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Circuit City files for bankruptcy protection

Monday, November 10, 2008 | 6:00 p.m. CST

RICHMOND, Va. — Circuit City Stores Inc. filed for bankruptcy protection Monday, heading into the busy holiday season and hoping the move will help the nation’s second-biggest electronics retailer survive.

The company said it made the filing 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.

According to Circuit City's investor Web site, the store in Columbia will remain open. Four stores in Missouri are slated for closure — Ferguson, Independence and two in Kansas City.

Circuit City filed for Chapter 11 protection, which will allow it to keep operating while it develops a reorganization plan. Its Canadian operations also filed for similar protection.

In court documents, Chief Financial Officer Bruce H. Besanko cited three factors: 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.

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.

Circuit City is a well-known brand and could re-emerge from bankruptcy, Stifel Nicolaus & Co. analyst David Schick said in a note to investors. “We believe the marketplace has a slot for a higher-end chain with a commissioned sales force,” he said.

But Stephen Lubben, a professor at Seton Hall Law School, said Circuit City’s survival depends on whether its creditors work with the company “or whether they think they’re a lost cause and cut them off permanently.”

JPMorgan analyst Christopher Horvers agreed, saying it boiled down to merchandise. “If they can get inventory into the stores, I can think they’ll remain competitive.”

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) and Toshiba ($17.9 million). Smaller creditors include GPS navigation system maker Garmin, Nikon, Lenovo, Eastman Kodak and Mitsubishi.

Deutsche Bank analyst Mike Baker told investors that consumers learning about Circuit City’s bankruptcy may go elsewhere because of a lack of confidence in the company.

At a Circuit City Warehouse Store already slated for closure in Milwaukee, Courtney Bergeron, 29, said he heard the news about the company and figured he should see if there were any deals for flat-screen TVs.

Although he saw some discounts — about 15 percent off televisions at least 32 inches wide — Bergeron figured he should wait.

“On Black Friday, they’re probably going to be lower than this,” he said.

Bergeron and his friend, Bertha Harris, also 29, said they hadn’t shopped much at Circuit City over the years. He said Circuit City’s selection was limited, so he ended up buying more electronics from Best Buy and discounter Wal-Mart Stores Inc.

Harris said she was always dissatisfied with service at Circuit City. When she asked questions the workers couldn’t answer them on their own, she said.

“They knew as much as I knew about things,” she said, adding it wasn’t much.

Circuit City 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.

Horvers said the reorganization could help the company get out of leases for certain bad store locations. Schick said that had been one of the company’s main issues.

Circuit City “had many problems in the end — but all began, in our view, with holding on to 1980s real estate too long,” he wrote.

The company had said last week that it planned to work with landlords to renegotiate leases, lower rent or terminate agreements.

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 an 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 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.

Missourian reporter Jenny Rogers contributed to this story. AP Business Writer Vinnee Tong reported from New York. AP Business Writer Emily Fredrix filed from Milwaukee.

 

 


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Comments

Ayn Rand January 16, 2009 | 11:25 a.m.

The Columbia store will close, too: http://newsroom.circuitcity.com/released...

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