Circuit City Doesn't Have Enough Cash to Declare Bankruptcy 50 comments
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Who's Next was the title of a classic rock album from The Who, of course, back in the days of vinyl records, but today when that phrase is mentioned, it's more likely to be referring to the list of troubled companies on the verge of bankruptcy.
Big box retailer Circuit City (NYSE: CC) may be next to declare themselves insolvent, although they are said to be pulling out all the stops to avoid that outcome.
Trading over $8 a share just one year ago, Circuit City's share price has been in steady decline and has fallen off the cliff lately to settle around 45 cents per share. Circuit City has, according to a Market Watch report, been in talks to secure a line of credit to cover operating expenses while in receivership (in anticipation of a bankruptcy declaration), but the lack of available credit in the current economy has left them with no takers willing to finance them through reorganizational bankruptcy.
This leaves the company with little choice other than scaling back operations and liquidating whatever it can for emergency cash. Initial statements suggest that 150 of Circuit City's 1484 stores in the US and Canada may be shut down. As recently as September you will recall that Circuit had announced a slowdown in the planned store openings for the coming year. It seems that wasn't nearly enough.
In addition to the closings, Circuit City may be liquidating up to $350 million in inventory, likely at fire sale pricing. If you're in the market for a big screen TV and you have enough cash left over after filling your gas tank, this might be your opportunity. This hints at one of the causes of Circuit City's troubles. During a period when Americans are uncertain about their personal income, and when they see their net worth falling everyday not only with real estate values, but also with falling 401k and other stock market investments, they are much less inclined to purchase high ticket luxury items like fancy new appliances or entertainment systems. With companies like Circuit City now focusing on cost-cutting and reducing payroll, things are likely to get significantly worse before they get better.
Circuit City is perhaps the earliest and hardest hit by the current slowdown as they were already losing customers to competitors. Having fumbled around with redesigning store layouts and sales structures, Circuit City has been unable to find a retail model that draws customers. No detailed estimate of the number of employees likely to be released was available although the Associated Press, citing unidentified sources put the number in the thousands. My own estimate, based on 150 stores shutting down would put the number between four and five thousand workers. If the remaining stores and corporate operations also pare staff the number could go higher. Circuit City currently employs about 45,000 people, although that number includes both US and Canada operations.
It is not known how many of the reportedly closing stores are in the United States and how many are in Canada. However, one has to wonder how much of an effect this sort of spill over of US economic troubles will have on Canada going forward. If other multi-nationals begin paring operations there as well, we could see the two trading partners reinforcing each other's decline.
Disclosure: none
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what do you think about CC as a buy at .25 cents a share ?? Even though many indicators are pointing against it, I feel like it's a good buy at such a low price.
I don't know anymore. Logic suggests that the company won't last long, but this isn't a logical market.
Par value is 50 cents, so conceivably you could buy in now and possibly get par if another company retires the stock at that value.
I'm not that brave.
Thanks, and I'm not on commission, but promote the benefits of service plans, installation, and accessories with every sale.
I wonder how BBY can train its people to do that, yet not pay them commission?
In my case, I prefer a noncommissioned atmosphere because employee relations seem less strained.
Customers seem to respond positively as well.
In the CE business, most other retailers pay some commission (appliances too). But none of them have the sheer power of BBY to alter the landscape.
BBY is probably the WMT of CE. And it's getting stronger, because it actually makes money.
-Ben C. store 0711
I applaud your wish to completely satisfy your customers, and I'm guessing your store will remain open.
The chain itself isn't making money, so I question your comment about how 'Ccity is making profits.'
Have you read the financial statements?
-Ben C.
Let's see...
Market share has been falling for five years, sales have been dropping for three.
Many stores are in declining malls, with poor visibilty and foot traffic.
The company is paying lease termination costs on stores that have been vacant for years, because in the pre-Schoonover era, leases were struck with 10 year terms, instead of the more normal 5 year terms.
The motivation for the landlords? You have a guaranteed cash stream for 10 years, regardless of how well your mall does. Perhaps that's why there are so many empty CC boxes strewn about the countryside.
The new credit facility that's in place paid off an earlier one that contained financial covenants. Since there was no incentive to improve operating performance as set out by the credit agreement, it gave the company no hammer in case results faltered. Results faltered, and the banks now have more invested than the stockholders.
The investment community has discounted the stock to 42% below par value.
In other words, the decline and fall of CC began before Schoonover took over. Now, the credit agreement was negotiated on his watch, but the long-term leases, product mix, vendor selection and slide in performance started long before he took the helm.
Not that he helped.
I'm struck by how fiercely people are defending CC.
Like a bettor who is down $5000, but still puts his chips on black because 'he's due for a run.'
I don't see a lot of potential with the future of CC. Perhaps a regional footprint would make more sense. Outsource the distribution piece (there are a lot of logistics companies out there that would love this deal), pay off the old leases (with DIP financing if necessary), pare down the HQ staff, close nonperforming stores, liquidate the associated inventory, and maybe, just maybe, the $200 million shelf registration would then get some interest on Wall Street.
Otherwise, it's just a further muddling through, until an antsy vendor stops shipping. Others will line up after them, and the end will come swiftly.
But that's just me.
Yes, Circuit City's stocks are plummeting, but a lot of it has to do with the filth that comes out of people's mouths when they don't have adequate perspective. Since I've been here, I've watched this store go from "I don't care!" to "How can I help?" Corporate is top-heavy. They concentrated on the wrong things for too long. We have a new CEO, and that helps, but what Circuit City really needs is store-level honest-to-God-genuine "I care." Instead of worrying about how much we're paid and what we're paid for, we need to worry about the customer. As far as people who put us down, how about you stand in our shoes. Some of us will go down with this ship, or sail to brighter waters.
1. Dropping appliances. I have no idea why, but that seems to possibly have been a huge mistake. They gave up a billion dollars of revenue and didn't replace it with anything. Foot traffic maybe? No idea, personally.
2. Getting rid of real salespeople. It is a fact: you cannot "cut" your way to profitability unless you manufacture something. A service based industry needs excellent salespeople.
3. Hiring teenagers. Teenagers are unreliable. I was a manager at Best Buy before I went to CC, and managed lots of teenagers. They don't care about anything except getting off as early as they can... and they certainly couldn't care less about the company or it's customers. No successful company is staffed with teenagers as it's salespeople.
You identified three major things that brought the company to its knees, and I'd like to expand on them if I may:
Dropping Appliances--The company did that in 2001, just before the greatest real estate boom in history. How many appliances could CC have sold during the RE boom years?
Cutting the top salespeople--Jack Welch, former CEO of GE, used to cut the bottom 10% every year. And every year, revenues, profits and productivity rose. When you cut the top tier, two things happen: 1)You lose their expertise and knowledge; and 2) people below them see there's no reason to improve, because if they're too good, they'll be gone.
Hiring teenagers--I couldn't have said it any better myself. I work at BBY with a lot of teenagers, and most of them do the work that they're asked to do. Some, though, just take up space, and care more about the new movie that's coming out than the customer in front of them.
I haven't been saying that all the CC stores are poorly run and unprofitable. Only some of them. But those stores are bleeding the company of its cash, and the only way I see to stop the bleeding is to identify and close those stores. After that's done, the remaining chain would probably be a good little business for someone to run.
it's obvious from some of the posts here that there are still reliable, dedicated and caring employees at CC. to those of you that count yourselves in that group, my heart goes out to you. i cant imagine the frustration that you have to be feeling right now. "no skin off my back" only works if you really dont care, or you're rich enough to not have to care (as in the people making the top decisions that got CC to where it is today). yes, it's cathartic to post complaints about a company when your last experience with them didn't go the way you wanted, but you cant take those gripes personally. upper management sucks. that's not your fault either. unfortunately, through no fault of yours, the future of the company is in serious peril. you can do your level best, but the problems inherent in the company still transcend your ability to fix them all. that's not a slam on you at all, but i hope that you're not trying to convince yourselves that a fairytale ending will appear out of the fog just by virtue of your sheer will and the universe's ultimate sense of fairness. at very least, i hope that all the posts that are pissing you off will convince you of the real possibility of an unhappy outcome and the importance of having a plan 'b', should that unhappy outcome become a certainty. the human costs associated with an end to CC are very real, especially for you all, but that is only a part of the whole price to be paid. after all, this website and this article are more about CC's situation as it relates to the investment world. thousands of investors have already paid a hefty price. i've never owned CC stock, but if i did, i'd be demanding blood on the streets of circuit city. having said that, CC has impacted my life and it bothers me to see them continue to do things wrong, promise to do better, screw more people over and repeat the whole process again and again. put in its ugliest terms, jobs lost at CC will be regarded as collateral damage. wall street wont care, the banks wont care, the executive wont care, your landlord wont care, your creditors wont care. i wish you all the best of luck, but if you see a chance to make your own luck, please dont pass it up!
I loved Circuit City
Oh Well
YOGI
Store 0420
And just who will be the first vendor to blink, in the Circuit City bankruptcy games? The award goes to: Sony!!!
This 'little birdie' sat on my shoulder and told me some interesting news. All of the Sony trucks headed for CC were told Thursday, to turn around and head 'em back to Sony. No baloney ... Circuit gets no Sony. My 'little birdie' is always right.
As I stated previously, watch the house-of-cards fall quickly. All other vendors are scambling today to follow suit. The Fat Lady is hitting the crescendo.
And to billdrummer:
Yes, I too was struck by the number of people who were defending CC here, but I completely understand. Loyalty is an admirable trait, and is combined here with the personal feelings about one's job (and financial livelihood) that make it hard to be objective. My heart goes out to the thousands of employees who are about to receive some very bad news, at a most unfortunate time of the year for them and their families.
thanks for the update! wow...we knew it was coming, but it's always a bit of a shock when somebody finally pulls the trigger. it was really only a matter of when, wasnt it?! now the question comes down to how fast the whole thing unwinds. do they go out with a bang or will it be like watching a tire go flat?
I contend that the end began when CC (under pressure from the Music Companies) let Best Buy off the canvass and raised its prices on CD's in the late '90's.
BBY re-grouped with the aid of Anderson Consulting. They re-designed their stores and went after "A" real estate just as Rick Sharp, CC's CEO lost his focus and turned to doomed businesses like used cars, commercial appliances, HVAC, DIVX, ZOOM, etc.
After forcing Richard Birnbaum ( the last top guy who really lived and loved the business) out, the die was cast.
Allan McCollough took over as CEO and made one disastrous decision after another. He fell for the GE myth and that led to an influx of sociopathic "Snakes in Suits", crazy political gambits like backing Bob Dole and Newt Gingrich, an growing fleet of private jets, exploding Exec Comp packages based on stock appreciation, etc. culminating in the exit from Appliances as mentioned previously.
Leaving the field as the second biggest consumer appliance retailer left the company without a summer peak business and made it totally dependent on Christmas sales.
Out of ideas and out of time, they blew their brains out in Jan 2002 by collapsing their field Divisions and management structure based on some poorly understood passages in a book by Michael Porter and in a desperate attempt to bolster their post 9/11 prospects.
The stock in Jan 2002, at the time of this blunder was $60, having clawed up from a 2 for 1 split at $100. Six months later, with no way to comp the Air Conditioner and Appliance sales, it was at $6. That's when they realized that the games and peripherals they put in the appliance spaces did, in fact, have good margins when new; but they had the shelf-life of fresh fish.
By that time, the lunatics were on the path. Promotions and titles flew as they flopped and failed, Yes Men were promoted and fired and the Deep Run Headquarters got nicknamed "The Russian Front". The passion for the product and concern for the customer were gone. Deep Run III was emptied out, Bain Capital roamed the halls looking for people to fire, and fear became the basic state.
Buyers like Carlos Slim might have turned it, but instead they turned to Phil.
Ending the commission era was the right track, but they took the wrong train. CC was a famous and successful poacher of retail talent. A consequence of this was high staff costs, but high quality staff was also the engine that allowed attachment, and sales of ancillary services.
The sucking sound started when, losing sight of this advantageous differentiator, they decided labor was a commodity and fired their highest paid Associates.
Well, it's good and done now. You can stick a fork in them. SONY always hated CC for spiffing and selling junk and disparaging its products.
It's fitting that they administered the coup de grace.
It couldn't happen to nicer bunch of guys.
Good riddance. It's just a shame that so many people had to suffer the collateral damage.