Can Circuit City Avoid Bankruptcy?

Oct.21.08 | About: Circuit City (CCTYQ)

Circuit City (CC) has undeniably a long history of nearly 60 years as a leader in the consumer electronics industry. However, the foundations of that status may not be enough for the electronics retailer to help it navigate from its current financial troubles.

According to Wall Street Journal, Richmond, Va.-based Circuit City is contemplating closures of at least 150 stores, in addition to thousands of job cuts, in hopes of avoiding insolvency and consequently a bankruptcy filing. By shutting the stores, the company hopes to liquidate about $350 million in inventory, which it could use to pay off certain real-estate costs and pressure existing landlords to renegotiate some leases many of which Circuit City regards as overpriced. The retailer has 714 stores in the U.S. and another 772 stores and outlets in Canada. Of the company's $3.98 billion in off-balance sheet obligations related to operating lease commitments, more than half is tied to leases with more than four years remaining.

Meanwhile, the company’s advisers are doing all they can to line up additional financing but so far lenders have shown little or no interest at all. In addition, deteriorating credit market has yielded the company little luck, forcing the nation’s second-largest consumer electronics chain to hire investment bank Rothschild Inc. to guide talks with banks in hopes of securing emergency financing. Circuit City, notes the Journal - has also retained the services of FTI Consulting to help the company devise a turnaround plan. FTI has advised on several troubled retailers, including home decor specialist Bombay Co. (BBA) and grocer Winn-Dixie Stores (NASDAQ:WINN).

In another move, that clearly underscores the seriousness of the situation — the retailer said it hired Skadden, Arps, Slate, Meagher & Flom LLP, which oversaw Kmart’s Chapter 11 reorganization, as its bankruptcy counsel.

It is obvious that if Circuit City somehow survives this mess, the company’s business strategy will have to be entirely reconfigured. At this point, it will be extremely difficult for the retailer to grow again or maintain its national powerhouse status. The company continues to face pressure from all sides including its larger rival Best Buy (NYSE:BBY) that keeps opening stores and gain market share at a steady pace.

Standard & Poor’s analyst Michael Souers said:

While we would appreciate [Circuit City] for its attempt to stay solvent, we remain highly pessimistic on holiday sales and on consumer spending in 2009.

Based on a nearly $163 million quarterly loss even before the financial crisis hit, Circuit City chances of either landing in bankruptcy court or be forced to close more stores soon after the New Year, are very high. The company employs about 45,000 people. It posted $11.74 billion in sales in fiscal ‘07.

CC shares fell 0.04 (10.26%) to $0.35 cents, hitting a 52-week low at the close of trading on Monday.

Disclosure: None