Circuit City plans to replace 3,400 with low-cost hires

NEW YORK - Circuit City, the electronics retailer facing larger competitors and falling sales, said yesterday that it would lay off about 3,400 store workers and replace them with lower-paid new hires.

The laid-off workers, about 8 percent of Circuit City Stores Inc.'s total workforce, would get a severance package and a chance to reapply for their former jobs - at lower pay and after a 10-week delay, the company said.

Analysts and economists said the move was an uncertain experiment that could backfire for the chain. The risks: Employee morale could sink, and customers could avoid the stores in a backlash.

Also, knowledgeable customer service provided by experienced personnel is a key way Circuit City can battle competitors such as Wal-Mart Stores Inc., they said.

"This strategy strikes me as being quite cold," said Bernard Baumohl, executive director of the Economic Outlook Group, a Princeton Junction, N.J., advisory firm. "I don't think it's in the best interest of Circuit City as a whole."

While other companies, such as Caterpillar Inc., have introduced two-tiered wage systems, under which newer workers make less, firing workers and offering to rehire them at a lower wage is rare.

"Firing 3,400 of arguably the most successful salespeople in the company could prove terrible for morale," Colin McGranahan, an analyst with Sanford C. Bernstein & Co. L.L.C., wrote in a note yesterday. "The question remains as to whether Circuit City can rebuild in time for the all-important holiday season."

Circuit City, the nation's No. 2 consumer electronics retailer behind Best Buy Co. Inc., said the workers being laid off were earning "well above the market-based salary range for their role."

They will be replaced with employees who will be paid at the current market range, the company said in a news release.

Company spokesman Bill Cimino declined to give the wages of the fired workers or the new hires. But Rick Weinhart, an analyst with BMO Capital Markets, of New York, said the company paid about $10 to $11 an hour, on average. Entry-level pay probably is close to $8 for inexperienced workers, he said.

"We haven't done something called [a] wage-management initiative before," said Jim Babb, another company spokesman. "All companies at one time or another need to go through and make sure their cost structure works with market conditions."

The moves will reduce expenses this fiscal year by $110 million and trim $140 million in annual spending next year. But sales may be volatile during the first half of this fiscal year as new salespeople learn their jobs, said the company, which has 13 stores in the eight-county Philadelphia area.

Circuit City chief executive officer Philip Schoonover was paid $8.52 million in fiscal 2006, including a salary of $975,000. Best Buy chief executive Brad Anderson received $3.85 million, including a $1.17 million salary.

Circuit City shares rose 35 cents, or 1.9 percent, to close at $19.23 on the New York Stock Exchange.

"The stock is up today on the news restructuring is going to help in the short term," Morningstar Inc. analyst Brady Lemos said. "Longer term, they could face challenges."

Circuit City lost $16 million in its most recent quarter and yesterday lowered its 2007 revenue guidance for a second time.

At a Circuit City store in Falls Church, Va., customers questioned the layoffs yesterday.

"I don't think it's fair," said Hamilton Smith, an 88-year-old retired federal worker who had just bought some batteries. "You need to give people a living, working wage." He said he would think twice before shopping at the company's stores again.

Circuit City's cuts come at a time when other retailers are trying to put more knowledgeable workers on store floors.

Circuit City's move, by contrast, "shows they're positioning for another tough year," said Timothy W. Allen, a Jefferies & Co. Inc. retail analyst.

Not only will service levels at the store suffer, he said, but "you've lost 3,400 customers-slash-employees."