Circuit City Doesn't Have Enough Cash to Declare Bankruptcy

| About: Circuit City (CCTYQ)

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.

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