Circuit City's (NYSE: CC) turnaround plan has been "disastrous" according to one activist shareholder. Mark Wattles criticized the board for focusing too much on cost-cutting and ignoring its impact on profits and revenues. And it's not hard to see the result: The electronics retailer reported a profit of $140 million in fiscal 2006 that quickly dropped to a loss of more than $8 million in 2007.

Management has blamed the decline on outside factors, such as the economy and increased competition from mass merchants. These factors may have affected performance, but firm's like Best Buy (NYSE: BBY) have prospered none-the-less. In fact, Circuit City's largest competitor announced yet another year of double-digit revenue growth while still beating analyst expectations on earnings per share.

Wattles believes that the right senior management team with the right strategy and focus would be able to immediately and dramatically improve Circuit City's profitability. As a result, the activist nominated his own candidates to replace the existing directors on the board. These nominees would conduct a comprehensive review of the retailer's strategy, operations and senior management in order to formulate and implement a plan to maximize value.

In particular, Wattles proposed a series of immediate changes the new directors would make:

1. Replace the current Chairman and CEO with a seasoned executive capable of restoring credibility with employees, vendors and stockholders;
2. Focus on the "customer experience" and strategies for making the current stores more productive;
3. Begin addressing the actual issues facing the Company and drive revenue growth, rather than focusing on cost-cutting strategies and "spin" campaigns.
4. Focus on the most immediate and least capital-intensive opportunities to improve the health of the business; and
5. Develop and articulate a deliverable promise for the new "The City" brand that works within the realities of the current store footprints.
   

Wattles also suggested that Circuit City not summarily dismiss any legitimate, third party interest in acquiring the company. The electronics retailer did exactly that on two occasions during the past five years, including the rejection of a $17 per share bid in February 2005. The activist demanded that the company immediately hire an investment banker to explore strategic alternatives if they receive an expression of interest.

In the end, Circuit City is a strong company with a national brand, strong cash position, minimal debt, and access to a newly-expanded line of credit. Wattles insists that the current senior management is not leveraging these assets to build value, but rather destroying it by focusing only cost-cutting measures. The existing board has lost credibility with shareholders and many believe new blood is exactly what is needed.

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