Can Wattles Recharge Circuit City?

By Glenn Curtis | March 11, 2008 AAA

CircuitCity's (NYSE:CC) stock has been pummeled over the last year, and for good reason. The electronics retailer has done nothing to differentiate its offerings, service or store layout from competitor Best Buy (NYSE:BBY). Its slothfulness meant the stock languished for years.

But thanks to the involvement of activist investor, Wattles Capital Management, shareholders now have something that they haven't had in quite some time - hope. (For more on the pursuit of shareholder value, see Activist Hedge Funds.)

What Wattles Offers
Wattles Capital Management (WCM) doesn't exactly have big-name recognition or a list of high-profile investments that one can actively point to. However, it is headed up by Mark Wattles, the founder of nationally known video chain Hollywood Entertainment. This is someone who knows a thing or two about retail. And I think his firm's involvement in the stock could hasten the turnaround of the struggling electronics retailer.

At present WCM owns about 11 million common shares or 6.5% of the outstanding stock, and is currently agitating for change. The firm has been jawboning the press and called for the ouster of the entire CircuitCity board. It has also nominated five directors that it wants to see seated.

This gives the current board and current front-line management a huge incentive to find ways to enhance shareholder value in a hurry. I think that Wattle's involvement has helped as there has already been a shakeup in organizational structure where the company fired its chief marketing officer and president of small stores. Since Wattles initiated his position, the company seems has suddenly become much more vocal about its plan to revise its store layout and to compete more effectively.

Wattles' slate of would-be directors has a lot of relevant experience that could be helpful in a turnaround. For example, Elliott Wahle has held a high-profile position at Toys R Us, a company that certainly worked through its share of ups and downs over the years. Meanwhile Don Kornstein has extensive experience as an investment banker at Bear Stearns (NYSE:BSC), and James Marcum who served as CFO at Hollywood Entertainment seems to know Wall Street and what institutional investors are looking for. All of these individuals could be big agents of change. (To get started with your own analysis, check out Evaluating The Board Of Directors.)

The Downside To The Story
Although Wattles' stake in the common shares may turn out to be a big catalyst, would-be investors should still approach CircuitCity stock with caution. That's for two reasons:

1) Although the company is in the middle of fixing its store layouts, it could take a year or more to see if its strategy pays off.

2) Even if Wattles' slate of directors is approved, it won't happen till June 24 at the annual shareholder meeting.

BottomLine
CircuitCity still has a long way to go, but if Wattles and his fund can force changes on the board, there could be some upside to the stock. The potential board members all have solid retail experience, and many of them have lived through similar turnarounds. Wattles's intervention offers the first glimmer of hope that CircuitCity has seen in ages.

For more tips on what to watch for in a turnaround stock, read Catching Comeback Stocks For Clients.

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