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Robert Rodriguez Buys Circuit City Stores Inc. Reduces Zale Corp.

October 16, 2008 | About:
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Robert Rodriguez had a “buy halt” since about a year ago. He was one of the few people who sounded off the credit crisis and he was certainly right about that. He is still with about 40% of cash. These are his buys and sells during the third quarter.

Robert Rodriguez buys Circuit City Stores Inc. during the 3-months ended 09/30/2008, according to the most recent filings of his investment company, FPA Capital. Robert Rodriguez owns 24 stocks with a total value of $760 million. These are the details of the buys and sells.

  • Added Positions: CC,
  • Reduced Positions: ZLC,

For the details of Robert Rodriguez's stock buys and sells, go to http://www.gurufocus.com/StockBuy.php?GuruName=Robert+Rodriguez

Added: Circuit City Stores Inc. (CC)

Robert Rodriguez added to his holdings in Circuit City Stores Inc. by 15.97%. His purchase prices were between $1.37 and $2.31, with an estimated average price of $1.9. The impact to his portfolio due to this purchase was 0.07%. His holdings were 5,636,000 shares as of 09/30/2008.

Circuit City Stores is a leading specialty retailer of consumer electronics. Circuit City operates Superstores and mall-based stores in many U.S. markets. Its international segment operates through retail stores and dealer outlets in Canada. Circuit City Stores Inc. has a market cap of $62.21 million; its shares were traded at around $0.37 with P/S ratio of 0.01.

These are FPA Capital’s commentary on Circuit City in their shareholder letter of Sept. 2007.:

During the third quarter, we initiated a new position in Circuit City (CC). We started buying the stock near $13 a share and purchased more as the stock declined to roughly $8 a share. We have purchased approximately a half position and are waiting to see how operational changes begin to impact the company. Circuit City is the second largest independent, consumer electronic retailer in the United States. The company operates roughly 650 super stores in the U.S., averaging approximately 25,000 square feet in size, which produce annual sales of over $11 billion. The company also has 800 smaller stores in Canada, each with approximately 2,000 square feet, which generate approximately $500 million of annual sales. The core U.S. stores sell audio, video, and home office products, entertainment software, and related installation and services.

We have been following Circuit City for many years, but until recently the company did not possess a management team strong enough to inspire our confidence that it could lead the company to achieve its profit potential. However, in 2006, the Board of Directors replaced the former CEO, who we believed was very ineffectual, and elevated Phil Schoonover from the President’s role to the CEO position. Prior to Schoonover’s joining the firm in 2004, he was with Best Buy for roughly a decade and helped turn around that retailer in the mid to late 1990s. We expect Schoonover, and the new executives he has brought in over the last couple of years, to transform Circuit City from a tired consumer electronics retailer into a modern, more efficient retailer that provides its customers with a better in-store experience than in the recent past.

Over the last couple of years, the new management team has started to roll out all new information technology systems to better manage merchandise, stores and labor. These new systems should all be operational by the end of next year. New standard operating procedures and districtlevel management directives were recently installed. Next year, the company says it will complete the roll-out of a new Point-of-Sale (POS) system for all 650 U.S. stores. These new systems will allow store personnel to more rapidly check out customers, management to better schedule labor hours, and integrate with the new merchandise systems to more accurately tailor in-store inventory for a given geographic area, based on demographics, sales history, and other data. All of these changes have not been easy for the company and the disruption to the stores has been greater than we anticipated. Recent sales have not met expectations; however, by the fourth quarter of its fiscal year ending February 2008, Circuit City should start to experience a meaningful pick-up from the weak results experienced earlier this year. Obviously, we are monitoring the turnaround very closely, but we agree that many of the changes management has implemented were required for the company to achieve better returns on capital.

Our profit expectations are below management’s guidance, yet very realistic. Circuit City’s management has publicly stated that they believe they can increase the company’s operating margin from 1.5% to 5% over the next few years. For comparison, Best Buy has achieved operating margins greater than 5% each of the last four years. Our expectations are more conservative. We believe that Circuit City could achieve a 3% operating margin level within the next few years. If we assume a small measure of revenue growth, we would not be surprised to see the company earning approximately $1.50 of EPS sometime within the next three to five years. In the meantime, Circuit City has over $2 per share of net cash on balance sheet, and has the ability to generate at least another $3 per share of cash through better working capital management while having a market capitalization that is at a very depressed 13% of sales.

Reduced: Zale Corp. (ZLC)

Robert Rodriguez reduced to his holdings in Zale Corp. by 52.04%. His sale prices were between $17.74 and $30.89, with an estimated average price of $23.5. The impact to his portfolio due to this sale was -1.64%. Robert Rodriguez still held 1,057,500 shares as of 09/30/2008.

Zale Corporation is a specialty retailer of fine jewelry. The company operates under four brand names: Zales Jewelers Gordon's Jewelers Bailey Banks & Biddle Fine Jewelers and Peoples Jewellers. Zales Jewelers provides traditional moderately priced jewelry. Gordon's Jewelers offers contemporary merchandise targeted to regional preferences. Bailey Banks & Biddle Fine Jewelers operates upscale jewelry stores which are considered among the finest jewelry stores in their markets. Peoples Jewellers offers traditional moderately priced jewelry to customers across Canada. Zale Corp. has a market cap of $533.27 million; its shares were traded at around $20 with a P/E ratio of 65.87 and P/S ratio of 0.23.

 


Rating: 2.9/5 (18 votes)

Comments

munger
Munger - 6 years ago
B-Rod is willing to buy some, what I consider to be, low quality companies given the right price. I think that has done well in the past when the economy has been pretty good but I wonder how effective that will be over the next few years.
cm1750
Cm1750 premium member - 6 years ago
I think Munger is right - there is a great article in Barron's this weekend about how secondary retailers did well when consumers overspent, but will do worse in a tighter credit environment.

I applaud B-Rod for calling the credit problems and staying in cash but his retail picks directly counter his main thesis. One of his big holdings in 2006 was Linen 'n Things that got bought out by private equity last year and just liquidated last week.

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