November 10, 2008

Circuit City Declares Bankruptcy

Circuit City Stores Inc., the nation's second largest consumer electronics retailer, filed for bankruptcy on Monday, citing tighter credit terms from suppliers and plunging consumer spending amid a slowing economy. 

Shares of the company's stock were suspended on the New York Stock Exchange following the news.

The bankruptcy filing, which comes just one week after the company announced it would close 155 stores and eliminate 17 percent of its U.S. workforce, makes Circuit City the largest retailer to file bankruptcy since Kmart filed for Chapter 11 in 2002. 

The 59-year-old retailer and 17 affiliates filed for protection from creditors in U.S. bankruptcy court in Richmond, Virginia, where the company is based. Its Canadian operations filed for creditor protection in an Ontario court.

Analysts believe the company might close additional U.S. stores as it negotiates to exit leases in Chapter 11.

"Don't rule anything out yet," Jefferies & Co analyst Dan Binder told Reuters.

"You could go away, you could restructure to something smaller, maybe somebody buys the brand and a couple hundred stores and maybe it ends up a regional player."

The company could face an uphill struggle to reorganize and emerge from bankruptcy in the current economic environment. 

"It has a lot to do with the macroeconomic crisis in the world right now," Aravindh Vanchesan, program manager for the retail systems group at Frost & Sullivan, told Reuters.

"Right now, customers are cutting back on spending."

Household-goods retailer Linens 'n Things attempted to maintain its operations by closing some of its stores after its May Chapter 11 filing, but ultimately liquidated altogether.  Last week, smaller electronics retailer Tweeter filed Chapter 11 and announced it would hold store-closing sales.

In Monday's filing, which comes just weeks before holiday shopping season, Chief Financial Officer Bruce Besanko said the company would seek to secure financing to implement its turnaround strategy. 

The company hopes to emerge from Chapter 11 during the first half of 2009.

"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.

The company said it had laid off about 1,300 workers on November 7, a day in which the Richmond newspaper reported hundreds of workers had been let go from corporate headquarters.

The filing concludes a rough two years for Circuit City, which posted losses for five of the past six quarters and faced a proxy battle from a major shareholder this year.  And in July, a takeover bid from Blockbuster Inc. was withdrawn.

Shares of the company's stock has soared 99 percent since January 2007, but now trades at less than 50 cents.

Suppliers suffering from the global credit crunch had tightened terms with the Circuit City in recent weeks, sometimes demanding upfront payments before shipping goods.

Analysts expect that No. 1 electronics retailer Best Buy Co, Wal-Mart Stores and other regional retailers such as hhgregg will eventually benefit from electronics store closures.

But in the short term, a flood of discounted merchandise from liquidating Circuit City stores could hurt retailers like Best Buy this holiday shopping season, which is already expected to be one of the slowest in recent years.

"Longer term, you've got Best Buy, who's dominant in the sector, taking share. But in the short run it could feel the pain of the liquidation activity," Binder said.

In its Chapter 11 filing, Circuit City reported $3.4 billion of assets and $2.32 billion of debt as of August 31, along with more than 100,000 creditors.

The company has secured a commitment for $1.1 billion of debtor-in-possession financing to allow it to operate during bankruptcy.

Hewlett-Packard Co, Samsung Electronics Co. and Sony Corp. are among the company's largest unsecured creditors, according to the filing, while HBK Master Fund LP and First Pacific Advisors LLC are the largest shareholders.  

Shares of Circuit City were down roughly 56 percent, or about 14 cents, prior to being halted on the New York Stock Exchange.  Best Buy shares were down 15 cents at $25.44.


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