Schoonover’s Exit Seen Signal Substantial Change at Circuit City

Schoonover’s exit four years after joining the chain from Best Buy (CED Sept 23 p1) caps shareholder Mark Wattles’ campaign for new management. Wattles Capital Management, owner of 6.5 percent of Circuit City, promised a proxy fight this year as he pushed to get rid of Schoonover and put his own slate of nominees on the chain’s board. Wattles Capital Management and Circuit City came to terms before the chain’s June annual meeting. The deal put three of Wattle’s five nominees on Circuit City’s board, including James Marcum, named vice chairman in August. Marcum will replace Schoonover while a permanent replacement is sought. Wattles and Circuit officials weren’t available to comment at our deadline.

“The management change likely accelerates a conclusion for Circuit City, with one of two outcomes: a successful turnaround, a tall order in this environment, or significant store closings, either with or without a change in corporate structure,” said Goldman Sachs analyst Matthew Fassler.

Whether a corporate restructuring can be accomplished without a bankruptcy filing isn’t clear, CE executives said. A bankruptcy case would allow Circuit City to free itself of underperforming stores at the crux of its problems, industry officials said. Circuit City’s fate also hinges on its ability to stock stores for the holidays.

“A lot of their problems have to do with real estate, and there is no way they don’t close some stores,” an analyst said. “At some point there also will be the question of whether they will have enough stock for the holiday selling season and if they don’t it would be silly” for Circuit to delay restructuring.

Schoonover is blamed for some Circuit City missteps, such as a 2007 decision to cut 3,400 jobs, including those of higher-paid sales associates -- but it’s clear that he inherited problems, industry officials said. Circuit City slowed expansion this year to 45 to 55 new stores from the planned 80 to 100 to focus on “rebuilding the selling culture” damaged by 2007’s job cuts, company officials have said (CED April 29 p1). The chain raced to deploy its “The City” format 20,000-square-foot stores as an alternative to standard 33,000-square-foot outlets. The City was introduced in 2006 and by the February end of its fiscal year Circuit City had 27 of the stores.

Schoonover blamed some of the company’s problems on an aging IT system that he inherited. That included a POS system that “three months after I joined the company as I traveled to stores, people were telling me they couldn’t get parts for the cash register” (CED Jan 16 p1). After joining Circuit city in 2004 as chief merchandising officer, Schoonover replaced former CEO Alan McCollough two years later. New POS systems had been installed in 165 stores by February.

Circuit City has been seeking a buyer for it’s the Source by Circuit City stores in Canada but hasn’t found one. It had expected to finish reviewing its Canadian stores in February.

Schoonover’s tenure at Circuit City included failed attempts by Highfield Capital Management and Blockbuster to buy the chain. In 2005, Highfield proposed paying $3.25 billion, or $17 a share, for the chain, a 20 percent premium to its $14.23 stock price. Blockbuster launched a bid this year, supported by major shareholder Carl Icahn, offering $6 to $8 a share. The company rejected it. Circuit City’s stock was trading down 4.7 percent at $1.62 Tuesday afternoon on volume of 2.1 million shares. It had a $272.9 million market cap.

Schoonover appears to be in line for $3.6 million in cash severance under his contract’s change of control provisions. He also stands to get $1.65 million in accelerated long-term incentives and $1.63 million from excise tax “gross-ups.”