Best Buy's profits leave Circuit City in the dust

MINNEAPOLIS — Everyone knew Circuit City was having a bad fourth quarter. Which made Best Buy's good one a little bit of a surprise.

The results reported by the nation's two largest electronics chains on Wednesday showed Best Buy increasing its lead over its smaller rival, with profit up 18 percent, while Circuit City lost money. While Best Buy profits from its operations outside the U.S., including China, and a major push into selling installation and advice in addition to TVs and iPods, Circuit City is closing Canadian stores and replacing 3,400 workers with cheaper help.

"I think Best Buy is just executing on all fronts. They're clearly the winner in this space and pulling away," said Joseph Feldman, who covers electronics retailers at independent research firm Telsey Advisory Group.

Both have their challenges. Price competition is fierce for their most important product, high-end TVs. And sales of compact discs have been falling. But initiatives Best Buy started a few years ago, such as its international operation, its Geek Squad tech support service, and store sections that cater to big-spending customers, are helping offset profit pressures in its core electronics business.

Meanwhile Circuit City has said it will close 62 company-owned stores in Canada. And its layoff of 3,400 of its most experienced (and expensive) sales workers announced last week has left some analysts wondering whether it is losing its best sales people just when it most needs them.

There are bright spots — Circuit City expects revenue in its home-installation service called "firedog" to double to $400 million this year, and it expects to open 40 or more U.S. stores this year, not counting relocations.

Feldman said the cost-cutting initiatives and new stores should all help Circuit City's bottom line, eventually. He made a rough estimate that the layoffs alone could save as much as $35 million if Circuit City saves $5 per hour per worker. "Even if it's half of that, $17 million, $20 million could be a lot. Every little bit does add up," he said.

Circuit City Chief Executive Philip J. Schoonover ran Best Buy's efforts to focus on its most profitable customers before jumping to Circuit City in 2004. He was named CEO at Circuit City in March 2006. Best Buy CEO and Vice Chairman Brad Anderson has known Schoonover for years.

"What he's taken on is a very difficult job to begin with. This has historically been a real difficult industry for retailers," Anderson said.