Circuit City Blows a Fuse

Nov. 4.08 | About: Circuit City (CCTYQ)

Let's check in on one of my favorite whipping boys: Circuit City (NYSE:CC). Needless to say the news isn't particularly good:

(From the FT): Circuit City, the troubled US consumer electronics chain, is taking urgent steps to keep its business afloat even as the holiday shopping season gets under way, saying it will close 155 stores and cutting 17 per cent of its workforce. 

The closures of around a fifth of its stores underline the bleak holiday outlook for many retailers this year, following the blow to consumer confidence delivered by the turmoil on stock markets that began in late September. 

However, Circuit City was in difficulties even before the financial crisis, and has been struggling for more than a year against competition from its rival Best Buy and from Wal-Mart and Target, the discounters, who have been enhancing their electronics offerings. 

In September, it announced another quarter of falling comparable sales, and said it was launching a review of its business under a new chief executive, James Marcum. 

It said on Monday that subsequently some of its suppliers tightened payment terms, in some cases declining to extend additional credit to the retailer for holiday demand. It also said that conditions in the credit markets had also made it impossible for vendors to secure credit insurance for shipments, and that some had started requiring payment in advance. 

“The current mix of terms and credit availability is becoming unmanageable for the company,” the company said in a statement. 

Mr Marcum said Circuit City’s problems had been aggravated by “unprecedented events…in the financial and consumer markets causing macroeconomic trends to worsen sharply.” 

“We are making a number of difficult but necessary decisions to address the company’s financial situation as quickly as possible,” he said.

At the end of the day the story around CC hasn't changed much: they're struggling to make money in a market that's proven to be quite lucrative for their competitors, and they've yet to make the necessary changes around customer experience, store layouts, branding, etc, in order to turn things around. What else can you say about a company that is losing money selling nearly identical items, at similar prices as its profitable competitors?  

What's happening (at the moment) is that the inability to finance inventory for the coming Holiday season has left Circuit City with no choice but to close down stores, because generally speaking most retailers would rather try and pull out all the stops for the holiday shopping seasons before they start closing down stores. But when faced with difficulties in procuring inventory for the coming holiday season, CC was left with no choice but to close down weaker stores and focus its limited resources on the rest.  

All that being said it's important that we don't look at Circuit City as a victim of current times because they've been struggling for years, if we currently had boom era credit markets all that would mean is that CC would be in this position a couple of quarters down the line as opposed to now. 

Moving forward I just don't see how CC survives because their currently weakened financial state has them scrambling to find ways to finance inventory, which won't leave them with the resources to make the required internal investments to turn the company around. In the end it's probably just basic human nature: it's hard to think about home improvements (no matter how necessary) when you're struggling to survive. 

Their other problem (perhaps the biggest one over the next 3-4 months) is that the coming holiday shopping season is looking to be an abysmal one for retailers, and CC is going to have to contend with deep discounts from competitors (who can afford to offer them) and fewer shoppers overall. 

I.e., it's virtually guaranteed that despite it all CC will lose money this holiday season (just like last year's), so how will this company continue to operate after turning in a loss during the most profitable time of the year for retailers? 

You can read more here (FT), and a transcript of their last earnings report here (Seeking Alpha).

View the full CC chart at Wikinvest 

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.