車美仕 (KMX) 2002 Q1 法說會逐字稿

Good afternoon, and welcome to the Circuit City fiscal 2003 first quarter results conference call.

All participants will be able to listen only until the question-and-answer session of the call.

I would like to inform you that today's call is being recorded.

If anyone has any objections, you may disconnect at this time.

Hosting today's call are Alan McCollough, Chairman and Chief Executive Officer of Circuit City Stores Incorporated and Austin Ligon, President of CarMax.

If you would like to ask a question during today's call, please press star one and you'll be announced prior to asking your question.

At that time, please state your company name before asking your question.

If you need any assistance during today's call, please press star zero.

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

Sir, you may begin.

Good afternoon.

And thank you all for joining us.

This morning, we announced first quarter fiscal 2003 results for both the Circuit City and CarMax businesses. In both cases our results were in line with expectations communicated in our June 6 sales release.

And for the Circuit City business, the reported results were better than the mid to high single-digit loss originally anticipated at the beginning of the year.

I'm going to start this morning's call with a brief overview of the consolidated results for Circuit City Stores Incorporated. Austin will then provide a review of the CarMax results.

Following Austin's remarks, we're going to take some questions for CarMax. I'll then provide a review of the Circuit City business following which we'll open the floor for questions related specifically to the Circuit City business.

Before starting, I need to remind you once again that our comments this afternoon will include some forward-looking statements which are subject to risks and uncertainties and we would refer to you our SEC filings for a more complete discussion of those risks.

For the first quarter '03 sales and earnings, consolidated sales were up 13% to $3.12 billion, versus $2.75 billion year ago in the quarter.

You should note that last year's sales and cost of sales amounts for Circuit City Stores Incorporated and the Circuit City Group have been reclassed. In the first quarter, Circuit City adopted EITF 00-14, accounting for certain sales incentives which requires mail-in rebates to be classified as a reduction of revenue.

Previously these rebates had been reported in cost of sales.

The rebate totals for each of the four quarters of last year are listed for you in today's earnings release.

CarMax is classifying revenue from the sale of wholesale vehicles in net sales in operating revenues.

Prior to this, CarMax wholesale vehicle sales were recorded as a reduction to cost of sales.

Last year's first quarter statement for the Circuit City Stores,Inc., and the CarMax Group have been reclassified to reflect this change.

First quarter consolidated net earnings are up 65% to $28.0 million from $17 million in the quarter a year ago.

And with that, we'll get on to the specific businesses, and I I'm happy to turn the call over to Austin at this point.

Thank you, Alan.

The first quarter sales as Alan mentioned, include a reclassification of wholesale revenue into sales.

Total sales were up 14% to $1 billion from $879 million in last year's first quarter. Used unit comps were up 12% on top of 20% used unit comp growth in last year's first quarter.

As we've mentioned consistently, it's the used units that drive our profitability in the CarMax business.

This strong rise in used unit comps demonstrates the continuing market share growth that we see in our markets which is driven really by the strength of the CarMax consumer offer.

And the continuing effect of CarMax.com on enhancing that offer.

Our new car comp sales declined roughly in line with the industry.

First quarter earnings met our expectations, including one-time expenses of $1.9 million, or 2 cents a share, related to the proposed separation of CarMax from Circuit City Stores, Inc.

Our net profit was up 10% to $29.2 million, and our EPS was up 8% to 27 cents.

Excluding these one-time separation expenses, earnings were up 17% to $31.1 million, and EPS up 16% to 29 cents.

The net effect of the wholesale vehicles is not material on earnings, because market efficiency prevents material differences between acquisition costs and subsequent wholesale costs as we have said previously.

From a gross margin point of view, gross margins were flat against last year, 11.8 to 11.8.

We met our average per unit gross profit dollar targets in used cars.

On the plus side, used car mix was up to 89% from 87% of the total vehicle mix and as you know, used cars are significantly more profitable than new cars.

On the negative side, from a percentage gross margin point of view, used car average retails were up from 15,500 from 15,100.

And the net effect was we had flat gross margins quarter over quarter.

As I've said all along, the key focus for us is the dollar margins per car and I'll reiterate that we met our targets on that.

The expense ratio was 6.8% versus 6.7% a year ago.

The expense ratio quarter over quarter reflects the expenses associated with our -- the resumption of geographic expansion, including training and relocation, building our management bench, and both store preopening and grand opening expenses.

And the one-time expenses associated with separation.

Mainly, attorneys, accounting fees, document preparation, et cetera.

These increases were partially offset by higher-than-expected income from our finance operations. As we told you at the beginning of the year, we expect costs of funds to go up.

They did not go up as much as we thought.

So we got more of a benefit in this first quarter than we expected. Favorable to plan and to last year's quarter.

As far as new store openings, you may remember that at the end of February, we entered Greensboro, North Carolina with a standard size used car superstore and we added a satellite superstore in the Chicago market in Merrillville, Indiana.

We followed up with our first store of this fiscal year in mid-April, a full-sized superstore in the Sacramento, California market, at the Roseville Auto Mall.

All of the stores are performing in line with our expectations and we are very pleased both with the sales and with the operational startup as we get back into the growth business. So far, so good.

We feel like we are getting into it at a fairly moderate pace but in a way that we'll be able to consistently continue and also get our executional benefits.

So with that I believe I'll turn it over to some CarMax Q & A.

At this time, if you would like to ask a question, please press star one and please announce your company name.

One moment.

Mr. Aram Rubinson, you may ask your question.

Hello

Yes, one moment.

Mr. Rubinson, you may ask your question.

Let's go on and have a question from someone else and we'll come back to Aram.

Mr. Dan Lure, you may ask your question.

I was cued up for the Circuit City questions.

I'm sorry.

Okay.

Go ahead.

Next question?

Mr. Aram Rubinson, you may ask your question.

Can you hear me this time?

I can hear you!

All right.

Good deal.

Sorry, thought I had laryngitis for a second!

Electronic.

On the SG&A side of the equation I think one of the things that would be real helpful to understand in a year like this would be a little bit of a split to the extent possible between the store selling and operating expenses and the corporate and overhead expenses.

And could you tell us, historically I assume, you've been leveraging down your G&A rate as a percent of sales.

And I'm curious this year if you expect your G&A rate as percent of sales, I assume to go up, do you think it would go up to the levels that it was at historically when you put out this white paper a little over a year ago to that 2.4% of sales or would there still be -- would you still be below that mark?

Yeah.

We made progress last year consistent with our expectations.

And actually, as Keith points out, we actually made a little more progress than the -- if you remember, we said we'd go down I believe from 2.4% to 1.7% with one doubling of sales.

And we made more than the expected progress on that last year.

Roughly, we expect to be flat to that this year.

So, although we'll have sales increase, all of the leverage benefit that we should get out of overhead will be eaten up by the additional costs of getting back in the growth business and of the separation from Circuit City.

But we don't think we'll go backwards and in fact we ought to be able to stay roughly in line with where last year was.

So the SG&A rate, though, as I've got it, is up, I've got at least in my model SG&A is up and my forecast at least this year versus last year.

Then if you're saying that G&A is flat as a percent of sales.

What I'm saying is flat is the overhead.

Pre-opening expenses which will...

So remember, the components of SG&A would be the comp stores which will be improving.

The new stores which will have pre-opening, grand opening, and because they're new, they'll have higher SG&A rates than the comp stores.

And then the overhead component.

Okay.

And then CAF is a deduct from that.

And remember, we expect CAF to be less profitable this year as some of the windfall spread that we got last year goes away.

Right. OK. I factored that in.

But I thank you very much.

Okay.

Next question.

Susan Quilty, you may ask your next question.

Thanks. Hi Austin. I know you can't talk about month-to-month sales trends but there have been a lot of mixed data points in the auto market in general in the used car market, as well, over the last three to four months.

Can you give us any sense for whether you continue to see fairly consistent trends?

I don't mean an update on the second quarter, but in terms of what saw in the first quarter, was it relatively consistent through the quarter, any really meaningful progression?

Obviously, you're right, we can't comment on month-to-month.

There was not a dramatic difference between any of the months.

As you know, the new car guys have a fair amount of volatility and we saw some of that in our new car business.

But that, there was no trend that we'd point out within the quarter as far as used cars go.

Okay.

And then one last question if I could.

You said that the bank contributions, the finance company contribution, came in a little bit better than expectations as the cost of funds didn't go up quite as quickly.

Did you choose to reinvest some of that someplace, or given that you were within the guidance range on the earnings, was it just a difference between being at the high-end and the low end of the range?

Uhm --

Was there anything disappointing in the business that offset it or was it that you chose maybe to just invest a little more?

Well, I think what we'd say is obviously at 12% unit comps we were at the very, very lower end of our range or just below the range.

So sales were at the lower end of our expectations but still roughly within expectations particularly for, you know, since our expectations low to mid-teens for the half.

And CAF made up for a little of that and made up for some of the SG&A costs that we had related to both new stores, preparing to -- for other new stores pre-opening and separation.

The one thing I'll point out and we did not give guidance between the quarters at the beginning of the year, but it is normally the case that the second quarter is a -- we do a little more sales and a little more profit in the second quarter than the first.

So you know, our own expectations would have been to have a little bit less in the first quarter and a little bit more in the second quarter.

So that's why we think overall this was pretty consistent.

Fair enough.

Thanks a lot, Austin.

Certainly.

Sharon Zackfia, you may ask your question.

Hi.

Can you tell me if you're targeting increased per unit gross margin dollars this year versus last?

Uhm... I don't think we -- I don't think so materially.

Roughly, we're targeting flat.

I mean, maybe -- slight variation store by store but --

Okay.

The more research stores will get a little bit better, and the new stores will come in a little bit under because they're turning more slowly than the -- [INAUDIBLE]

If you heard Keith Browning, our CFO's's comment, as our stores mature into higher level volumes, the sales to inventory ratio is better and with no higher prices, because of a little faster inventory turn, we make a little higher margin.

Okay.

But because we're opening new stores, those tend to have a little lower margin because they tend to have lower inventory turn so net-net it ought to about washout.

About flatish, this year.

Okay.

Then secondly, given the higher-than-expected contribution for finance in the first quarter, are you still expecting a roughly flat contribution this year?

You know, so far it's -- it's to early to tel, but so far the second quarter is below -- the cost of funds are below our expectations, as well.

Okay.

Don't know how it's going to pan out for the balance of the quarter because it's very early and we're not prepared to predict since we have been wrong a little bit so far...

But we still expect continued pressure.

It's just a matter of how much and when.

Yeah.

And that's beyond our control.

And we're sort of in the same situation you are.

If you could tell us where interest rates are going, we could tell what you to expect.

Well, I can't do that but thanks anyway.

Thanks.

Marie Saen, you may ask your question.

This is Hardy Bowen, actually.

Hi, Hardy.

How ya doing, Austin?

Fine.

Isn't it a little bit ridiculous to consider your finance operating income to be 55% of the total when actually I don't think you get any of that finance portfolio unless you recondition the cars better than everybody else, you sell them in a customer-friendly way so the guy ends up with a good car, and you have a huge inventory so the guy selects a good car... If you didn't have those things, I don't think you'd end up with your prime rate portfolio.

It seems to me that the expenses of the whole operation really have to apply to gross margin in general and that finance is about, as I calculate it 15, 16, maybe 17% of total gross margin dollars.

Isn't that fairer way to look at the business?

Yeah.

It sounds like you have been reading my notes!

[ laughter ]

It is, it is what in fact we've told everyone including Barron's's.

And it is exactly, it's the way we look at the business internally, it's the way we manage the business and it's the correct way to understand the business.

We have three sources of income.

We have gross profit from auto sales, warranty and service.

We have CarMax auto finance.

And we have third party finance.

CarMax auto finance is -- you've the numbers.

It's in the financial announcement.

It's 14% of those three numbers.

In the most recent quarter.

It was slightly more of -- it was 22% of the growth, so slightly more than proportional growth as Keith said because we did a little better than we thought.

But in the scheme of things, it is by far the smaller portion of where we make our money.

If you choose the same approach, I think the right way to say it is that auto sales including warranty and service is 403% of profit...

So it looks like we're hugely dependent on auto sales which is exactly the right way to view it.

Our auto finance business is certainly a part of our business.

We're glad to have it.

It's frankly from my point of view, one of the more dependable parts of our business.

And to the degree that there is risk in this business, we always believe that the biggest risk is in auto sales and auto margin.

So I think you put it well and as I said, you could have been reading my notes.

So...

[ laughter ] .

I appreciate at least somebody out there is listening to it.

I had one other question which was inventories, I think, were up about 4% year to year.

And does this imply that -- it must imply almost that inventories are almost flat at the existing locations, and, uhm, my guess the inventory turn is increasing.

But maybe could you give us a little color on what's happening there?

I'll let Keith answer.

Yes, I mean, you're right, inventory turns did increase for the quarter.

We're getting more efficient in our reconditioning process which helps in the back end and the total work in process that we have to have and I'd say just more broadly, we were on top of our inventory trends across both new and used cars throughout the quarter.

And recognize that for the first time in some years we have actually had some new stores which once again tend to be less efficient.

So we were pretty pleased with how the quarter came out.

Yeah, seemed like a good result.

Okay, thanks.

Thank you.

Mr. David Campbell, you may ask your question.

Hi, Austin.

I was wondering if you might comment on your store opening plans.

In particular, if you have a -- any anticipated opening dates for the stores you have announced, Las Vegas and Knoxville as well as what we might expect in terms of additional new store plans for the rest of this year.

Yeah.

Las Vegas, Knoxville, and I believe we've announced a Charlotte satellite store.

And those will all be in the third quarter, I believe, and we expect to have one to two more stores opening in the fourth quarter.

We know what the stores are but we haven't announced them yet.

But it would probably be a -- another satellite store and another full sized store.

Actually, two more satellite stores is the most likely.

But, we probably want to get another 90 days in before we give you specifics on that because as a lot- is always true, there are several, several eligible candidates in the hopper and it really depend on how the final permitting and feasibility comes out as to which ones actually get built first.

But we're still on target to open either 5 or 6 for the full year.

And expect probably 3 of those in the third quarter and 1 to 2 of those in the fourth.

Thank- you

I'll also note we're on track for our expectations for next year which would be between 6 and 8.

So as far as having the stores to be able to do that, roughly, once again, a mix of half satellite and half regular sized superstores.

We're quite happy with where the real estate process is to get us there.

Great.

Thank you.

Thank you.

Mr. Steven Iceman, you may ask your question.

If you could comment on the Barrons article.

The article argues that through gain on sale accounting, your earnings are inflated to the tune of around 23% because of the impact of gain on sale.

I'm wondering, could you comment on whether that's accurate or not and how much gain on sale impact did your earnings this quarter?

Let me make a broad comment and then I'll turn it over to Keith.

The broad comment is we believe that in fact the way we account for this, roughly mirrors the income that we would be receiving if we were doing this business with third party banks which we do a fair portion of our CarMax auto -- of our third party finance with others.

We do make a return on the finance portion in addition to what we would have gotten as commission from other folks.

We feel like the way we account for it is in fact in most similar to what it would be if we were doing it with third parties.

Could interject there for a second?

The issue is not whether you would be selling the loans for cash.

The issue is whether you would be using gain on sale accounting or accrual accounting.

And the Barron's's article essentially argues their earnings are inflated by 23- by 20%.

I have done similar calculations and reached similar results.

That's what I'm looking for.

What I'm saying is we don't believe the earnings are inflated.

We think the earnings correctly reflect the actual way that the finance should be accounted for.

Well, no one's questioning whether gain on sale account something GAAP or not.

The issue is whether your earnings would be lower if your securitizations were on balance sheet and you had to use accrual accounting.

The answer would be yes, if we chose the other method of accounting the earnings would be lower but the comparison of the prior year would also be lower.

That's right tomorrow.

To what degree?

I can't -- I can't answer that today.

What we happen to think is this is an appropriate revenue matching and that if you're a growth company especially --

Excuse me.

Let me interrupt you.

There isn't a single finance company in corporate America that would agree that gain on sale accounting is something a better form of accounting than accrual accounting.

I mean, the issue is the quality of the earnings of this company which seem to be larger than they otherwise would be if you were to securitize your loans on balance sheet and I'm simply asking what is the difference?

We can't answer that right this second.

I would tell that you there are a lot of public companies that use gain on sale accounting.

And so, you know, whether -- whether they would think that's better or not, uhm, I think that if you do look around, there is a lot of quality portfolios that regularly use gain on sale accounting.

And once again, as I'd say, I think, uhm, the point you're making is really an inaccurate and inapplicable point because if the ability is there for to us garner the vast majority of this income through third party finance sources.

And we choose not to do that because we actually believe we run a better bank ourselves.

We don't want to put ourselves at a disad- economic disadvantage as a growth company by using an excessively conservative accounting approach which accrual accounting would be.

So we think --

Whoa whoa whoa whoa whoa , you-

We think this is --

Whoa --

We think this is appropriate --

Are you saying [INAUDIBLE] accountings an excessively conservative form of accounting?

I want to make sure I heard you right.

I would say that this isn't the appropriate forum for discussion.

No.

I think you have done a good job of -- I'm not sure that you're asking a question but you have done a good job of expressing your opinion and I appreciate it and we'll take the next question.

Mr. Mike Hyman, you may ask your question.

I'm in for [INAUDIBLE], actually, my question's been answered.

Thanks.

Thanks.

Mr. Michael Hopkins, you may ask your question.

Hi, yes, can you hear me?

Yeah.

Yes.

I was wondering, are you still assuming a 1% net charge-off rate?

And why -- you assume a 1% rate on prime used vehicles when GMAC and Ford are running a 2 to 2 1/2% annualized net charge option, don't you think a 1% is very agressive?

I mean, the answer is, we've used 1% of originations and that equates to something much higher than 1% of average receivables.

And we consistently outperform our loss rates since -- and we have been doing this business since 1993 when we opened CarMax.

And so there is really no reason to adjust our assumptions since we've consistently underperformed those loss rates.

Underperformed being the keyword 'cause if you look at [Moodies] and annualize the monthly charge [overture] at 2% over the last three months.

Again you have to look at apples and oranges.

That's average receivables versus origination.

So once the loan-

One to one point two is of originations, not of average receivables.

It's 1 to 1.2% annually and you're running it over 2% annually in the last three months.

That's true.

That's average receivables.

So you're using the wrong denominator and numerator.

Okay.

Well, what are you, what was the charge-off dollar amount in the quarter?

I don't have that in front of me.

Okay, thank you.

But we've said that we're comfortable with our charge-off rate.

The other comment that we've made about used car portfolio in general is because of the quality of our used car portfolio, our experience is it out performs other people's used car portfolio which is why we make the assumptions we do and the reasons for that are we sell better quality cars, they are guaranteed and we eliminate the intermediary risk which most other people are taking.

We finance ourselves and the we don't lie to ourselves about what's true with the car or the buyer.

So... we tend to have a less risky portfolio there.

Last question, I believe.

Mr. Bruce Babcock, you may ask your question.

Yeah, thank you.

Can you be a little more specific on the final timing of the spinoff?

When will those shares be out in the market?

And then secondly, can you talk at all about whether you would plan to have a meeting for analysts for CarMax as a separate entity sometime after that?

Uhm, as far as being more specific, what we're really in the same position obviously once we've finalized outline of all of the preparation for spin, we'll let you know what specific dates are but right now we are looking at late summer or early fall.

The, uhm, as far as an analysts meeting, I believe until we have a shareholder vote on this, we will not have analysts meetings with outside non-shareholders but we certainly will after a shareholder vote talk to both analysts and interested potential shareholders.

So we'll give you lots of opportunity if you're a shareholder or if you're a non-shareholder to understand the attractiveness of the stock and the company and answer questions.

Thank you.

Can I ask one more question?

Sure.

Just -- I thought the spinoff was in July.

Did I misunderstand that or is it being pushed out a little bit?

Shareholder vote is currently planned for some time in July which means the spinoff will be effective sometime in August depending on the effectiveness of the date.

So it takes a few weeks after the vote --

It's a moving target so- and has not been set in stone.

All right.

Thanks.

Thanks very much and

I'll turn the call back over to Alan McCollough.

Thanks, Austin.

Before I start, in case there's some folks that have joined us in mid-call, I remind you once again that our comments will include some forward-looking statements which are subject to certain risks and uncertainties and we would refer you once again to our SEC filings for a full discussion of those risks.

But the Circuit City group first quarter sales and earnings sales were up 13% to $2.12 billion from 1.87 the prior year.

We were pleased that comp store sales were up 12%.

Circuit City business lost $1.3 million this year versus a $9.6 million loss a year ago.

Net earnings for the Circuit City group including CarMax were up 73% to 17.5 million from 10.1 in the prior year.

This year, we lost 1 cent in the Circuit City business compared with 5 cents last year.

The 1-cent loss does include 2 cents of remodeling and relocation costs this year versus 1 cent last year.

So if you would exclude remodeling and relocations it would translate to an EPS of 1 cent per share this year versus a loss of 4 cents the prior year.

You will recall that our original guidance was for mid to high single digit loss before any remodeling and relocation costs.

The CarMax contributions was 9 cents this year, versus 10 last year.

You'll also recall that as a result of last summer's secondary stock offering, the percentage of CarMax earnings attributed to the Circuit City group declined to 64% this year versus 74.3 the prior year.

Earnings for the Circuit City group then were up 60% to 8 cents a share versus 5 cents in the prior year.

We were, we were really delighted actually with the broad based improvement we saw in our first quarter sales.

We saw continuing solid sales growth in focus categories like video particularly big screen TVs, DVD players, satellite systems, wireless communications.

We also saw strong growth in self-service package good selections including things like DVD software, video game hardware, software and accessories so both parts of the business again a broad-based improvement.

Margins for this quarter were 24.2% compared to 24.7 in the prior year.

And I would tell that you although we experienced a decline in gross margins, you will again recall that it was in the range that we anticipated which was 24.5% give or take 50 basis points.

The decline in margin here reflects a more competitive pricing structure and product selection throughout the quarter as well as our response to more aggressive offers from others.

And a resulting sales mix.

So there were a lot of moving pieces that determine the orig- the final margin.

We did experience some trade-offs in margin for sales growth and we expect to balance the sales- the margin and sales trade-off going forward.

I think what we would suggest, it's responsible market share expansion.

Particularly as we look at our research, it tells us our core customers buy across all product categories in our stores and obviously we believe and do believe that in response to new compelling marketing, traffic-driving promotion, that actions that bring customers into our store allowing them to see firsthand and experience firsthand some of the improvements under way in our stores will benefit our business over the long term.

On the expense side, first quarter, excluding remodels and relocations was 24% versus 25.4 in the prior year.

And including the relocation and the remodel costs was 24.3 versus 25.5 in the prior year.

And you would expect the primary factor driving first quarter expense ratio was selling more, improved sales leverage.

The contribution from our finance operations which is reported as an offset to SG&A expense declined to $20.4 million in this year's first quarter, versus $29.5 million last year.

The decrease in finance operation earnings reflects a decrease in the gain on sale calculation of receivables, resulting from change in various valuation assumptions to reflect our current expectations.

As well as costs associated with the issuance of a new public securitization.

Effective May 1, we compete- completed the new securitization on 1 of 2 series maturing.

There were no new public securitizations issued in the quarter last year or last year for the entire year actually.

Remember, also, to the prior discussion as we talked about CarMax, that our finance operation income does not include any allocation of indirect costs or any intercompany income.

Despite the lower gross profit margin and the decrease in the contribution from finance operations, we were able to exceed our first quarter earnings expectation in part because of the additional leverage from the strong comparable store sales growth.

The -- in the inventory side, you'll notice that our payables to inventory ratio increased to 77%, up from 54% last year reflecting continued success of some of our supply chain initiatives.

Overall, I would comment that our inventory in stocks have been improving, have steadily improved over the last few months.

Supply constraints have had a relatively minor impact on first quarter sales.

Principally limited to a few select classes -- portable audio imaging and in the early in the quarter, some in notebook computers.

In the first quarter, I would say also, that we are as we see sales trends we are aggressively buying the trends.

Our intention is to make sure we're matching our purchasing with the trends as we see them going forward.

On the customer service side, we believe we have continued -- we have continued to focus on improving customer service through improving first of all the quality of the associates who serve customers and secondly through a number of other initiatives to add more value to our customer shopping experience.

We have, while our business has been improving steadily reduced the number of sales counters in each store.

We're clearly focused on fewer better sales counselors and at the same time we are requiring completion of cross-training e-learning courses to facilitate broader selling in the stores.

We believe these actions are improving customer satisfaction levels and improving sales counselor income.

Our sales counselors are absolutely making more money which we believe will help in retention our top performers and again translate into better customer service.

Sales counselor productivity obviously continued to improve.

In May, we set a new non-holiday high for sales for associates and during the quarter, we saw at least 12% comparable store sales increase came about with 16% fewer sales counselors in the stores.

I'd also say that we began a new process which we refer to as certification earlier this month to -- it's a -- it's an initiative to make sure all of our folks are qualified to sell across a number of categories.

In our case, the initiatives started from the very top of our company, led by John Froman, our executive Vice President and Chief Operating Officer and our three division presidents who were the first three to go through and complete the certification process and are now qualified

to sell in every department in our store...

[ laughter ]

On the remodeling front since there may be some interest there, during the first quarter, we completed the tested pilot phase, the video department remodeling program.

Adding another 18 in this quarter I believe the total of 20 by quarter's end that were done.

And as someone was generous enough to report, we believe these went pretty smoothly and that in fact that we're completing them faster than our original projection which was for approximately two weeks and are going to be much closer to one week and in some cases we've done them actually in under a week.

Our full store lighting upgrades are also running ahead of what I would have believed we could do at this point with over 100 stores complete as of the end of the first quarter.

We are again pleased with the progression of the remodel process to date as well as with some of the initial reactions from customers and sales counselors, but particularly that the process has gone smoothly, although we're now just getting into the real heavy activity phase as we move toward completion of the remaining 260 stores between now and the end of September.

We continue to anticipate that the remodeling and relocation expenses for the year will be within the 18 cents estimate we made at the beginning of the year.

And the first quarter, these expenses were about $8 million, or 2 cents per share net of tax.

And again we expect the majority of this year's remodel and reloc expenses will be incurred in the second quarter.

Last year's first quarter, the reloc expenses, as I said previously, were 1 cent a share.

I've also noted that we plan to continue improving the Circuit City store base.

This is a multi-year multiphase remodeling process and that the expenses we've talked about this year he would would expect to continue over the next several years.

And as well as remodeling, we are looking at options in some of our older stores for relocation where we believe that's the appropriate solution to provide the right customer shopping experience.

With that, we would be happy to answer a few questions on the Circuit City business today.

Once again, if you have a question, please press star one.

And also state your company name.

Mr. Matthew Bosler will, you may ask your question.

Goldman Sachs.

Couple of questions.

First of all, you are obviously able to outperform your expectations for the first quarter despite starting the fiscal year with an in- stock position that probably wasn't quite where you wanted it to be.

Given that the comparison is not a whole lot tougher and on a two-year basis actually looks quite comparable to what you had in the first quarter, is there any reason why you might not be able to repeat that kind of sales performance?

Well, as I said earlier, we were in reasonably good inventory shape throughout the first quarter so I wouldn't -- I wouldn't suggest that there is any cause there.

We think -- we've commented that we believe we are running all a better business, first of that we're appropriately competitive to make sure that we responsibly went after some market share.

And how will we do in the second quarter?

You know, we're going to continue to drive our business where we can do that responsibly.

We are going to -- we have -- we have a target of how much we said we would return in terms of earnings.

We are going to go after that and if we can drive sales -- more sales in order to get there that's what we are going to do.

Gotcha.

Second, and final question, relates to some of the compensation initiatives you, you've discussed.

And the broader question of what are you essentially doing to the break even of the business.

I guess the operating margin erosion that you have seen over the past several years from the levels you have through most of the '90s relates primarily to volume and volumes per store are not yet back to prior peeks.

But I'm wondering whether you have changed the cost structure of the business sufficiently such that with lower volumes or somewhat lower volumes you might be able to replicate the margins that you posted in those same years.

The biggest change we've made in compensation was changing our sales counselor compensation to essentially a flat commission structure versus a product-specific structure.

In fact, they are probably -- they are making more money today than they would have a year ago.

So that we believed in order to drive sales we needed to make sure we had a high caliber knowledgeable sales counselor and you don't get that for free.

Sure.

So I think, uhm, we are focused on driving sales through the box.

I think as I said, a lot of good things happen when you can sell more in every dimension and that we recognize that a lot of our customers shop all over the store not just in one spot in one time.

And it's -- it would seem appropriate that we try to have the best offer no matter what product they are a competitive offer, no matter what product they choose though-to-shop for.

Is it not true that there are somewhat fewer salespeople?

There are fewer salespeople, but because they're paid on a percentage of sales, your cost is really related to sales, not to how many salespeople you have.

So it, does the total compensation expense as a percent of sales decline or is it really unchanged from the prior paradigm?

No, it doesn't decline.

It would be very similar.

And in fact again we're, we're actually based on the rate our sales counselors are making slightly more on a rate basis than they were a year ago.

But sales leverage doesn't apply to commission sales counselors.

To the extent that in fact though we also as I pointed out do better on the packaged goods, lower technology side of the business where we've moved to a model that is more customer take with, there in fact you do get some leverage as you go forward because selling more -- you are going to sell more and it doesn't take more folks to go around.

On whole, though, I think our expectation is we need to get back to selling more.

All the initiatives, all the effort here is providing the right environment that will translate into more sales.

I don't want to try to save our way to prosperity but, rather, sell our way to prosperity.

Fair enough.

Thanks a lot.

Mr. Scott Goldman, you may ask your question.

Hi.

Scott Goldman from Bear Stearns.

In light of the recent marketing pushes by both XM radio and serious satellite radios upcoming national launch, I'm wondering if you could comment, one, on the trends with respect to satellite radio sales in your stores, particularly if you have unit sales?

And two, if you have -- if you expect to see more significant contribution coming from satellite radio and the audio business.

Yeah.

Obviously, I'm sorry, but we don't comment on that level of granularity related to sales.

I do think satellite radio is a good business, however.

It got off to a good start with XM.

In the early days, actually, there was a little product constraint because I think it jumped faster than folks had anticipated.

The entry on a national basis serious just adds more marketing fuel to the fire, if you will.

I think raises knowledge that folks-- the big issue that those have, both of them, is awareness at this point.

I think that there are far more folks who don't know that they exist than those who do, but I do believe it's a good offer and one that folks -- if you talk to folks who have the service in their cars, they become pretty zealous about it.

I think you wouldn't want to try to reach in and take their receiver away.

So I'm optimistic about that business as a good business for us and certainly good for our customers.

But it really is way early in the cycle to tell.

Okay.

Thank you.

Mr. David Campbell, you may ask your question.

Yeah, hi, I was wondering if you might make some comments on your earnings expectations for the second quarter.

Actually, we have not -- effectively, we reaffirmed our earnings expectations for the year as we originally provided them.

And we have not made any adjustments to the quarters.

Our expectation was a small profit in the second quarter.

Mm-hm.

Okay.

I'll make -- won't make any changes then, thank you.

All right.

Thanks, David.

And thank you very much, all of you, for joining us this afternoon.

We appreciate your interest.