Circuit City Stores said Wednesday it plans to cut costs by laying off about 3,400 store employees and hiring lower-paid employees to replace them. It also is trimming about 130 corporate information-technology (IT) jobs and has hired Goldman Sachs to explore strategic options for a possible unit sale of InterTAN Inc., the Canadian retailer it acquired in 2004.
Circuit City plans to outsource its IT infrastructure operations to IBM, a move that is expected to cut IT expenses by more than 16% over the seven-year contract. About 50 of the chain's130 internal IT infrastructure workers will join IBM and remain on site serving its contract. The other 80 will eventually be cut.
The store employees being laid off will receive generous severance packages and may apply for any open positions after 10 weeks, the company said in a news release. It said the workers marked for lay off were earning “well above the market-based salary range for their role.” They will be replaced as soon as possible, the company added, with employees who will be paid at the current market range.
“We are taking a number of aggressive actions to improve our cost and expense structure, which will better position us for improved and sustainable returns in today's marketplace,” Philip J. Schoonover, Circuit City's chief executive said in a statement.
Circuit City is in the midst of a multiyear effort to revamp its business and win back market share from larger rival Best Buy Co. While the news of Circuit City's cost-cutting sent its shares up on Wednesday, some analysts sounded a cautious note.
“While we view these cost cuts as clearly good for near-term earnings, they are not necessarily the way to drive longer-term operational success,” said Bernstein analyst Colin McGranahan. “It stands to reason firing 3,400 of arguably the most successful sales people in the country could prove terrible for morale.”
The analyst said that Circuit City had previously once shifted from a highly paid workforce that earned commissions to one based on lower-paid hourly wages.
“The prior occurrence had a dramatically negative impact on sales, and a significant risk exists that the same will happen again,” he wrote in a note.
Circiut City, which also increased the number of planned store closures to about 65 from 60, said it expects pre-tax expenses of about $144 million in the fourth quarter related to store closures, goodwill impairment and other restructuring activities.
