count although that would not be the plan at this point.

Our hope would be and our intention would be to get approximately 300.

In fiscal 2004 and 2005 we would expect to continue our activities in these stores and focus on remodeling the remaining portions of the store floor which I would expect at this point would be done - we would complete the stores and the stores that we choose to touch next year so we won't touch all of these stores but we'll touch a number that we can finish off and we'll do the rest of the remodel so the stores will be in fact complete.

In addition we're also looking for opportunities for relocating our older stores to more

within our trade areas. I believe I've commented in the past that we have some number of stores which are moving to under five years for lease expiration and particularly there we have to be active and out looking for sites.

For fiscal 2003, I'll make a few more questions - a few more comments before we open the call for questions including some guidance relative to quarterly performance. As I mentioned in February, we do anticipate comparable store sales growth in the mid single digits for the fiscal year 2003.

The growth we think will be driven in a number of areas including continued growth in categories where we expanded our selections following our exit from the appliance business especially things like video games, imaging, entertainment software, continuing growth in the industry's high growth categories particularly big screen televisions where we believe our high service business model will continue to give us a competitive advantage.

We see continued development of strong marketing programs launched in fiscal 2002 and first launched in 2002 and in 2003 we'll, as I've said, we will invest some additional funds in advertising and continue to explore new vehicles and opportunities to reach our core customer base.

We expect continued improvement in customer service levels as we focus on training, certification of sales counselors and retention of our very best performing sales counselors, continued focus on improving our store environments as I have talked extensively about the remodeling efforts and some relocation of stores going forward and obviously somewhat easier comparisons particularly in the first half of the year.

Given those easier comparisons for the first half and the progressive improvement in sales that we achieved particularly in the holiday period in fiscal 2002, I would expect the pattern of comp in 2003 to essentially be mid - or I'm sorry, high single digit through the first half so both the first and second quarter we would expect upper single digit, high single digit increases and then the second quarter - second half, excuse me, mid single digit increases for the second half of the year.

We would expect gross margins for the year to be relatively stable as much as they have been over the last couple of years.

Again there's always - there always is some potential movement based on shifts in product mix but we - our predictions and our - and our plan is based on relatively stable margins.

We do expect the SG&A ratio to climb modestly despite the anticipated increase in same store sales.

There are planned increases obviously in remodeling and relocation. We have talked about expenses in advertising.

There are also some store systems enhancements on the books - in our plans all of which are contributors to our higher expense ratio.

We expect that overall fiscal 2003 profit from the Circuit City finance operations will be similar to what we saw in fiscal 2002 so we're not projecting any growth in income from the finance operations next year.

We do believe that the finance operation contribution in the first quarter of fiscal 2003 will actually be less than last year with some increases in funding costs and particularly related to the anticipated expenses from the issuance of new publication

during the first quarter.

So for the Circuit City business, as we have said, the first quarter we would expect mid to high single digit loss.

We would expect to make a small profit in both quarter two and the third quarter with the majority of profit coming in the fourth quarter much as it did this year. For the year our expectations are 75 to 85 cent profit pre-remodel.

If you assume an 18 cents estimate of remodel expenses, that would suggest post-remodel earnings of 57 to 67 cent range. We also anticipate that the CarMax business will contribute approximately 30 to 32 cents per share to the fiscal 2003 earnings for the Circuit City group.

That gives no effect to the planned separation and assumes a full year of business for CarMax. Reflecting on the seasonal pattern of CarMax earnings, the majority of this contribution would be expected to be produced in the first and second quarters.

And with that and I apologize for the length but I particularly wanted to talk about the remodel process to make sure that we talked - give you as full an indication of our plan there as possible, I am happy to take a few questions.

Again, if you would like to ask a question you may press star one.

of

, you may ask your question.

Good morning.

Your cash levels are awfully high right now with the $6 a share and I'm wondering if you have any requirements for that cash beyond working capital build later in the year?

Do you need to hold cash for any reason due to

or other financing needs?

Obviously there are some inventory builds late in the year but as you point, there is a reasonable amount of cash on our balance sheet at this point and certainly much beyond what we would need to cover that.

Given your remodel costs that are visible in the next two years and your working capital requirements, what are the top two reasons why you think it's necessary to hold so much cash?

Well the - I'll try to interpret that question as why are we not buying back stock.

You're right on target.

OK.

First of all, we have at the moment no board authorization to do so and secondly anticipating the split off of CarMax it would appear reasonable that if you chose to buy back stock you would do it post-split off rather than pre.

OK.

I'll hand over the reigns in just a second but obviously the share repurchase authorization's very easy to change. Do you think there will be a more serious look at it after the spin off then there has been the last couple of years?

As I've said before, I'm not anti-share repurchase. To the extent that that's the best option to drive value for the investors we would certainly consider that.

We haven't asked the board at this time. As you point out, we certainly could do that but again I think this is a - this is a question better asked post-split rather than pre.

Great. Thank you.

of

, you may ask your question.

Yeah.

Good morning. It's actually

for

.

My first question has to do with I'm a little confused about the remodeling discussion, Alan when you were talking about the plans after fiscal year '03.

OK.

If I understand correctly, you know, you're going to complete the 300 video department and lighting next year. Now did you say that after that you would go back and do the rest of those stores or you would attack the other 300 stores that didn't get anything done in '03?

No. I'm sorry.

Yeah. Our - what this appears to be done best as is a two step process that in step one we would do the lighting upgrade and video remodel.

Step two would be come back and complete the remainder of the store. Now understanding that you wouldn't do 300 completions the following year.

That would be a lot of money and more importantly it would be beyond I think a reasonable bandwidth of folks to do which is this process is not trivial and certainly it takes some effort from corporate to get done.

So I'm anticipating that if we complete 300 store video remodels and lighting upgrades then some number of - some subset of that 300 in the following year we would go complete the remodel process to make those look like essentially what you've seen in Chicago.

So it's not effecting the remaining 300. This is finishing the 300 that we're talking about having video resets and lighting upgrades to.

So the rest of the 300 stores will essentially go completely untouched for two, three, four years?

Well some number of those stores as they near the end of their lease term actually are candidates for relocation and so that is a part of the process.

OK. Great.

And the other question is I'm a little unclear if we're looking at Q1, the period we're in now, versus Q1 last year we're looking at kind of a similar earnings level. I have comps will be higher somewhat offset by the - or the less contribution from the finance business then as we look at Q2 upcoming versus Q2 last year you would also assume some higher comps but we also have a huge amount of remodel expense so I'm a little unclear - I was hoping you could kind of explain to us the magnitudes of the factors there that lead to a pretty sizable - expected but sizable loss in Q1 and then a big improvement for Q2?

Well the improvement - the Q2 that I talked about was pre-remodel expense.

OK.

And so we do expect the majority of the expense associated with the remodels to happen in the second quarter. There is some part of the remodel expense that'll actually be in the first quarter that we'll get 20 stores done in the first quarter, start in earnest in June and so the majority of the - the largest portion of the expense will show up there and then obviously some in the third quarter as well but when I was suggesting that we would expect a pre-remodel profit from the business in the second quarter.

Right. That's all for me.

Thank you.

Thanks.

of SunTrust Robinson Humphrey, you may ask your question.

Hi.

Good morning.

Good morning.

The first question just a clarification then on I guess what we were just talking about. First quarter guidance for mid to upper single digit EPS loss, does that include any of these remodels that'll make their way into 1Q?

Well the first quarter loss - there's only 20 stores that will be effected in the first quarter. So that's a relatively modest number.

So it doesn't ...

Right.

OK.

So it really doesn't have much ...

But when you - I mean I'm just sort of thinking the way we're going to hear from you during the year.

When you say something like that should we assume - I mean ...

We can certainly break out for you pre and post-remodel during the year so you can understand what's going on from the core business separate from the costs.

We'd like for you to see two things. We'd like you to understand that we said remodels will be 18 cents effect and that we're living within that 18 cents and then separately what's the - what's going on in the core business.

So we'll show - we will disclose those every quarter.

Could there - I guess as a follow up to that question, could there be anything that would make you speed up the process both within the remodel, you know, and the strength of your business?

If - the real issue is trying to make sure we do this in a controlled way with minimum disruption on the stores that we get the obviously the most positive impact from and I think choosing 300 this year, we absolutely believe we can do this and accomplish it without effecting the business but I think we're trying to be prudent in how much we choose to bite off not so much from a financial perspective but from a management bandwidth perspective both in the stores and here at corporate. So could there be?

Perhaps. I think the plan for this year is certainly in place and we'll recalibrate based on how things go this year.

OK. Two quick statistical questions, could you talk about digital television as a percentage of your total TV sales right now?

And ESP as a percentage of sales? Thanks.

We will have someone look that up and I'll cycle back. I don't know the digital television number right off but we will come back to that before the call is over.

Operator, if you could go onto the next question please.

of UBS Warburg, you may ask your question.

Thanks. Two quick ones, number one on the AP ratio going to 83 percent.

How much of that is the fact that you know your inventory ended tighter than you would have liked and probably you're about to build receipts and therefore the age of your inventory might be relatively young versus how much of that is process improvements and purpose for working capital gains?

It would be impossible to toss out and I don't know what the percent would be.

Certainly in some categories your - the age of your inventory might be left but those particularly in the case of laptops those are typically pretty fast turning categories so it wouldn't be an impact. We've not done that calculation so I can't tell you - I can't give you a percentage.

We look more at the impact of the - and we didn't try to take credit for the decline in inventory in an absolute bank of $200 million understanding that some of that was we would have liked to have a little more but I think it's more the dollar value of the inventory than the percent payable but again, I have not done that calculation.

OK.

So it's - so it's not that much due to an internal initiative to really pump that ratio up and improve the working capital?

Well certainly there is absolutely an initiative to move in that direction.

I'm just trying to suggest that we - I can't separate for you was any of that caused by the fact that we were lean in some categories in inventory but clearly there's initiatives here. As you saw at the end of the third quarter when there was no - when there's no conversation about inventories that we made great progress in moving in that direction so absolutely we've attempted to increase that ratio.

And then the follow up question is, as you said you're getting better in stock positions with every week.

What are you seeing on the consumer side or the customer side in terms of retaining customers that maybe come in and were disillusioned and disappointed? Are they eager to come back when you do have the merchandise?

All I can tell you is we're continuing to see increases in traffic so my take from that, it doesn't appear to have been a significant problem and the other thing that I would point out is while I know we've commented upon it freely as we've gone out into the marketplace and actively shocked competitors to try and buy the same products that we didn't have, it was very tough to do that typically what we didn't have nobody had and so I think for the most part if customers were disappointed in our store they were likely disappointed in other places but I can tell you with certainty that traffic is up.

And do you think you're about 80 percent getting back to normal inventories, 70 percent, 90 percent?

No, I don't - I apologize.

I haven't done that math either.

From your target in stock level.

It really is a

by

level. We look at in stock by store by day and count ourselves out of stock if at the end of the day we actually happen to be out no matter that we had some during the course of the day and so we have a fairly rigorous measure.

And our in stock - our actual in stock percentages are back at pretty normal levels.

OK.

Great.

The other thing I would point out and I know some folks have been looking online, we do offer the ability to shop online and pick up at the stores and there were some questions about being in stock or not in stock.

I would just sort of in the information category we consciously show out of stock online even when there's small quantities in the stores because we don't - we will never run the risk of trying to disappoint anybody who bought online to go pick up at the store. So if the inventory levels in the store get low, we will show zeros online.

But the trend from week to week is still measurable.

Yes.

The trends week to week is positive and again the out of stock measurement is comparable to what it would have been in normal times at this point.

Thanks.

...

I'm sorry.

If you could, we've got the answer to

question.

, this is

.

At the end of the year and this is the answer to your question about digital TVs as a percent of the mix, as a percent of the

mix it was a little over 30 percent. It's almost 80 percent of the projection TV mix at the end of the year.

And then for ESTs the - as you know we disclosed a couple numbers.

The percent EST in the total reported sales number is 3.9 percent and that's probably the most relevant number at this point. That's only down a little bit from the full year last year.

Last year it was 4.0 percent.

of Deutsche Bank, you may ask you question.

Alan and Austin, when the split off takes place will there be any requirement for Circuit City Stores to donate some of Group's cash to CarMax

about $3 million?

I'm not aware of any such requirement.

OK. So when you think about the cash position at the electrical stores, 12 months from now maybe a bit of an impact because you hope that your in stock - your inventory levels will be somewhat higher but unless you're very aggressive in buying back stock and getting, what is it, $130 million is going to be spent on the remodels this year, that's going to - that number's going to stay in excess of a billion.

A year from now you'll have still in excess of a billion in cash.

Well yeah and this is a conversation better had post-split that we can talk about.

You clearly - you clearly aren't going to do anything relative to stock buy back until ...

Sure.

Until the split happens.

Right.

And I think at that time I'm happier to have that discussion about what options may be.

OK.

A second question, on the finance

, if you were to close that down and look at the cost savings, you know, not having the administrative support and then outsource that with someone like GE, for example, like Home Depot and

do.

Yeah.

What would the earnings impact one way or the other?

Actually until you have a discussion with GE it'd be impossible to even guess.

Clearly there's contributions that

and Home Depot get contribution from the credit provider or participation from the credit provider in exchange for being in the business.

So I - but I have no idea what that might be at this point so it'd be - it would be impossible to even to guess at that number.

How frequently do you discuss with third party, you know, credit part operators, you know, the costs of using their programs so you can determine whether or not it's you know in the best interest of Circuit City to continue that program?

There has not - there is no real specific frequency. We occasionally go and have conversations with some of these folks as a - as a means of calibration but haven't done so in some time.

On the remodels, obviously we're going to see you know the best return on capital from the, you know, the video departments giving us this sweet spot of the business.

As you begin to effect the, you know, remaining part of the store, you know, whether it's the software assortment, you know, wireless communications, do you think that the ROIC will still cover that 12 percent

or is there a chance that some of the departments, you know, would be EVA negative but you still have to do that so that the, you know, the store, you know, looks like a new format?

That's an interesting question that I think we can better answer when we finish the video process.

Video as we know got a big pop out of the full remodels in Chicago. Lighting is a little tougher to estimate to the extent that you effect the whole store when you essentially brighten it up and give the customers a more inviting place to shop.

All I can tell you is that we have a baseline in Chicago which we're very pleased with that exceeds our cost to capital then we'll know as we go through this process and as we go through it during the year how these stores perform relative to what those may do and that will give you the indication of OK, if you spend the money to do what's left what would your expected return from that be?

And at this point I'd be just guessing.

And then the last question Alan on the quarterly earnings you gave some fairly tight guidance for the first two quarters.

We were way off on 2Q. I was just curious to how you're penciling in the third and fourth.

I'm not sure - I apologize.

On the quarterly earnings you gave some, you know, some guidance to the first two quarters of the year.

Right. We said slight profit pre-remodel expense in the second quarter.

Right. How would you handicap the third and fourth quarter?

If we didn't - if we didn't feel like those were attainable we wouldn't have put them out there. I mean I don't know how - handicap is our best estimate of what we believe we'll achieve.

Yeah. OK.

Thanks a lot.

With that we'll take a couple more questions before we sign off.

of

, you may ask your question.

Thank you.

Two questions, first of all if you could talk in a bit more detail about the

that you plan to execute in the first quarter and tell us whether the way you're going about this one represents a difference at all from prior

and if that's why you highlighted it when you spoke about the numbers today?

It really isn't a difference in the process.

It's simply they don't - they don't occur every quarter and frankly they don't necessarily have to occur every year that typically they're a multi-year

and so that it is - we pointed it out because it'll happen in the first quarter and if there wasn't an equivalent of that in the first quarter of the prior year but there's nothing unusual about the

itself simply that it happens - the timing of it.

Got you.

And how significant is the cost of that to you in the quarter in which you execute it?

Well we don't break out - again I apologize. We don't break out that cost but it's material enough that we made note of it and again the

are typically three year terms and so you're not going to see this every quarter but it will happen in the first quarter.

OK. And secondly questions on a couple of merchandise categories.

Walking the stores looking I guess less at in stock then at display space and the way you're using it there seems to be some gaps or perhaps over capacity in display space in the stores in the audio area but not in the - not so much in the MP3 area as in - as in the rack components and the digital camera area. So if you could just us a sense of the direction in which those businesses are moving and whether you're contemplating reallocating space that's been designated to them.

Yeah. I think particularly in the home audio category that the pure audio component business is not nearly the business it was a few years ago and you could expect over time that we'll reallocate some of that space to other audio type categories that were the businesses have shifted and so I think that really is an ongoing process in all the stores as you - as you look at doing recess every year to reallocate space based upon where product trends are going and where shifts are happening.

Digital cameras actually will continue to be a pretty strong business and you'll see some other products integrated with digital cameras as you try and make it clear and easy for the customer to understand how those products are used but it will be very typical for us to do what we would consider a recess during the course of the year in all stores to try and reallocate space.

In the digital camera area, is it - is it currently that you can meet the demands with a smaller

assortment? Is that - is that where you're taking that business?

What happens in digital cameras particularly is that it's very seasonally

and you take your assortment up in the holiday season and so you're - you have to build capacity for what you need to display in the November/December timeframe. That does give you some slight excess capacity other times of the year unless you choose to fill it with other products.

It's a - it's one of the more seasonal products in nature.

Great.

Thank you.

OK.

If we could take one last question please.

of Gerard Klauer Mattison, you may ask your question.

Hi guys. Two questions, the first is in the mid single digit comp guidance you guys have provided to us, what kind of a sales impact do you have factored in from the store remodels?

That's number one. Number two, if I understand what you're trying to do in terms of the remodels, you're doing the lighting and video, you know, it probably runs 300 to $350,00 a store, we're expecting similar total expenses over the next couple of years and you're expecting to finish off those 300 so I guess the questions becomes you know my math indicates, you know, you're only spending about $1 million a store you know whereas previously you indicated that the Chicago stores were really costing you about a million and a half so I'm just wondering, you know, what you took out or how'd you bring those costs down or am I missing something?

Thanks.

Well Chicago - it's often more difficult to do things in Chicago than any other city but for a number of reasons but the Chicago stores were of an earlier generation in which the in fields were what we would consider obstructed which means there was a permanent barrier in the center of the store which had to be removed.

The majority of the stores that are remaining and the stores we're talking about have no such barrier and it makes life a lot easier and let's things be done faster and at lower costs. I also think as you - as you go through these processes you learn along the way and the reason you do it in stages is you find ways to do it, some more efficiently and so will it be a million and a half?

We would hope that we could come in certainly less than that. That'll determine the number of stores we do in the next couple of years to sort of to keep within the 18 cent range that we put out there this year and again, some of it's management and store time and attention that's needed to be devoted to all these but it is - Chicago was on the high end of what you'll see for the balance of the stores that are in the group we're talking about.

And your other question ...

Was about sales impacts from the

stores.

Essentially we've factored in - we've balanced what we believe will be upside from the video with potential disruption from video and so it's actually fairly modest because you're not - you're not moving in departments. The tougher part for the stores is when you reset the whole store and it requires moving from one area of the store to the other and you then have to require - you're required to do it in phases and block off areas of the store.

In this case you're going to be probably a couple of weeks where you're really noticing any impact. Again none on the lighting because that's at night, a couple of weeks in the video area.

We think it's more than compensated by the potential gain in the video area once you're finished. So no real - no real net disruption.

OK. And the last question is I guess somebody else alluded to it earlier, you know, the rest of your stores I mean what is the game plan?

I understand certain leases will be expiring but you know is there another remodeling phase that we could potentially see on your other stores or is there another part of a

grand plan if you will? Thanks.

Yeah. Thank you.

Clearly every store needs to be up to the standard we believe that the customer deserves. Some portion of the stores that are on the - that aren't being touched in this - in these sections are on the list of stores we would look to relocate and how aggressively we'll go after that depends on some results we see as we continue to put new stores in the ground of which we've been pleased but I'd just hate to forecast beyond three years.

I mean we're saying the reason we're going to do this - here's what we're going to see the next two years. I think it's reasonable to expect that we believe all our stores need to be equal to what the customer deserves and that we would continue to move forward either relocating or doing some renovation.

I'd just hate to be too specific or predict what may look out in '05 and '06 at this point.

OK.

Thanks a lot.

All right.

We thank you for your interest and for joining us this morning. Thank you very much.