車美仕 (KMX) 2002 Q2 法說會逐字稿

Ladies and gentlemen, good morning and welcome to the Circuit City fiscal 2003 second quarter results conference call.

Hosting the call this morning are Mr. Alan McCullough, Chairman, President and Chief Executive Officer of Circuit City Stores Inc. and Mr. Austin Ligon, President of CarMax.

Mr. McCullough 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 second quarter results.

Following the CarMax review will be a question and answer period.

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

If do you have a question at either one of those times, please press the 1 on your touchtone phone.

You will hear a tone indicating you have been placed in queue.

You may remove yourself from queue at any time by depressing the pound key.

If you should need any assistance during the call, please press zero, then the star key and an operator will assist you offline.

As a reminder, today's call is being recorded.

I would now like to turn the call over to Mr. McCullough.

Please go ahead, sir.

Thank you and good morning.

This morning we announced second quarter fiscal 2003 results for both the Circuit City and CarMax businesses and in both cases, the results were in-line with our previously communicated expectations.

I will start this morning's call with a brief overview of the consolidated results for Circuit City Inc. and then Austin will provide a review of CarMax results.

After that, we will take questions on CarMax, then followed by a review of the Circuit City business and open the floor up at that time for Circuit City questions.

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

For Circuit City Stores Incorporated, second quarter sales were up 11% to $3.3 billion from $2.96 in the prior year.

Consolidated net earnings were up 38% to $20.5 million from $14.9 million in the prior year.

During the last few weeks, we have made significant progress toward the separation of CarMax from Circuit City.

On September 10, shareholders and our board of directors gave final approval to the separation plan and the related proposals.

Earlier this week, we finalized the distribution ratio at .314 CarMax incorporated shares for each Circuit City group share.

We expect to complete the separation at month end with CarMax becoming an independent separately traded public company as of October 1.

After the separation date, Circuit City will account for CarMax as a discontinued operation.

At the separation Hugh Robinson and John Snow will leave the Circuit City board and move over and join the CarMax board.

We have also previously announced that Rick Sharp who retired from the Circuit City board in June would become Chairman of the new CarMax board.

Earlier this month, we were also very pleased to announce the addition of Ron Brill, a 20-year veteran of Home Depot to the Circuit City board.

Ron retired from Home Depot in 2000 as Executive Vice President and Chief Administrative Officer and I can tell you we are particularly happy that someone with Ron's integrity, his financial background, and relevant retail experience will be joining our board at the next session.

With that, I would like to turn the call over -- my last chance to turn the call over to Mr. Ligon to report on another good quarter for CarMax.

Thanks a lot, Alex.

Well, second quarter sales for CarMax, total sales were up 15% to $1.08 billion from $938.9 million in last year's second quarter.

Our used car comp units rose 12% compared to last year's 22% in second quarter used comp growth.

As we indicated in our sales release, we experienced somewhat softer used car comp growth, comp unit growth, in July when new car manufacturers introduced a broad-based five-year, zero% financing incentives.

We adjusted our prices on appropriate makes and models quickly during the month, using the data available to us from a proprietary inventory pricing management systems and we also saw the wholesale market quickly adjust to restore the spread between new and used cars and as a result we saw our sales pace rebound in August and we were able to minimize any effect on our gross margin.

Our three new super stores, Sacramento, Greensboro, North Carolina, and our satellite superstore in Maryville, Indiana in the Chicago market, continued to perform in line with or above our expectations.

As far as second quarter earnings go including one-time cost of $1.3 million or 1 cent per share, related to the proposed separation of CarMax from Circuit City, our net profits were up 16% to $31.7 million and our EPS was up 20% to 30 cents a share.

Excluding those one-time separation costs, the earnings would have been up 20% to $33 million and EPS up 24% to 31 cents.

In the second quarter, our gross margin was 11.5% versus 11.6% last year.

As I noted, the slight short fall was primarily due to the results of pricing pressure brought in July from the zero percent financing incentives in a large segment of the new car business, particularly domestic.

The effect of the short fall was partially offset by the increase in our vehicle unit mix to 89% used cars versus 11% new cars this quarter up from 87% used cars in last year's second quarter.

And as we have always emphasized, used cars are much more profitable than new cars.

As far as our expense ratio goes, our expense ratio was 6.6% this quarter versus 6.6% in the year ago second quarter, including the one-time separation costs and excluding the one-time separation costs, the ratio improved to 6.5% from 6.6%.

This quarter's SG&A reflects our increased expenses associated with renewed geographic expansion that includes both the corporate expenses related to growth and supporting new store openings as well as the expenses of building our store management bench so that we can ensure experienced store purchasing sales service and business office management in each one of our super stores as we ramp up growth.

It is important to note that building this management bench helps us both maintain and hopefully even increase our productivity as we grow.

The quarter's SG&A expense also included the $1.3 million in one-time nontax deductible separation costs which are largely attorneys and accountants fees, document preparation, et cetera.

Excluding the cost of separation, the increases were more than offset by the expense leverage from double digit used unit comp growth and the higher than expected income from finance operations.

We also saw that our costing funds at CarMax auto finance were lower than the prior quarter in the prior year.

Because of the low cost of funds, spreads were higher than expected even though consumer loan rates came down during the quarter.

As far as new store openings go, our new store openings for this year continue with an opening on Monday, September 23 as we open our satellite -- our first satellite super store in Charlotte, North Carolina, market.

With this satellite, we will begin to test how much we can increase market share penetration in some of our older, more established markets.

In our older markets, such as Richmond, Raleigh, and Charlotte, we estimate that we have an 8 to 10% market share of late-model 1 to 6-year-old used cars within the 30-mile radius of the existing store which covers most of the metro area.

This market share, however, can be as high as twice that within ten miles of the store.

So adding a satellite store in a market like Charlotte will help us understand over the next several years how high our market share of late model used cars can go and how densely we may be able to store both mid-size and even larger markets.

So, turning to expectations, based on our performance in the first half, we now expect second half used unit comp growth in the mid to high single digit range, slightly lower than our original expectations which were in the high single to low double digit range.

For the third quarter, we expect used unit comp growth in the 6 to 9% range, which is on top of, if you will remember, the exceptional 29% achieved in last year's third quarter.

EPS we expect to be roughly flat in the third quarter with last year's 17 cents a share.

As far as the fourth quarter goes, we expect EPS growth in the mid-teens compared to last year's 17 cents.

For the year, we continue to expect net earnings in the range of $99 to $105 million and on a fully diluted basis that includes all CarMax shares as outstanding, those earnings yield EPS in the range of 95 cents to a dollar in line with our original expectations.

Those EPS expectations do not include the approximately 8 cents per share of one-time separation costs.

So with that, let me open it up to some questions.

And ladies and gentlemen, just as a reminder, if you do have a question at this time, please press the 1 on your touchtone phone.

One moment please for our first question.

Our first question is from the line of Sharon Zechia with William Blair & Company.

Please go ahead.

Hi.

In the press release you mentioned that you're not anticipating expense leverage from the ramp up and expenses related to the Circuit City spinoff.

I think this is incremental corporate expenses if I'm understanding correctly.

Can you go through kind of what the magnitude is of the expenses you are expecting to incur as a stand-alone company?

Wait one second.

I was just talking to Keith, our CFO, we haven't given any expectations for exactly what those are.

What we really need to do is get through this operation and then we'll give some definitive expectations as to what those are.

Are you planning on having a call after the separation or are we going to wait until the end of the third quarter to get more clarity on that?

The answer is we will have a call once we have the information that we feel we are in a good position to give you clarity on that, okay.

And as you can imagine, or maybe you can't imagine, but separation is a fairly hectic process.

Sure.

Getting to the point where we have that what we don't want to do is we don't want to give you an inaccurate estimate.

We want to get to the point where we have an accurate estimate and release that to you.

So we will do that, you know, when we feel we get to a point that we have got a good estimate to give you.

But you feel like you have got a good enough feeling for it now that you're guiding to know expense leverage?

Roughly, yeah.

Roughly?

Yeah.

That is what we said all year, we don't expect to get any expense leverage out of this.

Okay.

Thank you.

Okay.

Our next question from the line of Jack Carlow, [inaudible] SEC capital.

Please go ahead.

Hi, Jeff Perry actually.

Can you run through what the finance income was in the quarter?

Finance income in the quarter? [ inaudible ]

I guess the question is I see the number in the release and the fee income numbers, is that a pretax or net number?

That is a pretax number.

That is a pretax number?

And how much of that is securitization gains? [ inaudible ]

Don't have that to disclose at this point.

Any sense?

Could you just sort of bracket it in terms of percentage?

I don't have the detailed financials with me, I can't give it right now it will be in our 10Q list.

Okay, but typically it has been a very high percentage of the finance income?

I'm assuming that wouldn't change?

I would expect it would be a similar percentage.

Similar percentage.

Consistent with history.

Yep, thanks.

Our next question from the line of David Campbell with Davenport Company, please go ahead.

Good morning all, and congratulations on a good quarter.

Thanks.

I was wondering if you might talk about your inventories, it looks like they were down a couple of percent and also if you could mention how you are planning for the model year changeover this year?

Part of the reason inventory is down year over year is that they're we do have fewer new car franchises so that is a portion of it.

The balance of it really is that we had strong sales in the final month of the quarter as you probably remember, we focused on trying to get down and ready for the fall transition season.

We are not investing in incremental inventory to build sales this time of the year.

It just really was a result of our ongoing execution and then our focus on trying to make sure that our inventory levels heading into the fall transition are at the appropriate levels.

And we are happy with where those inventory levels are and so we are prepared, as we have been for the last several years for the model year changeover and the pricing dip we always see in the fall.

Great, thanks.

Thank you.

Our next question is from the line of Maurice Dane with Arnold & Company.

Please go ahead.

Thanks.

The resumption of zero percent financing now on a lot of the '03 models, can you say what kind of impact you see on traffic at the super stores, relative to the impact we saw last fall and then the spring?

As you know, we don't comment on the middle of a quarter but in general, I mean, zero percent financing, the change over that happened as we go from '02 to '03 in general for most cars is a change from five years zero percent financing to three years zero percent financing.

And if you kind of do the numbers, the monthly loan on a three-year zero percent finance is about twice the payment as a five-year.

So, almost nobody takes that.

So, in other words, generally this is -- a three-year zero percent finance is a fairly typical incentive level compared to what might previously have been available on -- through a special lease, through cash back to the customer or through cash back to the dealer.

So our general view of three-year zero percent finance is that it is a fairly typical incentive level consistent with what has been out there for the last four or five years.

I guess when you see the zero percent headlines on the ads that is good for driving traffic and --

Is a marketing tool, but --

A marketing tool, yeah.

But find almost nobody takes the three-year zero percent.

Nobody who needs a loan can take that loan.

You exploited the higher traffic last fall, you converted a lot of those people that were out shopping, and so CarMax customers had tremendous sales.

This spring would have been a little bit tougher because going to five years, the new car dealers were able to convert a lot of those into buyers, I'm presuming.

So your sales may have been a little soft.

Just a matter of driving the used car pricing down.

Are you talking about July?

Yeah.

Yeah.

It is important to differentiate last fall, which is so far once in a lifetime occurrence we saw not only zero percent financing when GM originally launched it, every car in their inventory, even including Corvettes for five years.

But we also saw, you know, a complete stoppage of the market that was then restarted.

And so there were a lot of dynamics there, and as I have noted to many people, the fact that we have such a strong appraisal offer allowed us to stay very active in the market and be extraordinary beneficiaries of last fall's traffic boom when other dealers were largely pulling back on trade-in offers.

As far as this July, in effect, what I have talked continuously about is that is the impact to us of a new car incentive primarily is how big a change is the dollar amount, in effect, from what was previously out in the market?

And so when we saw in July a strong zero percent, five-year, on some vehicles, that had an impact on those vehicles, effectively reducing their price a little more, $500 to $1,000 more, in the marketplace than it had been before.

And on those vehicles, we either had to take some of them, we had to take price adjustments and some we didn't.

But generally, you see both some downward price pressure and some -- some pressure on sales, but because the wholesale market adjusts very quickly and because we also adjust our prices on appropriate models, we were able to actually get the quarter to come out pretty close to where we expected it to at 12%.

So it is really our ability to adjust to that that's the key and it is the step function changes and incentives that create a little volatility, but you know, so far, we have been pretty good at managing three there.

I will point out if you compare CarMax to the latest report we have from the publicly traded new car guys, they reported negative 5% used unit comps in their second quarter, which was April, may, June, compared to our 12%, so we are still running about a 17% spread over the market.

Now we are back to three-year zero% financing.

The monthly payments are higher than they were in July, so they would not have the same depressing effect on used car pricing I would presume.

Don't think so, three years, zero percent financing is more or less back to the same standard $1500 to $2,000 incentive we have seen out there on a regular basis for the last five years.

As you were pointing out now the incentives from the new car manufacturers are less expensive than they were a year ago.

So we might not expect to see the same volume of shoppers coming out on the street, already had two shots at that?

Absolutely not.

No.

We don't expect any repeat of last year's extraordinary events after September 11, where -- that caused a huge auto shopping boom and we don't expect that at all.

A followup, think we will see numbers that July auction prices were down versus June four or five percent or so could you comment on what you saw in August and maybe now in September at the auctions?

Not really.

And the reality is, taking a broad market index of options is not terribly helpful because that's not how you adjust to the marketplace.

What matters is, what was pricing on '02 Explorers in San Antonio and what did you in San Antonio to adjust to that?

So, although we certainly -- and we think the Mannheim index is as good an index as there is out there.

That's not the key driver of decision making.

The key driver of decision making is car by car, market by market and that is where our proprietary information systems are the key.

As you know, we don't really reveal what we know to other folks.

The only thing we can look at is the Mannheim index.

I would refer to that.

Yeah.

And I can't help you in terms of any -- any conclusions to draw from that, other than wholesale prices go up, they go down and what really matters is your ability to manage through it.

I'm going to -- I apologize, going to have to turn to the next questioner.

Okay?

That would be from the line of Trish Darren of J.P. Morgan.

Please go ahead Ahead.

Yes, thanks.

Regarding the financing, just going back to that, [inaudible] auto financing was $22 million, third party financing [inaudible] fee was $4.6.

I'm just trying reconcile that with the P&L which I think indicates $53 million as the finance income offset?

Would you be able to help any -- what the gap is?

I'm confused.

Yeah, we are trying to find what you are referring to

Sure.

The press release is on the second quarter and I think you are looking at a year-to-date number perhaps?

Right.

No, this says SG&A was $650 -- I'm sorry gross profit was $650 million and then it says SG&A $614 for the three months ended August 31, and then it says net of financing of $52.68, 678 sorry, for the three months ending August 31.

So the offset in the panel is 52, or 53, then in the text, CarMax auto finance the second quarter was 22.

This is Ann Pollyar [ph], you are looking at the Circuit City Stores Inc.

P&L.

Oh, I'm sorry.

I wondered what the -- [ inaudible ] The break down of the $22 million you didn't have, right?

But it is similar to what -- as you know, our policy for sales that we sell receivables every month, very consistent --

Yeah, no, that's fine.

The last question I had was just actually, going back to the road show, did you -- were -- was I right in understanding, a normalized environment if there was no growth, did you mention the gross margin or operating margin expansion would typically be 60 basis points or I did completely misunderstand that?

I think you completely misunderstood it, but I will -- let me clarify.

What we have said now for about the last 18 months since we have posted our investor note on the internet 18 months ago as we started the growth program, that over one doubling in sales, so for instance, $3 1/2 to $7 billion in sales if you take where sales were last year to $7 billion in sales, we expect to pick up roughly 60 basis points of corporate SG&A leverage.

Okay.

In other words, corporate SG&A we think will go down about 60 basis points, over that doubling of sales which will be probably 4, 4 1/2 year period but we won't get any of that this year.

Yeah, that is fine.

Thank you very much.

Okay, thanks.

Okay and I believe this is our last question.

From Jeff Krenshaw with Truffle & Company.

Please go ahead.

Hi, congratulations on another great quarter.

Thanks.

My question was regarding something you had in the press release was -- I guess you experienced slightly lower than planned per unit gross margins for the used cars.

Can you just give us an idea as far as where that came in versus your expectations, where it came in versus last year and what your thoughts are for the remainder of the year?

Yeah, just a second.

Yeah, it was a very modest difference and you know, significantly less than $100 difference.

So you know, it was a minor difference in gross margin, we just wanted to acknowledge that when we adjust price in July, yes that has some impact, but it was a very modest impact.

And as far as our expectations for the rest of the year, we expect gross margins to be in line.

And just so I -- that's -- in line with the [ inaudible ] $2,085 per used vehicle is that right?

Broken down?

Yeah the comment Keith was adding was that it is important to understand that our lowest gross margin is always in the third quarter 'cause there is seasonality.

This is model year changeover time.

But, if you look at our overall gross margin, yeah, we've talked about the gross margin on a per unit basis on a proto typical basis.

On the year, it would be roughly in line with that $2,000 from the car on a per unit sold basis for used cars.

Okay so then the third quarter you said was about $100 less -- I guess in addition to that -- [ inaudible ] Anyway -- so, like what, $1800 --

Let me go back.

What I said is in the second quarter, it was significantly less than a $100 difference.

Okay.

Okay?

And in the third quarter, it is always lower and I don't think we have -- we haven't given people guidance on exactly how much lower it is for used cars but it goes down somewhat lower in the third quarter and that's built into our expectations, so, overall, we were pretty close to gross margin and we expect to stay in line with where our gross margin expectations are quarter by quarter.

Okay, gotcha.

Thanks.

With that, I will turn it over to Alan and he can talk you to about the Circuit City business.

Thanks, Austin.

Before continuing, just in case some folks have joined us in the middle of the conference call, I would remind you again that our comments will include some forward-looking statements which are subject to risks and uncertainties and again refer you to our SEC filings for complete discussion of those risks.

For the Circuit City group, second quarter sales were up 10% to $2.2 billion from $2.02 billion a year ago, comp sales were also up 10%.

Circuit City business including remodel and relocation costs had an $11.2 million loss this year versus $12.5 million loss in the prior year.

Net earnings for the Circuit City group which included the contribution from CarMax were $9.1 million this year up from $6.8 last year.

On a per share basis that would equate to approximately a 5 cent loss this year for the Circuit City business versus 6 cents last year.

This year's number includes 8 cents of remodel and relocation costs as opposed to only 4 cents in last year's number.

So excluding remodel and relocation, our earnings per share would have been 2 cents this year, which was in line with our guidance of a the slight profit in this quarter and better than our loss of -- loss of 2 cents last year.

So 2 cents profit this year versus the 2 cents loss in the prior year.

CarMax contribution to earnings was 10 cents compared with 9 cents last year.

All so all-in earnings per share for the Circuit City group 4 cents this year versus 3 cents in the prior year.

I would tell you on a sales basis, we are absolutely pleased with the strong second quarter sales growth that I begin and I'd be remiss if I didn't acknowledge, I think great effort by folks all over the Company and certainly through our store group toward customer service in a number of ways.

We realize we still have a long way to go but think we have made great progress in taking better care of our customers.

We had strong back-to-school traffic that produced growth in notebook computers, home office, peripheral software, office accessories, that type of product and throughout the quarter we have had traffic driving promotions in things like entertainment software, commodity products, backed up by a much stronger assortment of commodity entry level products when you compare what we had the prior year.

For gross profit margin, gross profit margin declined 80 basis points from 24 1/2% in fiscal year '02 to 23.7 this year.

The lower gross margins reflect margin pressure from stronger sales of commodity electronics and personal computers which have lower-than-average margins as well as more competitive pricing, particularly in traffic-driving categories and in some cases our response to more aggressive promotional offers from other folks.

The tradeoff in margin for sales growth was offset by sales growth in some of the more fully featured products such as big screen TVs and in that case particularly, digital television products.

We do expect to balance margin and sales tradeoff going forward as we try to fulfill our objective, as we stated a profitable market share growth.

But whether in response to traffic driving promotions, broader, deeper product selections or new compelling marketing we believe actions that bring customers into our stores, allowing them see firsthand some of the work that's going under way by our folks is a benefit to our business in the long-term and in the short-term.

And I think you can see some of that benefit in the expense leverage we generated from the sales in the second quarter.

The expense ratio, as reported declined 110 basis points from 25.6% last year to 24.5% this year.

The primary factor obviously driving the improvement was leverage from sales which more than offset the negative impact of higher remodel and relocation costs.

Remodel and relocation in this year's quarter were $25.8 million dollars compared with only $12.8 in last year's second quarter.

And if you take that away, excluding the remodel and relocation costs from both years, the leverage benefit of the stronger sales improvement would be even greater.

It would have moved from 25.0% last year to 23.3 this year or 170 basis points improvement.

Contribution from our finance operation, which is reported as an offset to SG&A improved modestly to $26 million this year and this quarter from $24.8 last year.

Favorable interest rates as well as -- and favorable operating expenses more than offset the costs associated with a second new securitization which happened during the quarter.

For the full year, we continue to believe that our -- or expect that our finance operation contribution will be very similar to what we saw last year.

Payables, in terms of direct inventory, payables were 71% of inventory at the end of the second quarter which is right in line with last year's number, which was 72.

Both numbers reflect a change in the cash conversion cycle from some improvements we've made in supply chain and think if you look prior to last year, you would have seen a conversion rate more in the 60% of inventory range.

At the end of the second quarter, you saw that merchandised inventory, we chose to invest in the inventory, and inventory was increased by $484 million compared to the same period last year.

There are a number of things going on there and I will list a few.

For sure, we had a stronger inventory position in personal computers versus the prior year.

You'll remember the prior year we were going into a transition to Windows XP and consciously reduced our inventory in computer products to make sure we didn't incur any extraordinary transition cost.

We clearly have a commitment, an ongoing commitment, to improving our in-stock levels in all stores.

We have seen broader and deeper assortment in select product categories and if you're in our stores, I think you'll see improved merchandising displays, we have gone much further to our product specific fully loaded end caps which we think present better value to our customers.

We also think and I absolutely believe that our sales results for the quarter are partially reflective of the success in customer service but also the fact that we have got plenty of inventory to sell.

We do remain optimistic on the outlook for the upcoming holiday season and believe the benefits of customer service, merchandising, remodeling, marketing, all these initiatives should continue to provide us opportunities to grow sales and grow market share.

Accordingly our inventory buying practices are geared toward maximizing the upside at the same time we try to minimize risk.

Circuit City cash went to $772 million, about the same point it was last year at this time.

This decline was anticipated.

It primarily reflects as we have just spent -- I have spent some time talking about inventory, which was partially funded by payables but also reflects a payoff of $100 million term note in this July maturity as well as some remodeling spending.

On the customer service front, we have talked in the past about the fact we were really ramping up the level of training in the stores and I'm delighted to tell that you on -- as of September 1, all sales counselors who have been with us for more than 60 days have gone through our certification process, which includes both online testing of some 80 to 90 randomly generated questions from our e-learning courses as well as validation exams from their in-store management team.

And I think certification is just one more piece of how we are attempting to -- throughout the store and organization raise level of service we are able to provide to our customers.

On the remodel and relocation front, during the quarter we made significant headway on this year's remodeling program.

We have completed the video remodel and the full store lighting upgrades in approximately 200 super stores.

As of August 31, we completed more than 225 video department remodels and we completed substantively all of the lighting upgrades we expect to do this year.

Our expectation is that we would complete the video department remodels by the end of the current month.

We also relocated two super stores in the first quarter and two in the second quarter of this year.

Year-to-date, through the first half, remodel and relocation expenses were 10 cents a share, remodeling, I can tell you as we have said before, are running on plan and on budget.

We continue to expect total expenses for both remodeling and relocations won't exceed the 18 cents per share that we talked about at the beginning of the year.

Of the remaining and remodel location costs, relocation costs anticipated for the year, we certainly -- we expect a larger portion of the third quarter as we complete the video remodels, we also expect to relocate approximately six more stores between the third and the fourth quarter of this year.

We are pleased in a number of ways, we are pleased with progression of the remodels as well as pleased with our ability this year to have a very minimal disruptive effect on sales as we have gotten these done in a very short period of time with great cooperation from the stores.

We believe that the video remodels, if you haven't seen them, I would urge you to do that I think you will too, because I think they are a clear improvement in the way we are able to present large televisions to our customers.

My only anecdotal at this point, if you listen to our own folks and listen to customers who had a chance to see it firsthand, we are pretty pleased about what the -- the feedback that we are getting.

I tell you we are often asked when the remodel finishes on Thursday, how were the results on Friday that we will -- we will withhold comments specifically until we have meaningful results.

Just as last time, we will tell you as soon as we have numbers we are comfortable that we can tell you.

And at that time, we will be delighted to pass on what we have seen financially.

For the reminder of the fiscal year, I will make a few comments before we take a few questions about the Circuit City business.

Comparable store sales and gross margins are going to depend on activities we use.

As we have talked about balancing promotional activities and trying to balance the impact on sales and market share growth and we will continue to do that.

Our objective is to promote intelligently or promote responsibly and try to achieve profitable market share growth.

As a result of that it is a bit difficult and we are not now endorsing any specific sales guidance because we are going to do what we need to do to achieve the objective and the earnings that we have -- that we set out as our target at the beginning of the year.

We do remain comfortable that including remodel and reload expenses for the Circuit City business, we are comfortable with a 57 to 67 cents per share number that we published at the beginning of the year, excluding remodel and relocation costs that would translate to the Circuit City business earnings of 75 to 85 cents per share for the fiscal year.

With that, I'm happy to open this up for a few Circuit City business questions.

And once again, ladies and gentlemen if do you have a question, please press the 1.

Our first question from the line of Danielle Fox with J.P. Morgan.

Please go ahead.

Thank you.

I have a couple of questions.

First, you mentioned that you don't expect the cost of remodeling plans to exceed 18 cents this year but you've spent only 10 cents so far.

Given how close we are to the holiday season, how likely is it that you actually spend the entire amount?

And in the past you have indicated that we should [ inaudible ] next few years, I'm wondering if that is still the case.

Yes, as I pointed out, there are six relocations still to go in this year and as you do these remodels, you complete the remodels faster than the bills come in, so, that at this point, we are comfortable that we won't exceed the 18 cents but I think it would be unwise to try and project anything beyond that at this point.

Again, we are happy with the process, we believe -- we absolutely believe the costs are under control, but it's just a little early to predict anything beyond the 18.

In terms of the next few years, we have in fact, said that the one thing that is for sure is we want to make sure we have a store base and an experience for our customer that we are happy with and what drove the notion of the need to remodel was that we obviously had situations we weren't happy with.

That still exists, we will continue to work it until we get to a better position, whether it be for relocation or remodel.

I think the 18 cents as we -- as we watch this year's and we look at the results from both of these activities, the 18 cents continues to be a good place holder for the next two years, even if the exact form of that may change slightly.

I think that is a fair estimate at this point of the fact that this is an ongoing process, we don't intend to stop and that is good place to put a number out there for the moment.

Just one other.

Given a more compressed official holiday selling season this year, should we interpret your decision to invest aggressively in inventory now to mean that you intend to begin pursuing this business more aggressively sooner?

Well there are fewer days -- assume you are talking about there are fewer days between Thanksgiving and Christmas.

Interestingly what -- as everybody focuses on those number of days, if you have watched business evolve over the last few years, Christmas is probably a 10 to 12-day period, that there is three or four days around Thanksgiving and 7 or 8 days right before Christmas Day that determine in large part how you are going to do and so we are less distracted by the total number of days there.

And that is really not what is driving this.

As I said, for starters, we were in a low inventory position in PCs last year, there's a substantive amount of money we spent now to be in good shape in that business because we are not facing any imminent XP transitions as we were a year ago.

And as we pointed out, we were very pleased with that business and the strength of that business in the back-to-school season and so that is part of the investment.

There is an inventory that I would suggest just brought in a little early so that if you looked at -- if you look at the position that we will start the month of October or in this case, ended the past month and look at the position we will be in at the beginning of December, we would expect a smaller change from the end -- trying to make sure I say this correctly, a smaller change from the end of the second quarter inventory position to the beginning of the fourth quarter inventory position than we saw a year ago.

So we will need to bring in less between now and December 1 than we did a year ago.

So I wouldn't expect the delta between last year and this year to stay at this level.

Thank you.

Our next question from the line of David Shish with SunTrust Robinson Humphrey.

Please go ahead.

Hi, good morning.

'Morning.

Three very brief questions.

First, could you update us on the gaming inventory supply chain on the software side?

There was some issues with that last year getting it quickly to the customers.

Could you talk about that?

Second, could you perhaps give us some rough estimate on how much of the inventory swing is due to the PC and related category?

And then lastly, anything could you talk about for expectations for digital television category around the holiday season this year?

Thanks.

Sure.

Relative to the gaming, the situation we talked about a year ago is we -- we were the only one I think on the block who didn't have the ability to ship directly to stores.

In the music business, you are able to get the inventory well before street date and we would run it through our normal distribution channels and send it to the stores so the stores would have the product on street date.

In the game business, the game manufacturers typically won't do that.

They prevent early distribution by preventing release before the release day.

We have now in place the ability to direct ship to stores.

We certainly saw the benefit of that on the last major release, which was a -- Mario, right, I have gotten where I don't play these any more -- but Mario Brothers most recently from Nintendo, which was a great success and we saw the benefit of having gone through the work to provide direct-to-store delivery.

So yeah, that was a problem a year ago, it is no longer a problem.

In terms of inventory, computers, we haven't quantified, that was a substantive portion but certainly there is again, I don't want to suggest that is nearly all.

We did bring in inventory early .

There are are several components to that but computers weren't insignificant.

The television business, look I -- you can tell we believe strongly about the television business by when you walk in any of our new stores, or where we put our energy in remodels this year and -- nothing I see that makes me feel anything less than extraordinarily optimistic about the potential of TV.

I think -- digital is for sure the -- people are making that transition even prior to the time that they actually have a lot of great digital material, just relying on DVD to drive the sets.

And I think now, as you see the form factors evolving and see plasma sets moving into -- while not a popular price, a more reasonable price, as I think I have said in the past, we expect to have a prominent name brand plasma TVs where the display will be $5,000 this fall.

Which I believe is sort of a breakthrough event.

I don't think -- find it interesting in that we have seen a lot of movement in price over the last two years from where this set would have been $15,000 probably three years ago, it doesn't feel like there is lots of -- lots of quick slide room below this.

The investment that you have to make to be in the plasma business is substantative.

This is a long way from assembling components in China.

This is a significant manufacturing investment.

There is still a number of yield issues there as folks work through building these.

But having said that as you watch, as we have set up these displays in stores and particularly where we remodel the stores, as you watch customers interact with some of these sets, we -- I feel nothing but strongly.

We do a lot of research, we spend a lot of money trying to figure out what the customer wants.

For me, I want to go stand in stores on weekends and see what they do.

When you watch them in the new TV departments, it's hard not to feel optimistic about the TV business.

Thanks.

Our next question is from the line of Kelly Chase with Thomas Wisely Partners.

Please go ahead.

Yes, Hi.

I understand from the comments you're not willing to, I guess, endorse any sort of sales expectations at all.

We use -- would it be -- prudent, however to assume the same type of margins, deterioration in the mall?

It is kind of hard for us to model when you are not giving us any guidance on the top line.

What is tough in projecting sales is as you heard a lot of folks talk about there has been some volatility in the market.

And I don't want to be out there changing forecasts every other day.

We are going to respond to the market.

We think -- we have an earnings target we are comfortable with and we'll adjust our promotional activities accordingly to make sure that we stay there.

I think when you look at the -- the margin absolutely went down but what you saw is not a deterioration in margins of big screen televisions, for example, but rather a larger share of traffic drivers, promotional items.

I can tell you absolutely we are gaining share in the entertainment software business which unfortunately is the not largest margin contributor that they're there is out there that -- that you know when we are -- we had a great day yesterday for example in "Monsters Incorporated."

That brings your margin rate down but it doesn't mean that your margin on your better products is changing.

I think what you are just seeing is we decided we are not going to be uncompetitive in promotional traffic driving items, we are going to make sure folks in our store have the chance to buy those at the right price and have quantities to support that decision and we are going to make sure we compete aggressively as we have been in the entertainment software business, where I said we are gaining share.

So, yeah, margins -- could margins be down?

I would expect that they would be down as we continue to follow that strategy.

Okay.

Thank you.

Our next question from the line of Bud Bugetts with Raymond James.

Go ahead

Hi, Alan.

Two questions if I could, could you review the training and the people and you went over that before, I'm sorry, I got knocked off the line for a few minutes.

Sure.

And secondly on the inventory issue, I realize the delta between this quarter and the beginning of the fourth quarter won't be as large as last year but coming out of last year, you had logistics issues and reordering issues that I think impacted either the end of the last quarter or the beginning of the first.

Could you kind of tell us where you are in that situation so that that doesn't repeat this year?

Sure.

On the training front, I just mentioned briefly that we talked about the fact that we were putting all of our sales folks through a certification process and that our target was to get that complete by September.

And that involved taking a number of courses, taking an 80 to 90 question, randomly generated question, test and on the floor certification by management.

That has been completed with everybody has been with us for more than 60 days.

So, it was an enormous undertaking but we are pleased beyond belief with our store folks who really came through and got this done.

Last year's inventory, as we, I think said repeatedly, we had a good December.

We had a better December than actually we might have thought at the beginning and it is certainly towards the end of the month and into January/February, we acknowledged that we were -- two things, there was a confluence of two events, we performed better than we had expected.

We had a great December and subsequent to 9/11, we found manufacturers who historically would have been in the business of reloading our pipeline stopped, that most of Asia just basically went on hold because of fear of the unknown.

And I think two things, we are going to go into December in better position than we were last year.

We are going to -- we are planning to have a good year, we are delighted with how the business is doing now; we are planning to have a good fall.

I don't think we are facing the same situation with the manufacturing community.

They recognize that they reacted hastily and I think that they are -- I'd be surprised to see that again.

I believe that they will be much more thoughtful as they make their own inventory decisions going forward.

Just as a follow up on that training issue.

Is there any quantification of the cost impact of the training and obviously there's a part of that that's ongoing but I suspect some also that is a one time --

Not really.

We -- it is -- this is a certification in this map was a one-time event.

We would expect to continue to certify all the new folks as we hire them and they come up to speed.

At the end of the day, we've acted -- by going to online training we believe we have saved money, we're delivering training better, faster and a lower cost.

And so I don't think any extra cost would have been -- would have been fairly small that we would have incurred in the quarter.

I mean, online really lets do you this in a very efficient way.

Thank you very much.

Our next question from the line of Nancy Fasler with Goldman Sachs.

Please go ahead.

Thanks a lot.

Good morning.

Most my questions have been answered.

I do just want to ask one related to the flexibility that you have if you were to choose to deploy your cash or some of your cash in a repurchase, whether -- if you could just outline any restrictions associated?

In other words, a spinoff or if there are any covenants in your securitizations that would influence your ability to buy back stock, helpful for us to get a sense of that.

Yeah, [inaudible] there are some restrictions related to the spinoff and because I don't know the specifics there, I would rather not get into that, but there is a -- there is a -- I believe a limit to what we are able to buy, okay.

Thankfully someone smarter than I handed it had to me.

Okay.

The amount of shares we might be able to purchase would be dependent on various tax rules.

The only issue -- we believe we could repurchase up to 20% but that would be the ceiling, limit us based on tax rules related to the separation.

Beyond that you know, I just -- we have said that we are not going to talk about -- we wouldn't entertain any idea until the CarMax splitoff is complete.

Sure.

And I really don't want to presuppose on behalf of the board what they might or might not choose to do.

I will leave that up to them but there is a limit that is associated with the spinoff of CarMax.

Sure, those parameters are very helpful.

Thanks.

Okay.

Can we take one more question?

That would be from the line of Colin McManahan with Sanford Bernstein.

Go ahead

Morning, Alan.

Morning.

Most of my questions have been answered as well.

One on the TV category, since it is, I think, a fairly important part of the thesis going forward.

We would agree.

Can you comment on the overall trends in the TV category, including digital and analog together and then maybe break it out and where there are pockets of strength in TV and any help you can provide us on the TV category would be helpful?

Well, the TV business has been good broadly, but there's two piece of that.

Certainly we have made attempts to do a great job in large television and particularly large digital televisions.

That hasn't been too tough because the price delta to the customer is very reasonable.

When you stand in front of a television set that has digital display capability and one that doesn't, for $500 to $1,000 you will make that switch because a TV is an investment.

It's not something you are going to buy in the near term.

The other part of the -- we are seeing it TV business good broadly, even in the analog sense.

Some of that is because we have chosen to compete.

I mean, I think that we have now a very attractively priced well-manufactured great sets at the moment that you can buy at Circuit City as cheaply as you will buy them anywhere that you go and that has not always been the case.

So we are seeing a blend, we are seeing continued strength in our big TV business, particularly digital TV business, but we're also seeing strength even in commodity, 13, 20-inch televisions, an area that we have seen weakness before, but again [inaudible] perhaps shame on us, we haven't been as competitive as we should have been.

But we have clearly are, again, we are not -- this is sort of -- I want to give the customer what they want, if they want to buy a low-priced television, I don't want them to make them go somewhere else to get it.

If they want another, I hope to be the best place to do that we expect the television to do well well into the future.

It really -- at the end of the day, TV, there is a lot of other products, TV is the center piece of your home entertainment system, it's sort of like your car.

People like to have a good television set, they want to show that off.

It's -- it is just I think -- we have seen that as we have tried to sell lesser brands and large TVs.

That doesn't work so well.

So, we remain delighted and committed to the TV business.

With that, I will thank all of you for joining us this morning.

I appreciate your time and interest in Circuit City.

Ladies and gentlemen that does conclude your conference for today, thank you for your participation and you may now disconnect.