Circuit City BANKRUPT

[Solauren]

And so it begins...

By Michael Felberbaum and Vinnee Tong, AP Business Writers
Circuit City seeks bankruptcy protection amid pressure from vendors ahead of the holidays


RICHMOND, Va. (AP) -- Circuit City Stores Inc. filed for bankruptcy protection on Monday heading into the busy holiday season as analysts question whether the nation's second-biggest electronics retailer will be able to survive.

The company said it decided to file for bankruptcy protection because it was facing pressure from vendors who threatened to withhold products during the holiday period. The company also said it cut 700 more jobs at its headquarters, after announcing a week ago that it would close 20 percent of its stores and lay off thousands of workers.

Circuit City filed for Chapter 11 protection, which will allow it to hold off creditors and continue operations while it develops a reorganization plan. Its Canadian operations also filed for similar protection.

Doing so "should provide us with the opportunity to strengthen our balance sheet, create a more efficient expense structure and ultimately position the company to compete more effectively," James A. Marcum, vice chairman and acting president and chief executive, said in a statement.

Shares in Richmond, Va.-based Circuit City fell 14 cents, or about 56 percent, to 11 cents on Monday before being halted.

Circuit City, which has had only one profitable quarter in the past year, has faced significant declines in traffic and heightened competition from rival Best Buy Co. and others. The company laid off about 3,400 retail employees last year and replaced them with lower-paid workers, a move analysts said could backfire, hurting morale and driving away customers.

While the retail industry overall is facing what's expected to be the weakest holiday season in decades, Circuit City's struggles have intensified as nervous consumers spend less and credit has become tighter.

In court documents, Chief Financial Officer Bruce H. Besanko said three factors led to the bankruptcy filing: erosion of vendor confidence, decreased liquidity and the global economic crisis.

"Without immediate relief, the company is concerned that it will not receive goods for Black Friday and the upcoming holiday season, which could cause irreparable harm to the company and its stakeholders," Besanko said in the filing.

The company's biggest creditors are its vendors: Hewlett-Packard has a $118.8 million claim followed by Samsung ($115.9 million), Sony ($60 million), Zenith ($41.2 million), Toshiba ($17.9 million) and others. Smaller creditors include GPS navigation system maker Garmin, Nikon, Lenovo, Eastman Kodak and Mitsubishi.
Stifel Nicolaus & Co. analyst David Schick said in a note to investors that since Circuit City is a well-known brand it could re-emerge from bankruptcy, saying "We believe the marketplace has a slot for a higher-end chain with a commissioned sales force."

But Stephen Lubben, the Daniel J. Moore professor of law at Seton Hall Law School, said the company's surivial depends on "whether these folks here like Sony and Hewlett-Packard are going to be willing to work with Circuit City going forward or whether they think they're a lost cause and cut them off permanently."

Lubben said it has the added burden of facing Chapter 11 at a difficult time for retail.

Meanwhile, Deutsche Bank analyst Mike Baker told investors that consumers learning about Circuit City's bankruptcy may choose elsewhere due to a lack of confidence in the company.

Circuit City Stores Inc. announced a week ago it planned to close 155 of its more than 700 U.S. stores by Dec. 31. It is laying off about 17 percent of its domestic work force, which could affect up to 7,300 people.

"This isn't a surprise," JPMorgan analyst Christopher Horvers said of the bankruptcy filing, adding that the reorganization could help the company get out of leases for certain bad store locations.

Circuit City had also said last week that it would further cut back on new store openings and planned to work with landlords to renegotiate leases, lower rent or terminate agreements while it dealt with tightening credit from its vendors.

"At the end of the day I think it's really about an inventory position," Horvers said. "If they can get inventory into the stores, I can think they'll remain competitive."

Horvers also found it encouraging that the company was able to secure financing. Circuit City said it had lined up $1.1 billion in loans to provide working capital while it is in bankruptcy protection. That replaces a $1.3 billion asset-backed loan it had been using.

Loans to operate while in bankruptcy are called debtor-in-possession, or DIP, loans.

"That's a big DIP in the current market," said John Penn, a partner at law firm Haynes & Boone who is not involved in the case. "To secure that size DIP now is quite a achievement. With the news of the cuts last week -- and vendors wanting to know they can get paid -- having a recognizable source like a DIP can calm a lot of vendor concerns."

The company said in its filing that it had $3.4 billion in assets and $2.32 billion in liabilities, as of Aug. 31.

Circuit City posted a wider second-quarter loss in September with a 13 percent decline in sales at stores open at least a year. The company has been under new leadership since late September when Chief Executive Philip J. Schoonover agreed to step down.

Shares in Circuit City have traded under $1 for more than a month and the company received a warning about that last month from the New York Stock Exchange.

AP Business Writer Vinnee Tong reported from New York.

[Darth Wong]

What US electronics store chains remain if CC goes belly-up? Best Buy?

[Ghost Rider]

What US electronics store chains remain if CC goes belly-up? Best Buy?

Pretty much. Both Microcenter and Fry's are still outliers, I believe.

[Lord MJ]

Best Buy and Frys I believe. Radio Shack?

CompUSA has already bit the dust, I believe.

[Col. Crackpot]

What US electronics store chains remain if CC goes belly-up? Best Buy?

Pretty much. Both Microcenter and Fry's are still outliers, I believe.

Also Tweeter announced last week that they were closing up shop and liquidating every asset they owned. That leaves Best Buy and Wal Mart

[Count Chocula]

Wal Mart (shudder).

[Col. Crackpot]

Best Buy and Frys I believe. Radio Shack?

CompUSA has already bit the dust, I believe.

Dead and buried

[KrauserKrauser]

Well, Chapter 11 is not technically the final nail in the coffin. Companies have come back from it in the past.

Circuit City has been circling the drain for a while now. I had the stock in one of my hypothetical portfolios and it was fun to watch it enter free fall mode over the last few years.

[Bob the Gunslinger]

Best Buy and Frys I believe. Radio Shack?

CompUSA has already bit the dust, I believe.

Dead and buried

Radio Shack is gone? How could they afford to donate money to Yes on 8, then? Did they just screw themselves over even more just to spite the gays?

[General Zod]

Best Buy and Frys I believe. Radio Shack?

CompUSA has already bit the dust, I believe.

Dead and buried

Radio Shack is gone? How could they afford to donate money to Yes on 8, then? Did they just screw themselves over even more just to spite the gays?

Uhm, no. CompUSA is the one that's dead and buried.

[Kodiak]

What US electronics store chains remain if CC goes belly-up? Best Buy?

Best Buy would be the definite frontrunner, but I could see OfficeMax and Office Depot moving in to fill the vacuum.

[Bob the Gunslinger]

Uhm, no. CompUSA is the one that's dead and buried.

Oh. I thought that had happened quite a long time ago.

I expect Walmart, Target and Costco to fill in the gaps left behind by Circuit City and Best Buy when Best Buy eventually fails.

[KrauserKrauser]

Oh. I thought that had happened quite a long time ago.

I expect Walmart, Target and Costco to fill in the gaps left behind by Circuit City and Best Buy when Best Buy eventually fails.

You are just a bit premature on that one. While Circuit City had been operating at a loss for years, Best Buy if nothing else is still making money.

Generally with companies as large as Best Buy is now, as long as they are showing a profit, they shouldn't be closing up any time soon.

Why do you think Best Buy is going to fail in the near future when they will the only and biggest game in town for specialty electronics?

[RedImperator]

This isn't unexpected. The US has far too much retail square footage; cheap credit financed overexpansion in the 90's and 00's, and while the dot-com bust culled some of the herd (I worked for one of the chains that went bankrupt in that correction), there are still too many chains with too many stores competing for too few customers. Recessions always hurt specialty retail even in the best of times, and this isn't the best of times. Specialty retail can't compete with discount retail on price and it can't compete with high-end retail on expertise and quality.

I would not be the least bit surprised to see a lot more chains die. Toys 'R Us has been struggling for years, most mid-tier discounters are already dead and the rest are dying, Borders and Barnes & Noble are pursuing a merger (if it doesn't happen, expect Borders to go bust), and everybody knows about Sears's problems. Even Home Depot is having trouble, thanks to heavy competition and too many stores. If the recession hangs around for long enough, we're going to see a bloodbath in retail.

[The Duchess of Zeon]

Shit, the two stores are so utterly featurelessly identical that I had always assumed that Borders was some kind of subsidiary of Barnes and Noble, I didn't realize they remained separate companies.

[Solauren]

I'm not sure bloodbath would be the right term, but it definately would be interesting.

[RedImperator]

Shit, the two stores are so utterly featurelessly identical that I had always assumed that Borders was some kind of subsidiary of Barnes and Noble, I didn't realize they remained separate companies.

Borders also owns Waldenbooks, which is getting pummeled because mall sales are down across the board, while Barnes and Noble owns Barnes and Noble.com (it also owns B. Dalton's, another mall chain, but B&N has been ruthlessly liquidating it and it probably won't be around much longer). Borders had an agreement with Amazon.com, but that's ended now. So for the time being, Borders is saddled with a poorly-performing mall subsidiary and has just launched an online store, while B&N is unloading its poorly-performing subsidiary and is making good money online.

[Alyrium Denryle]

I will confess, the news of Circuit City, which IIRC has connections to a certain Abomination being passed in CA, going under makes me happy inside.

[Bob the Gunslinger]

It doesn't help that Borders took on a shitload of debt to create its new concept stores and website, both of which seem to be too little too late as far as gaining new customers goes. They've also neutered their Rewards program and destroyed the two advantages they had over Barnes and Noble, their selection and their customer service. Dutchess may not notice any difference between the companies now, but as a long time bibliophile I can tell you that there did indeed used to be quite a difference.

Anyway, Best Buy is going the same way. They can't keep selling their media at a loss just to get people in the door and expect to stay competitive with Walmart and Costco, and a recession makes for a pretty poor time period in which to work on commission, so I see some serious problems for them with employee morale and retention. Besides, RI pointed out how a specialty store like BB is going to survive the recession when surrounded by discount and high end competition that don't need to survive on selling add-ons, or whatever BB calls the accessories and crap they have to sell to make a profit.

[Broomstick]

Well, Chapter 11 is not technically the final nail in the coffin. Companies have come back from it in the past.

As examples - Chrysler back in the 70's/80's and virtually every American airline, including big players like United, American Airlines, and Delta. Lots of others, too.

Chapter 7 is the "going out of business for good/liquidating everything" bankruptcy.

[Guardsman Bass]

I would not be the least bit surprised to see a lot more chains die. Toys 'R Us has been struggling for years, most mid-tier discounters are already dead and the rest are dying, Borders and Barnes & Noble are pursuing a merger (if it doesn't happen, expect Borders to go bust), and everybody knows about Sears's problems. Even Home Depot is having trouble, thanks to heavy competition and too many stores. If the recession hangs around for long enough, we're going to see a bloodbath in retail.

I have my doubts as to whether Home Depot will fall over and die; it and Lowe's are next to identical (I've worked in both). Depot did finally manage to get rid of that crappy CEO they had for more than five years (two years ago).

[Enigma]

This also affects The Source (used to be Radio Shack) here in Canada as they are owned by Circuit City.

[Ryan Thunder]

I will confess, the news of Circuit City, which IIRC has connections to a certain Abomination being passed in CA, going under makes me happy inside.

Can I join you in that (if for different reasons)? Their stores always seemed rather uninteresting and poorly stocked compared to the RadioShacks they replaced...

[Phantasee]

Aw man, my friend works at Circuit City. Although, I'm not sure how the US company going under affects the Canadian places. Basically, Circuit City bought up all the Radio Shacks in Canada and renamed them The Source by Circuit City.

There goes my access to cheap, discounted electronics.

PS: Bob, Best Buy doesn't work on commission here in Canada, is that different in the US?

[TimothyC]

PS: Bob, Best Buy doesn't work on commission here in Canada, is that different in the US?

No it isn't. While I don't work for them, I work for a regional competitor. And the way I am getting treated right now, well the rest goes without saying.