form10-q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
_________________________

FORM 10-Q
 
(Mark One)
 
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended August 31, 2008
or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to _______

Commission File Number: 1-5767
 

CIRCUIT CITY STORES, INC.
(Exact name of registrant as specified in its charter)

Virginia
54-0493875
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
9950 Mayland Drive
 
Richmond, Virginia
23233
(Address of principal executive offices)
(Zip Code)

(804) 486 - 4000
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No □

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x
Accelerated filer □
Non-accelerated filer □
Smaller reporting company □

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  □ No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
Outstanding at August 31, 2008
Common Stock, par value $0.50
168,125,359
CIRCUIT CITY STORES, INC.
FORM 10-Q
TABLE OF CONTENTS



PART I.
FINANCIAL INFORMATION
 
     
Item 1.
 
     
 
3
     
 
4
     
 
5
     
 
6
     
Item 2.
14
     
Item 3.
27
     
Item 4.
27
     
     
PART II.
OTHER INFORMATION
 
     
Item 1.
28
     
Item 1A.
28
     
Item 2.
28
     
Item 4.
28
     
Item 6.
29
     
     
SIGNATURES
30
     
EXHIBIT INDEX
31
 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Circuit City Stores, Inc.
Consolidated Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
 
   
Three Months Ended
August 31
   
Six Months Ended
August 31
 
   
2008
   
2007
   
2008
   
2007
 
Net sales
 
$
2,391,402
   
$
2,643,968
   
$
4,692,476
   
$
5,129,505
 
Cost of sales, buying and warehousing
   
1,882,404
     
2,097,957
     
3,704,804
     
4,023,309
 
Gross profit
   
508,998
     
546,011
     
987,672
     
1,106,196
 
Selling, general and administrative expenses
   
668,042
     
677,909
     
1,308,051
     
1,326,263
 
Asset impairment charges
   
73,000
     
     
73,000
     
 
Operating loss
   
(232,044
)
   
(131,898
)
   
(393,379
)
   
(220,067
)
Interest income
   
822
     
3,858
     
1,990
     
9,595
 
Interest expense
   
4,434
     
124
     
6,116
     
167
 
Loss from continuing operations before income taxes
   
(235,656
)
   
(128,164
)
   
(397,505
)
   
(210,639
Income tax expense (benefit)
   
3,518
     
(65,110
)
   
6,484
     
(92,773
Net loss from continuing operations
   
(239,174
)
   
(63,054
)
   
(403,989
)
   
(117,866
Earnings from discontinued operations, net of tax
   
     
218
     
     
464
 
Net loss
 
$
(239,174
)
 
$
(62,836
)
 
$
(403,989
)
 
$
(117,402
)
                                 
Weighted average common shares:
                               
Basic
   
165,353
     
164,837
     
165,151
     
165,340
 
Diluted
   
165,353
     
164,837
     
165,151
     
165,340
 
                                 
Loss per share:
                               
Basic:
                               
Continuing operations
 
$
(1.45
)
 
$
(0.38
)
 
$
(2.45
)
 
$
(0.71
)
Discontinued operations
 
$
   
$
0.00
   
$
   
$
0.00
 
Basic loss per share
 
$
(1.45
)
 
$
(0.38
)
 
$
(2.45
)
 
$
(0.71
)
                                 
Diluted:
                               
Continuing operations
 
$
(1.45
)
 
$
(0.38
)
 
$
(2.45
)
 
$
(0.71
)
Discontinued operations
 
$
   
$
0.00
   
$
   
$
0.00
 
Diluted loss per share
 
$
(1.45
)
 
$
(0.38
)
 
$
(2.45
)
 
$
(0.71
)
                                 
Cash dividends paid per share
 
$
   
$
0.04
   
$
0.04
   
$
0.08
 

See accompanying notes to consolidated financial statements.


Circuit City Stores, Inc.
Consolidated Balance Sheets
(Amounts in thousands except share data)
   
August 31, 2008
   
February 29, 2008
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
91,235 
   
$
296,055
 
Short-term investments
   
1,268 
     
1,366
 
Accounts receivable, net of allowance for doubtful accounts
   
329,516 
     
330,599
 
Merchandise inventory
   
1,508,944 
     
1,573,560
 
Deferred income taxes, net of valuation allowance
   
32,466 
     
38,672
 
Income tax receivable
   
161,389 
     
158,116
 
Prepaid expenses and other current assets
   
43,868 
     
41,352
 
                 
Total current assets
   
2,168,686 
     
2,439,720
 
                 
Property and equipment, net of accumulated depreciation of $1,574,546 and $1,448,250
   
966,707 
     
1,037,321
 
Goodwill
   
113,928 
     
118,031
 
Other intangible assets, net of accumulated amortization of $7,974 and $7,224
   
15,802 
     
18,400
 
Other assets
   
134,957 
     
132,458
 
                 
TOTAL ASSETS
 
$
3,400,080 
   
$
3,745,930 
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Merchandise payable
 
$
754,521 
   
$
912,094
 
Expenses payable
   
268,107 
     
232,386
 
Accrued expenses and other current liabilities
   
343,525 
     
346,818
 
Accrued compensation
   
74,729 
     
85,127
 
Accrued income taxes
   
17,165 
     
17,680
 
Short-term debt
   
215,000 
     
 
Current installments of long-term debt
   
14,203 
     
11,582
 
                 
Total current liabilities
   
1,687,250 
     
1,605,687
 
                 
Long-term debt, excluding current installments
   
52,566 
     
57,050
 
Accrued straight-line rent
   
152,369 
     
145,960
 
Deferred rent credits
   
168,578 
     
163,662
 
Accrued lease termination costs
   
78,564 
     
82,900
 
Deferred income taxes, net of valuation allowance
   
31,281 
     
35,586
 
Other liabilities
   
152,720 
     
151,910
 
                 
TOTAL LIABILITIES
   
2,323,328 
     
2,242,755
 
                 
Commitments and contingent liabilities
               
                 
Stockholders’ equity:
               
Common stock, $0.50 par value; 525,000,000 shares authorized; 168,125,359 shares issued and outstanding at August 31, 2008 (168,859,462 at February 29, 2008)
   
84,063 
     
84,430
 
Additional paid-in capital
   
327,739 
      
319,573
 
Retained earnings
   
570,462 
     
981,112
 
Accumulated other comprehensive income
   
94,488 
     
118,060
 
                 
TOTAL STOCKHOLDERS’ EQUITY
   
1,076,752 
     
1,503,175
 
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
3,400,080 
   
$
3,745,930
 
See accompanying notes to consolidated financial statements.

Circuit City Stores, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
 
  
Six Months Ended
August 31
 
 
  
2008
   
2007
 
Operating Activities:
  
             
Net loss
  
$
(403,989
)
 
$
(117,402
)
Adjustments to reconcile net loss to net cash used in operating activities of continuing operations:
  
             
Net earnings from discontinued operations
  
 
     
(464
Depreciation expense
  
 
  90,554
     
96,089
 
Amortization expense
  
 
  1,328
     
2,403
 
Asset impairment charges
   
73,000
     
 
Stock-based compensation expense
  
 
  8,604
     
12,290
 
Loss on dispositions of property and equipment
  
 
  2,203
     
483
 
Provision for deferred income taxes
  
 
114
     
(72,478
Other
  
 
(2,601
)
   
1,018
 
Changes in operating assets and liabilities:
  
             
Accounts receivable, net
  
 
(22,536
)
   
55,785
 
Merchandise inventory
  
 
  53,742
     
(185,180
)
Prepaid expenses and other current assets
  
 
  1,120
     
(26,835
)
Other assets
  
 
1,734
     
1,144
 
Merchandise payable
  
 
(154,023
)
   
182,887
 
Expenses payable
  
 
  18,304
     
19,158
 
Accrued expenses, other current liabilities and income taxes
  
 
(14,834
)
   
(131,279
Other long-term liabilities
  
 
  937
     
29,067
 
Net cash used in operating activities of continuing operations
  
 
(346,343
)
   
(133,314
 
  
             
Investing Activities:
  
             
Purchases of property and equipment
  
 
(110,502
)
   
(148,161
)
Proceeds from sales of property and equipment
  
 
  36,904
     
23,407
 
Purchases of investment securities
  
 
     
(1,169,510
)
Sales and maturities of investment securities
  
 
     
1,474,360
 
Other investing activities
  
 
  356
     
(1,691
)
Net cash (used in) provided by investing activities of continuing operations
  
 
(73,242
)
   
178,405
 
 
  
             
Financing Activities:
  
             
Proceeds from short-term borrowings
  
 
  1,557,685
     
4,515
 
Principal payments on short-term borrowings
  
 
(1,342,711
)
   
(4,747
)
Principal payments on long-term debt
  
 
(9,212
)
   
(3,756
)
Changes in overdraft balances
  
 
  17,185
     
(9,340
Excess tax benefit from stock-based compensation
  
 
     
928
 
Repurchases of common stock
  
 
     
(46,757
)
Issuances of common stock
  
 
     
4,722
 
Dividends paid
  
 
(6,650
)
   
(13,490
)
Other financing activities
  
 
(814
)
   
(1,127
)
Net cash provided by (used in) financing activities of continuing operations
  
 
  215,483
     
(69,052
 
  
             
Discontinued Operations:
  
             
Operating cash flows
  
 
     
12,233
 
Investing cash flows
  
 
     
 
Financing cash flows
  
 
     
(58
)
Net cash provided by discontinued operations
  
 
     
12,175
 
 
  
             
Effect of exchange rate changes on cash
  
 
(718
)
   
1,544
 
 
  
             
Decrease in cash and cash equivalents
  
 
(204,820
)
   
(10,242
Cash and cash equivalents at beginning of year
  
 
296,055
     
141,141
 
 
  
             
Cash and cash equivalents at end of period
  
$
  91,235
   
$
130,899
 
See accompanying notes to consolidated financial statements.
CIRCUIT CITY STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)

1.
Basis of Presentation

Circuit City Stores, Inc. is a leading specialty retailer of consumer electronics, home office products, entertainment software, and related services.  The company has two reportable segments: its domestic segment and its international segment.

The domestic segment is engaged in the business of selling brand-name and private-label consumer electronics, personal computers, entertainment software, and related services in its stores in the United States and via the Web at www.circuitcity.com and www.firedog.com.  At August 31, 2008, the domestic segment operated 705 Superstores and 9 outlet stores in 158 U.S. media markets.

The international segment, which is comprised of the operations of InterTAN, Inc., is engaged in the business of selling private-label and brand-name consumer electronics in Canada.  The international segment’s headquarters are located in Barrie, Ontario, Canada, and it operates through retail stores and dealer outlets in Canada, primarily under the trade name The Source By Circuit CitySM.  At August 31, 2008, the international segment conducted business through 772 retail stores and dealer outlets, which consisted of 502 company-owned stores and 270 dealer outlets.  The international segment also operates a Web site at www.thesource.ca.  In February 2007, the board of directors authorized management to explore strategic alternatives for InterTAN, Inc., which could include the sale of the operation.

Effective January 28, 2007, the company returned the management of 92 Rogers Plus® stores to Rogers Wireless Inc. Results from the Rogers Plus® stores are presented as results from discontinued operations for the three months and six months ended August 31, 2007.

In May 2008, the company retained Goldman, Sachs & Co. to assist the company in exploring strategic alternatives to enhance shareholder value.  Management and the board of directors have thus far concluded that, while strategic options will always be explored as part of their fiduciary responsibility, given current market conditions, it is prudent to focus internally on improving the company’s performance in order to operate as a standalone business.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities.  Actual results may differ from these estimates.  The accompanying unaudited financial statements contain all adjustments of a normal, recurring nature, except as otherwise disclosed herein, which are, in the opinion of management, necessary for a fair presentation.  Due to the seasonal nature of the company’s business, interim results are not necessarily indicative of results for the entire fiscal year.  The company’s consolidated financial statements included in this report should be read in conjunction with the notes to the audited financial statements in the company’s fiscal 2008 annual report on Form 10-K.

Within the financial tables in this quarterly report on Form 10-Q, certain columns and rows may not sum due to the use of rounded numbers for disclosure purposes.  Percentages presented are calculated from the underlying whole-dollar amounts.

2.
Recent Accounting Pronouncements

As permitted under transition rules by the Financial Accounting Standards Board (“FASB”), the company partially adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” as of March 1, 2008, on a prospective basis. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements, but applies to existing accounting pronouncements that require or permit fair value measurement as the relevant measurement attribute. As permitted by FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,” the company delayed the adoption of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until March 1, 2009. The partial adoption of SFAS No. 157 did not have an impact on the company’s financial position, results of operations or cash flows. The full adoption of SFAS No. 157 is not expected to have a material effect on the company’s financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.”   SFAS No. 159 permits entities to choose to measure many financial instruments and certain assets and liabilities at fair value.  The company adopted SFAS No. 159 as of March 1, 2008.  As the company did not elect the fair value option for any of its financial instruments or other assets and liabilities, the adoption of this standard did not have an impact on its financial position, results of operations or cash flows.
 
On March 1, 2008, the company adopted Emerging Issues Task Force Issue 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”), on a prospective basis. This Issue requires income tax benefits from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested equity shares, nonvested equity share units, and outstanding equity share options to be recognized as an increase to additional paid-in capital.  During the first six months of fiscal 2009, the income tax benefit of these dividends could not be recognized because the company has recorded a full valuation allowance against the net deferred tax assets of its U.S. operations.  Thus, the adoption of EITF 06-11 did not have an impact on the company’s financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.”  These new standards significantly change the accounting for and reporting of business combination transactions and noncontrolling interests (previously referred to as minority interests) in consolidated financial statements.  Both standards will be effective for the company beginning with the first quarter of fiscal 2010 and will be applied prospectively to future business combinations.

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”).  This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.”  The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other U.S. generally accepted accounting principles.  This FSP is effective for the company as of March 1, 2009, and will be applied prospectively to future business combinations.  

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”).  This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in computing earnings per share under the two-class method described in SFAS No. 128, “Earnings Per Share.”  This FSP will be effective for the company beginning with the first quarter of fiscal 2010 and will be applied retrospectively.  The company is currently evaluating the impact of adopting FSP EITF 03-6-1.

3.
Loss per Share

For the three months and six months ended August 31, 2008, and August 31, 2007, no options or nonvested stock were included in the computation of diluted loss per share because the company reported a net loss from continuing operations. Shares excluded were as follows:

   
Three Months Ended
   
Six Months Ended
 
   
August 31
   
August 31
 
(Shares in millions)
 
2008
   
2007
   
2008
   
2007
 
Options
   
8.2
     
7.7
     
9.0
     
8.1
 
Nonvested stock
   
3.3
     
4.0
     
3.7
     
4.0
 

4.
Income Taxes

Quarterly, the company evaluates its deferred income taxes to determine if any adjustments to its valuation allowances are required under the guidance of SFAS No. 109, “Accounting for Income Taxes.  During the third quarter of fiscal 2008, the company determined that its U.S. operations had generated a cumulative three-year loss.  Based on this and taking into account all future sources of taxable income and other available objective evidence, management concluded that a full valuation allowance should be recorded against the net deferred tax assets of the U.S. operations.  As of August 31, 2008, the net deferred tax assets of the U.S. operations continue to be reduced by a full valuation allowance.

During the six months ended August 31, 2008, the company recorded income tax expense of $6.5 million on a loss from continuing operations before income taxes of $397.5 million.  Due to the valuation allowance, the company did not record an income tax benefit for the loss of its U.S. operations.  The income tax expense is comprised primarily of state and foreign income tax expense as well as discrete items.  The discrete items are comprised primarily of an adjustment to a previously-filed tax position related to leases.

5.
Exit and Other Activities

At a location’s cease-use date, estimated lease termination costs to close a store, distribution center or repair center are recorded in selling, general and administrative expenses on the consolidated statements of operations. Accrued lease termination costs include future minimum lease payments, taxes, insurance and maintenance costs from the date of closure to the end of the remaining lease term less estimated sublease rental income, net of tenant improvement allowances and broker fees.  The company evaluates these assumptions each quarter and adjusts the liability accordingly.  The liability for lease termination costs is discounted using a credit-adjusted risk-free rate of interest.
The accrual for lease termination costs for the domestic segment includes the following activity:
 
   
Six Months Ended
 
   
August 31
 
(Amounts in millions)
 
2008
   
2007
 
Accrued lease termination costs at beginning of period
 
$
115.5
   
$
105.6
 
Provisions for closed locations
   
5.9
     
4.2
 
Changes in assumptions about future sublease income
   
7.1
     
5.3
 
Interest accretion
   
5.2
     
4.0
 
Cash payments, net of cash received on subleased locations
   
(18.0
)
   
(19.9
)
Accrued lease termination costs at end of period
   
115.7
     
99.2
 
Less current portion of accrued lease termination costs
   
37.2
     
30.2
 
Non-current portion of accrued lease termination costs
 
$
78.6
   
$
69.0
 
 
At August 31, 2008, accrued lease termination costs of $115.7 million consisted of 98 locations, of which 37 were subleased.  The provision for closed locations included in the table above represents the initial estimate of lease termination costs for locations at the cease-use date. The current portion of accrued lease termination costs is included in accrued expenses and other current liabilities, and the non-current portion is presented separately, on the consolidated balance sheets.

At February 29, 2008, accrued severance totaled $10.0 million and was included in accrued compensation on the consolidated balance sheet.  During the first six months of fiscal 2009, the company made cash payments of $6.1 million and recorded an additional accrual of $3.2 million related to severance arrangements.  The additional charge is recorded in cost of sales, buying and warehousing or in selling, general and administrative expenses depending on the classification of the related employee’s payroll expense.  At August 31, 2008, accrued severance totaled $7.1 million and is included in accrued compensation on the consolidated balance sheet.

6.
Stock-Based Compensation
 
Under the company’s stock-based incentive plans, stock options, nonvested stock, nonvested stock units and other equity-based awards may be granted to employees and non-employee directors. At August 31, 2008, 1.8 million shares of common stock were available for future grants. Common shares are issued from authorized and unissued shares upon the exercise of stock options, the grant of nonvested stock or the vesting of or lapse of deferral restrictions on nonvested stock units.

Compensation expense for stock-based incentive plans is summarized in the table below.

 
Three Months Ended
 
Six Months Ended
 
 
August 31
 
August 31
 
(Amounts in millions)
2008
 
2007
 
2008
 
2007
 
Compensation expense recognized:
               
Stock options
 
$
2.4
   
$
2.3
   
$
4.4
   
$
5.0
 
Nonvested stock and nonvested stock units
   
3.0
     
5.0
     
4.2
     
7.3
 
Phantom stock units
   
(0.6
)
   
(0.5
)
   
0.2
     
(0.6
)
Employee stock purchase plan
   
0.1
     
0.1
     
0.2
     
0.3
 
Other
   
0.0
     
0.1
     
0.1
     
0.1
 
Total compensation expense recognized
 
$
4.9
   
$
7.0
   
$
9.2
   
$
12.1
 
Tax benefit recognized, before valuation allowance
 
$
1.8
   
$
2.5
   
$
3.4
   
$
4.4
 

Stock-based compensation expense is recorded in cost of sales, buying and warehousing or in selling, general and administrative expenses depending on the classification of the related employee’s payroll cost.  The classification of stock-based compensation expense is summarized in the table below.

   
Three Months Ended
   
Six Months Ended
 
   
August 31
   
August 31
 
(Amounts in millions)
 
2008
   
2007
   
2008
   
2007
 
Cost of sales, buying, and warehousing
 
$
0.4 
   
$
1.3
   
$
1.0 
   
$
1.9
 
Selling, general and administrative expenses
   
4.5 
     
5.7
     
8.1 
     
10.2
 
Total compensation expense recognized
 
$
4.9 
   
$
7.0
   
$
9.2 
   
$
12.1
 
The company recognizes stock-based compensation expense net of an estimated forfeiture rate based on historical forfeiture activity. During the six months ended August 31, 2008, and the six months ended August 31, 2007, the company increased the estimated forfeiture rate on certain nonvested stock awards to reflect changes in expectations regarding the number of instruments that will vest. These changes were the result of higher than anticipated actual forfeitures.

The value of each phantom stock unit is based on the market value of one share of common stock on the vesting date. The units, which will be settled in cash upon vesting, are remeasured at each reporting date. Due to the decrease in the market value of the company’s common stock, the company recorded a benefit of $0.6 million related to phantom stock units in the three months ended August 31, 2008, and a benefit of $0.5 million in the three months ended August 31, 2007.

The fair value of each option granted is estimated on the grant date using the Black-Scholes option valuation model with the following weighted average assumptions:

   
Six Months Ended
August 31
 
   
2008
   
2007
 
Expected dividend yield
   
0.3
%
   
1.3
%
Expected stock volatility
   
54
%
   
44
%
Risk-free interest rate
   
3
%
   
5
%
Expected term (in years)
   
4
     
5
 

Using these assumptions in the Black-Scholes model, the weighted average grant date fair value of options granted was $0.91 per share for the six months ended August 31, 2008, and $5.20 per share for the six months ended August 31, 2007.
 
During the three months ended August 31, 2008, the company issued options with respect to 0.6 million shares of common stock with a vesting period of three years and a contractual term of five years. Due to a lack of historical exercise behavior for options with a similar contractual term, the company used a simplified method to estimate the expected term of the grant. An average of the award’s weighted average vesting period and its contractual term was calculated and resulted in an expected term of 3.5 years.

The company’s stock option activity is summarized in the table below.

   
Shares
(in thousands)
   
Weighted
Average
Exercise Price
   
Weighted
Average
Remaining
Contractual 
Term
(in years)
   
Aggregate
Intrinsic 
Value
( in millions)
 
Outstanding at February 29, 2008
   
10,101
   
$
13.38
             
Granted
   
957
   
$
2.13
             
Exercised
   
   
$
             
Forfeited
   
(436
)
 
$
8.34
             
Expired
   
(2,103
)
 
$
21.52
             
Outstanding at August 31, 2008
   
8,520
   
$
10.36
     
6.8
   
$
0.0
 
Vested and expected to vest at August 31, 2008
   
7,651
   
$
10.94
     
6.6
   
$
0.0
 
Exercisable at August 31, 2008
   
3,349
   
$
12.76
     
4.4
   
$
 

As of August 31, 2008, the total remaining unrecognized compensation expense related to unvested stock options expected to vest was $13.3 million and is expected to be recognized over a weighted average period of 2.2 years.

The company’s nonvested stock and nonvested stock unit activity is summarized in the table below.
 
   
Shares
(in thousands)
   
Weighted Average
Grant Date
Fair Value
   
Aggregate
Intrinsic Value
(in millions)
 
Nonvested at February 29, 2008
   
4,319
   
$
16.15
         
Granted
   
11
   
$
2.63
         
Vested
   
(897
)
 
$
19.12
         
Forfeited
   
(534
)
 
$
17.28
         
Nonvested at August 31, 2008
   
2,899
   
$
14.95
   
$
5.2
 
Total unrecognized compensation expense related to nonvested stock and nonvested stock units at August 31, 2008, was $14.4 million and is expected to be recognized over a weighted average period of 1.2 years.

The company issues phantom stock units that are settled in cash at the end of the vesting period. At August 31, 2008, 2.7 million phantom stock units were outstanding. A total of 0.2 million phantom stock units with a three-year vesting period was awarded during the six months ended August 31, 2008. Based on the market value of the company’s common stock as of August 31, 2008, the total remaining unrecognized compensation expense for 2.1 million units expected to vest was $2.9 million and is expected to be recognized over a weighted average period of 2.3 years.

7.
Comprehensive Loss

Comprehensive loss consists of net loss and certain other items that are recorded directly to stockholders’ equity, net of deferred income taxes.  In addition to net loss, comprehensive loss includes foreign currency translation adjustments, adjustments to reflect the funded status of the company’s pension plans on the consolidated balance sheets, and unrealized gains and losses on available-for-sale securities.
 
The components of comprehensive loss, net of taxes, were as follows:

 
Three Months Ended
 
Six Months Ended
 
 
August 31
 
August 31
 
(Amounts in millions)
2008
 
2007
 
2008
 
2007
 
Net loss
 
$
(239.2
)
 
$
(62.8
)
 
$
(404.0
)
 
$
(117.4
)
Foreign currency translation adjustments
   
(21.3
)
   
2.6
     
(23.2
)
   
19.2
 
Other
   
(0.1
)
   
0.1
     
(0.3
)
   
0.1
 
Comprehensive loss
 
$
(260.6
)
 
$
(60.1
)
 
$
(427.6
)
 
$
(98.1
)

8.
Pension Plans

The company’s domestic segment has a noncontributory defined benefit pension plan and an unfunded nonqualified benefit restoration plan that restored retirement benefits for domestic segment senior executives who were affected by Internal Revenue Code limitations on benefits provided under the company’s defined benefit pension plan.  Both plans were amended to freeze benefit accruals effective February 28, 2005, except for select grandfathered participants who were at or near their early or normal retirement date.  Both plans were further amended to freeze benefit accruals for the grandfathered participants as of February 29, 2008.  As a result, all participants in the plans are no longer eligible to increase their benefits under the plans, but will retain any benefits accrued through the effective date of the plan amendments.

The components of net pension income for the plans were as follows:

   
Three Months Ended
   
Six Months Ended
 
   
August 31
   
August 31
 
(Amounts in millions)
 
2008
   
2007
   
2008
   
2007
 
Service cost
 
$
   
$
0.6
   
$
   
$
1.2
 
Interest cost
   
4.0
     
4.0
     
8.1
     
8.0
 
Expected return on plan assets
   
(5.5
)
   
(5.2
)
   
(11.0
)
   
(10.4
)
Recognized prior service cost
   
     
0.1
     
     
0.1
 
Recognized actuarial (gain) loss
   
(0.1
)
   
0.4
     
(0.1
)
   
0.7
 
Net pension income
 
$
(1.5
)
 
$
(0.1
)
 
$
(3.0
)
 
$
(0.3
)

The company did not make any contributions to the defined benefit pension plan during the six months ended August 31, 2008.  No contributions are required during fiscal 2009 under applicable law for this pension plan.  The company intends to make any contributions necessary to meet ERISA minimum funding standards and intends to make additional contributions as needed to ensure that the fair value of plan assets at February 28, 2009, is equal to or exceeds the accumulated benefit obligation.

A contribution of $0.8 million, which is equal to the expected benefit payments for fiscal 2009, is expected to be made to the restoration plan during fiscal 2009.  Benefit payments during the six months ended August 31, 2008, were $0.4 million.

9.
Asset Impairment Charges

Due to the company’s financial performance and the initiation by management of a comprehensive review of the business, the company evaluated its long-lived assets for potential impairment as of August 31, 2008.  The evaluation considered information available at August 31, 2008, and resulted in the determination that the carrying value of the fixed assets of some of its domestic segment stores would likely not be recovered through estimated future cash flows, considering assumptions regarding the expected lives of those assets.  As a result, in the second quarter of fiscal 2009, the company recorded impairment charges of $73.0 million to reduce the carrying value of the assets to their estimated fair value.
 
10.
Discontinued Operations

For the three months and six months ended August 31, 2007, net earnings from discontinued operations totaled $0.2 million and $0.5 million, which are net of $0.1 million and $0.3 million of income taxes, respectively.  These amounts primarily relate to the operations of the Rogers Plus® stores, of which the management was returned to Rogers Wireless Inc. in January 2007.

11.
Segment Information

The company has two reportable segments: its domestic segment and its international segment. The company identified these segments based on its management reporting structure and the nature of the products and services offered by each segment.  The domestic segment is primarily engaged in the business of selling brand-name and private-label consumer electronics, personal computers, entertainment software, and related services in the United States.  The international segment is primarily engaged in the business of selling private-label and brand-name consumer electronics in Canada.

Net sales by reportable segment were as follows:

   
Three Months Ended
   
Six Months Ended
 
   
August 31
   
August 31
 
(Amounts in millions)
 
2008
   
2007
   
2008
   
2007
 
Domestic segment
 
$
2,244.1 
   
$
2,511.4
   
$
4,410.9 
   
$
4,888.3
 
International segment
   
147.3 
     
132.5
     
281.6 
     
241.2
 
Net sales
 
$
2,391.4 
   
$
2,644.0
   
$
4,692.5 
   
$
5,129.5
 

The (loss) earnings from continuing operations before income taxes by reportable segment were as follows:

   
  Three Months Ended
 
Six Months Ended
 
   
  August 31
 
August 31
 
(Amounts in millions)
 
2008
 
2007
 
2008
 
2007
 
Domestic segment
 
$
(240.5
)
 
$
(130.2
)
 
$
(400.4
)
 
$
(216.6
)
International segment
   
4.9
     
2.1
     
2.9
     
6.0
 
Loss from continuing operations before income taxes
 
$
(235.7
)
 
$
(128.2
)
 
$
(397.5
)
 
$
(210.6
)
 
The international segment’s earnings from continuing operations before income taxes for the three months and six months ended August 31, 2008, include a benefit of $4.3 million due to a correction of an immaterial amount related to goodwill impairment charges recorded in prior periods.

The international segment’s earnings from continuing operations before income taxes for the six months ended August 31, 2007, include a recovery of $7.5 million related to a former subsidiary.

Total assets by reportable segment were as follows:

   
August 31,
   
February 29,
 
(Amounts in millions)
 
2008
   
2008
 
Domestic segment
 
$
3,012.7 
   
$
3,335.7
 
International segment
   
387.4 
     
410.3
 
Total assets
 
$
3,400.1 
   
$
3,745.9
 

         The domestic segment net sales by category were as follows:

   
Three Months Ended August 31
   
Six Months Ended August 31
 
   
2008
   
2007
   
2008
   
2007
 
(Dollar amounts in millions)
 
$
   
% of
Sales
   
$
   
% of
Sales
   
$
   
% of
Sales
   
$
   
% of
Sales
 
Video
 
$
925.6
     
41.2
%
 
$
948.2
     
37.8
%
 
$
1,815.0
     
41.2
%
 
$
1,882.2
     
38.5
%
Information technology
   
649.4
     
28.9
     
774.7
     
30.8
     
1,240.8
     
28.1
     
1,403.3
     
28.7
 
Audio
   
268.3
     
12.0
     
325.8
     
13.0
     
530.9
     
12.0
     
660.7
     
13.5
 
Entertainment
   
233.8
     
10.4
     
267.1
     
10.6
     
495.9
     
11.2
     
539.7
     
11.1
 
Warranty, services and other(a)
   
167.1
     
7.5
     
195.6
     
7.8
     
328.4
     
7.5
     
402.5
     
8.2
 
Net sales
 
$
2,244.1
     
100.0
%
 
$
2,511.4
     
100.0
%
 
$
4,410.9
     
100.0
%
 
$
 4,888.3
     
100.0
%
 
(a) Warranty, services and other includes extended warranty net sales; revenues from PC services, mobile installations, home theater installations and product repairs; net financing; and revenues from third parties for services subscriptions.

The international segment net sales by category were as follows:
  
   
Three Months Ended August 31
   
Six Months Ended August 31
 
   
2008
   
2007
   
2008
   
2007
 
(Dollar amounts in millions)
 
$
   
% of
Sales
   
$
   
% of
Sales
   
$
   
% of
Sales
   
$
   
% of
Sales
 
Video
 
$
27.6
     
18.7
%
 
$
26.2
     
19.7
%
 
$
53.1
     
18.9
%
 
$
46.2
     
19.2
%
Information technology
   
50.4
     
34.2
     
46.6
     
35.2
     
97.7
     
34.7
     
86.4
     
35.7
 
Audio
   
51.5
     
35.0
     
45.2
     
34.1
     
95.5
     
33.9
     
81.7
     
33.9
 
Entertainment
   
10.2
     
6.9
     
6.2
     
4.7
     
19.5
     
6.9
     
11.2
     
4.7
 
Warranty, services and other(a)
   
7.7
     
5.2
     
8.3
     
6.3
     
15.7
     
5.6
     
15.6
     
6.5
 
Net sales
 
$
147.3
     
100.0
%
 
$
132.5
     
100.0
%
 
$
281.6
     
100.0
%
 
$
241.2
     
100.0
%
 
 (a) Warranty, services and other includes extended warranty sales and product repair revenue.

12.
Supplemental Consolidated Statements of Cash Flows Information

The following table summarizes supplemental cash flow information.

   
Six Months Ended
 
   
August 31
 
(Amounts in millions)
 
2008
   
2007
 
Supplemental schedule of non-cash investing and financing activities:
           
Non-cash capital expenditures(a)
 
$
22.6
   
$
35.6
 
Capital lease obligations
 
$
7.4
   
$
5.2
 
Sale-leaseback receivables(a)
 
$
8.5
   
$
6.7
 

(a) Amounts disclosed in prior quarters reflected the change in the accrual and receivable balances rather than the balances related to non-cash transactions arising during the period.  Prior year amounts have been corrected to reflect the non-cash transactions for the period.  The correction did not impact the statements of cash flows in any period.

13.
Liquidity

For the six months ended August 31, 2008, the net loss from continuing operations was $404.0 million, which includes non-cash asset impairment charges of $73.0 million.  Cash, cash equivalents and short-term investments declined from $297.4 million at February 29, 2008, to $92.5 million at August 31, 2008, and borrowings under the company’s asset-based credit facility increased from $0 at February 29, 2008, to $215.0 million at August 31, 2008.  The decline in the company’s cash position was primarily driven by cash used to fund losses from operations, an increase in net-owned inventory and net cash used to purchase property and equipment, partially offset by net proceeds from short-term borrowings.
 
The company’s plans to manage its liquidity position in the remainder of fiscal 2009 include improving traffic, close rates and attachment rates, which would have a positive impact on both sales and margin; reducing projected capital expenditures below prior year levels; maintaining an intense focus on controlling expenses; and maintaining strong relationships with its vendors to ensure continued availability of vendor credit.  During the second quarter of fiscal 2009, the board of directors suspended the declaration and payment of quarterly cash dividends on the company’s common stock as part of its focus on conserving capital.  Additionally, the company is evaluating capital-related projects that have been planned for the second half of fiscal 2009 and for fiscal 2010.  Other than existing commitments, the company intends to suspend store openings beginning with fiscal 2010 in order to focus on improving the execution of the company’s business.

The company continuously reviews the relationships with its vendors in order to address issues that may arise from general macroeconomic conditions or from the company’s financial condition.  The company understands that the decisions that its vendors make with respect to the company may depend on factors that include their specific economic situations, the company’s risk profile and other factors, such as the availability of adequate credit insurance or their ability to factor their receivables from the company.  At any time, a vendor could change either the availability of vendor credit to the company or other terms under which it sells to the company, or both.  The company similarly reviews its cash requirements, working capital changes, capital expenditures and borrowing availability under its credit facility.  While some vendors have modified terms as a result of their specific decisions, based on the company’s current relationships and expectations with respect to future events, the company anticipates that its sources of liquidity will be sufficient to meet its obligations without the disposition of assets outside of the ordinary course of business or significant revisions of its planned operations through the remainder of fiscal 2009.  Significant changes in the credit limits or payment terms that the company has with its vendors or the incurrence of additional losses beyond its current expectations, however, could adversely impact the company’s liquidity.

14.
Subsequent Event

On September 22, 2008, the company and Philip J. Schoonover, chairman of the board, president and chief executive officer, terminated their employment relationship, effective immediately.  In connection with the termination of the employment relationship, the company has enforced the employment agreement between the parties that was effective as of October 4, 2004.  As provided in the employment agreement, Mr. Schoonover will forfeit stock options with respect to 1.1 million shares of common stock.  As of August 31, 2008, the unrecognized compensation expense associated with these forfeitures was $8.3 million.




ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

We are a leading specialty retailer of consumer electronics, home office products, entertainment software, and related services. We have two reportable segments: our domestic segment and our international segment.

Our domestic segment is engaged in the business of selling brand-name and private-label consumer electronics, personal computers, entertainment software, and related services in our stores in the United States and via the Web at www.circuitcity.com and www.firedog.com.  At August 31, 2008, the domestic segment operated 705 Superstores and 9 outlet stores in 158 U.S. media markets.

Our international segment, which is comprised of the operations of InterTAN, Inc., is engaged in the business of selling private-label and brand-name consumer electronics in Canada.  The international segment’s headquarters are located in Barrie, Ontario, Canada, and it operates through retail stores and dealer outlets in Canada, primarily under the trade name The Source By Circuit CitySM.  At August 31, 2008, the international segment conducted business through 772 retail stores and dealer outlets, which consisted of 502 company-owned stores and 270 dealer outlets.  The international segment also operates a Web site at www.thesource.ca.  In February 2007, the board of directors authorized management to explore strategic alternatives for InterTAN, Inc., which could include the sale of the operation.

Effective January 28, 2007, we returned the management of 92 Rogers Plus® stores to Rogers Wireless Inc. Results from the Rogers Plus® stores are presented as results from discontinued operations for the three months and six months ended August 31, 2007.

In May 2008, we retained Goldman, Sachs & Co. to assist us in exploring strategic alternatives to enhance shareholder value. Management and the board of directors have thus far concluded that, while strategic options will always be explored as part of our fiduciary responsibility, given current market conditions, it is prudent to focus internally on improving our performance in order to operate as a standalone business.

Management’s Discussion and Analysis (MD&A) is designed to provide the reader of financial statements with a narrative discussion of our results of operations; financial position, liquidity and capital resources; critical accounting policies and significant estimates; and the impact of recently issued accounting standards. Our MD&A is presented in seven sections:

·
Executive Summary
·
Critical Accounting Policies
·
Results of Operations
·
Recent Accounting Pronouncements
·
Financial Condition
·
Financial Outlook
·
Forward-Looking Statements

This discussion should be read in conjunction with our Consolidated Financial Statements and accompanying Notes included in this report and in the fiscal 2008 annual report on Form 10-K, as well as our reports on Form 8-K and other SEC filings.

Within the financial tables in this quarterly report on Form 10-Q, certain columns and rows may not sum due to the use of rounded numbers for disclosure purposes.  Percentages presented are calculated from the underlying whole-dollar amounts.  All per share amounts are presented on a fully diluted basis.

EXECUTIVE SUMMARY
 
Fiscal 2009 Second Quarter Performance
 
·
Net sales declined 9.6 percent to $2.39 billion from $2.64 billion in the same period last fiscal year driven by a comparable store sales decline in the domestic segment.

·
In the domestic segment, direct channel sales, which include Web- and call center-originated sales, grew 1 percent, and firedogSM PC services and home theater installation revenues decreased 5 percent from the same period last fiscal year.  In the second quarter of last fiscal year, we posted direct channel sales growth of 20 percent, and firedogSM PC services and home theater installation revenues increased 22 percent.

·
Gross profit margin increased 63 basis points to 21.3 percent due primarily to higher merchandise margins as well as favorable mix shifts among product categories in the domestic segment.
 
 
·
SG&A expenses as a percentage of net sales increased 230 basis points from the same period last fiscal year, which primarily reflects the overall de-leveraging impact of lower sales in the domestic segment.

·
Asset impairment charges were $73.0 million, or 3.1 percent of net sales, for the second quarter of fiscal 2009.

·
The loss from continuing operations before income taxes was 9.9 percent of net sales compared with a loss from continuing operations before income taxes of 4.8 percent of net sales in the same period last year.

·
We reported a net loss from continuing operations of $239.2 million, or $1.45 per share, for the second quarter of fiscal 2009, compared with a net loss from continuing operations of $63.1 million, or $0.38 per share, in the same period last fiscal year.

Our results of operations may be sensitive to changes in general economic conditions that impact consumer spending, including discretionary spending for our products and services.  The economic turmoil that has arisen in the credit markets and in the housing markets during and following the second quarter of fiscal 2009 may suppress discretionary spending and other consumer purchasing habits and, as a result, adversely affect our results of operations.

CRITICAL ACCOUNTING POLICIES

See the discussion of critical accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2008 annual report on Form 10-K.  These policies relate to inventory valuation, goodwill, income taxes, accrued lease termination costs, stock-based compensation and pension plans.  During the second quarter of fiscal 2009, we recognized asset impairment charges related to our fixed assets and have concluded that asset impairment charges should be considered a critical accounting policy.

Asset Impairment Charges

We test long-lived assets for impairment when circumstances indicate the carrying amount of the asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to the estimated future undiscounted cash flows of the related asset group over its remaining life.  If the carrying amount of an asset group exceeds its estimated future undiscounted cash flows, an impairment charge is recognized to write the asset group down to estimated fair value.  Application of the impairment test for long-lived assets requires judgments, including the identification of the asset group, assessment of the probable remaining life of an asset and the determination of fair value of the asset group.

We estimate the fair value of an asset group using a discounted cash flows approach.  Applying this methodology requires significant management judgments, including estimation of future cash flows and selection of an appropriate discount rate.  Changes in these assumptions could materially affect the determination of fair value.

Due to our financial performance and our initiation of a comprehensive review of the business, we evaluated our long-lived assets for potential impairment as of August 31, 2008.  The evaluation considered information available at August 31, 2008, and resulted in the determination that the