Circuit City Falls Further: 'Bring Out Your Dead' 282 comments
-
Font Size:
-
Print
- TweetThis
Anyone remember the famous Monty Python skit? See it below:
Circuit City (CC) is the old guy being carried by John Cleese.
Circuit City Stores reported a wider quarterly loss and withdrew its financial outlook on Monday as the electronics retailer reviews its business, sending its shares down 10% to $1.26 a share.
Last week brought the overdue firing of CEO Phil Schoonover, also said it would suspend store openings beginning with its 2010 fiscal year to focus on turning around its operations.
Circuit City has reported losses for five of the past six quarters, and sales have dropped for more than a year. Q2 net loss was $239.2 million, or $1.45 a share, compared with a loss of $62.8 million, or 38 cents a share, a year earlier. Total sales fell almost 10% to $2.39 billion and same-store sales, fell 13.3%.
A year ago, in a post commenting on then-rumors that Sears Holdings' (SHLD) Eddie Lampert might make a bid for the company, I said, "Lampert, based on his past history, would more likely wait for these buffoons to run it into bankruptcy and pick it up for a fraction of today's price".
I doubt Lampert wants it, but if he does, bankruptcy is right around the corner..
Disclosure ("none" means no position): Long SHLD,None
Related Articles
|
This article has 282 comments:
I'll bet the bankers that put together their lending facility are scouring the loan documents to see whether there's any way they can get out of it.
I looked at the filing, and it didn't appear that the lending group put any financial covenants in the agreement. Which makes sense to a degree, because they were already losing money when it was booked. But with credit markets frozen and banks looking at liqudity pressure, I'd be surprised if the lending group (includes BAC and JPM, among others) didn't put some stops on draws.
When that happens, vendors will stop shipping, and CC will be done.
My comment from last week about the company's balance sheet is absolutely what happened:
seekingalpha.com/user/...
True to my prediction, cash is down, borrowings are up, and market cap fell to the basement over the previous year.
I'll bet the bankers that backed the credit line are looking for loopholes in the agreement. But it doesn't seem to me that financial metrics were part of the SEC filing describing the deal:
www.secinfo.com/d14D5a...
I'll bet they wish they had.
Wondering what they were taking while the company was falling into this abyss?
If you believe management (questionable) CC will revive itself going into the holidays. Staffing and in-store stock will be up for the season, pricing will be competitive, marketing will be targeted and effective, and the company still has full support of its vendors.
The lack of financial covenants on the $1.3 billion credit facility is a testament to how much pressure bankers had on them to get deals done a year ago, despite looking at a borrower with falling sales, negative FCF, non-existent EBITDA and no strategic plan. The loan got approved anyway because it's overcollateralized with inventory.
But consumer electronic inventory isn't worth much in bankruptcy court. Which is a very real possibility if the holiday season turns out as grim as it seems it might.
And to AT57,
The first directive by Schoonover was to trim back ordering flat-panel TVs during the 2006 holiday season, which led to lower sales because stores were out of stock. The decision to fire the higher paid salespeople was the second.
When you sacrifice customer service in a retail business to save a few dollars, you usually pay for it tenfold. If the buying experience for the end user at CC was at all better than average - their main competitor, BB offers average service, at best - they would not be in the fix they're in.
www.bloomberg.com/apps...
It won't be long, now. Stock is trading at $0.72.
Good job on your research on their debt situation! Given CC's current state, is it within the realm of possibility that the lending facility could make that available money suddenly unavailable and even call the outstanding debt? If the penalties that they'd face are easier to take than the lickin' that they'd get by riding it out, the endgame could come a lot sooner than later.
Thanks for the kind words. I bet the bankers are looking at the deal now, to determine what constitutes a Material Adverse Event (one of the triggers for technical default). Hiring the restructuring firm may be one of those events, but the lawyers will have to fight it out. Losses beyond what the company expected could also be considered material. Or, the impairment charge of $73 million points to a potential for additional writedowns on the balance sheet, which would further impair the capital position. Or, having the stock trading at such a low level (essentially a penny stock now).
This is going to be interesting, but I don't think it will take too long to figure out what's what.
I wouldn't be surprised if a notice goes out by the end of the week. On the other hand, maybe they can work out an arrangement that will allow them availability on the credit line through the holidays, with an orderly liquidation after the Christmas season.
That's what CompUSA did last year.
Time will tell, as it always does.
Get'ER going circuit
Only if the banks don't curtail borrowing (which is happening with blue chip companies like McDonald's), customers flock back to the stores (which is a reversal to what's going on now), and the company can figure out how to sell stuff at a profit (which they haven't done in a year and a half).
The track record doesn't support your view.
To retailers, the 3 months coming up are known as the 'Golden Quarter'. Normally, the overall retailing year is made or broken on the results of that time period. That's why effort becomes focused to the point of obsession on getting the sales done at that time of the year. That's a heck of a time to 'get back to basics' and 'accelerating the company's turnaround'. It's going to be tough enough to do one job right. What happens to every job that's done under system overload? When your house is burning down around you, it's a little late to go shopping for a fire extinguisher.
They've already booked their holiday season buys and the suppliers must be excreting pickles. If they deliver, they could get stiffed big style. If they hold the product back, they have to scramble to off-load it somewhere else.... or CC gets put on the 'cash up front' list. Once on the list, whatever inventory and cash flow control CC may have would unwind immediately. Lost control = lost sales = lost quarter = last quarter. If there's a catalyst anywhere here for a rebound, I'd love to see it.
Disclosure ("none" means no position): Long SHLD,None"
You are so obviously biased here - you are saying BK is "right around the corner" but you've done NOTHING to determine what their liquidity situation is (i.e., the status of their lending facility). So your "right around the corner" call is uninformed at best. SHLD is a piece of garbage, BTW, it PPS gets propped up by Lampert's hedge fund pals - talk about hypocrisy, this company ALREADY UNDERWENT BANKRUPTCY - good luck with that one!
Please read the link above that takes you to the filing on the credit facility.
Highlights:
No financial covenants;
Draws limited to inventory purchases and issuing letters of credit to suppliers;
Draws to support Canadian purchases are to be repaid prior to draws to support domestic store support;
Loan draws are unrestricted--company can use loan proceeds as it sees fit;
Base rate is either Libor or prime + an index--which is confidential
So from a liquidity standpoint, it looks like the credit facility will do the job of keeping them liquid through the holidays. What happens after that is anyone's guess.
I realized after I posted that I had contradictory data in the highlights section. Draws can be used for general corporate purposes as long as they don't violate Reg U or X governing board of director conduct.
My error.
Thanks for the encouragement. I've been watching this company for nearly two years, and it's amazing to me that they've continued to stay in business.
If anyone remembers, last year, the company lost money during the holiday quarter (that fact wasn't announced until full-year earnings came out). Now, it's one thing to post losses during the second quarter, but when you can't make a profit during the peak season, it spells doom in large black letters.
If CC isn't profitable during the holiday season, I don't see many options remaining except liquidation.
And to BigM52,
The 'bailout' package is looking more and more like a feeding trough for any troubled business or industry--how did the auto industry get $25 billion to finance 'alternative energy development' when they're the ones who are supposed to be doing the engineering? What about the armies of designers, engineers, computer wizards and physicists who already work for the automakers? What have they been doing all this time--designing more comfortable seats?
If I were a taxpayer (I'm in a bracket that doesn't pay much), I'd be livid that companies who fail to fulfill their own self-stated goals get to belly up to a feeding trough that I'm filling with my tax dollars.
I'm just livid because of the hubris of CEOs that presume government subsidies are effective business strategies.
I'd rather see the CEOs roll up their $250 shirt sleeves and work on improving the way their companies run. Instead, it seems like all they have to do now is call their congressman, drop a check in the mail, and wait for the slop truck to deliver the dough.
But that's a tangent to your original question, and I apologize.
If the government is smart, it won't allow companies to partake of bailout dollars unless the company is vital to the economy. CC is not vital to the economy. It's a marginal retailer with a lot of poorly run stores.
The principal thing is that the credit facility is in place, and available as long as the company is in business. So it can use the money to cover its bills for as long as the facility stays available. But the banks have more invested than the stockholders do, so it's in their best interests to keep the business alive. In fact, you might be better off buying the debt, instead of the stock. At least you'd get some yield. But wait, the debt isn't for sale.
My bad.
James Lubary dont you see this??? Let's give this man a chance!!!!!
I wasn't aware of the details behind this loan program, thanks for enlightening us.
As far as the idea that the carmakers are GSEs, I'd call them MSE's--market sponsored enterprises. Their debt is trading at huge yields (20%+ is huge), they're still cranking out losses every day, but the market continues to buy it.
If the government offered to buy up all the debt and issue Treasuries instead, then I'd call them GSEs. But that's just me.
Surely no sane, rational person out there really believes that CC will have even an average holiday season this year ... they live in a world of 'make believe' where common sense business and the customer's perception of any shopping experience do not matter.
The Fat Lady is ready to sing at CC ... listen ... you can hear her warming up in the dressing room right now!
With CC trading at 0.66/share, it seems like the market has already got the fat lady on stage.
Competitors are worried that CC will do stupid stuff on Black Friday to gain traffic, like sell big screen TVs for $199.99.
That happened in 2005, I believe. The discounts were huge, nobody made a profit until deep into the season, and while sales held up, margins got crushed.
With a grim holiday season staring down on the retail landscape, it's not beyond the realm of possiblity to expect a wounded animal (CC) to lash out in a futile attempt to save itself.
I don't think it will work But the net result will be falling margins across every category the company competes in. Which isn't good for anyone in that business, large or small.
A correct perspective and historical reference! I do predict that traffic-drivers in the video realm will see a margin bloodbath ... in anticipation of the 2009 digital conversion retailers will be ready to draw their guns at the competition's first blink. Possible profit havens such as Blu-ray will be sacrificed to the marketing gods as well ... even the sacred accessory categories like connectivity and mounting hardware will be offered up.
After all, there's no 'second place' in a gunfight ...
Interesting to note that in the the recent financial statements that CC's audio category business is way down. Gee, I wonder why? Shop for a decent home audio receiver at most stores, and you'll find the displays are non-functional. They don't even try. Hmmm ... there must not be any money in home audio, according to the cubicle-sitters who steer the company ship.
I do not believe that Circuit City will be a major contributor to the intensity of the fray during holiday season 2008. They will react in desperation, as you suggest, but moreso within the context of the drowning victim who clutches desperately at anything that appears to be above water. I don't think CC's pockets are deep enough to survive even a few bubbles ... All eyes should be focused upon Wall Mart ... they are the marketplace Goliath this year.
Your experience seems unique. Although the company did sell $2.8 billion in goods and services during the quarter. So they haven't alienated everyone--if they did, the sales would fall to zero.
To Quickdraw,
Thanks. And as for your comment about audio, there are excellent margins in audio products. If they're sold properly. What you've identified is a clue to how the business is currently being run: If you have nonfunctional displays, you can't demo the products. And without demos, you can't sell audio.
The company seems to have forgotten the basic blocking and tackling skills that comprise 'effective retail selling strategies.'
We'll see how things play (pun intended) out.
Does a failure of the US Company automatically mean the Canadian subsiduary (InterTan) will fail too?
They've had many problems up here, and have been up for sale for over a year, although I'm not sure they've had any offers. They were profitable in this last quarter, but apparently it was the result of a $4M rebate from the government or something?
Any thoughts or ideas?
Thanks,
CanadaD
InterTAN is a wholly owned subsidiary and joint borrower on the credit facility. If CC were to file BK, the subsidiaries would be included.
The profit was attributable to a tax credit and favorable currency exchange transactions. That also helped out the sales comparisons, because comp sales were up 11% almost entirely because of a devalued dollar compared to a year ago.
The chain has been on the block since late 2006--its possible sale was mentioned in the 2006 annual report (FYE 2/2007). But I believe you're right in that nobody wants it.
I was wrong in my previous post. Apparently, local currency sales were up 11.2% after all, partly because of better sales, partly because of currency fluctuations. A goodwill credit of $4 million helped with the net profit--although the gross margin sank over 4 points.
Sorry. I'm so surprised by good news from this company that I miss it.
Thanks for the insight, the Canadian Press is asleep on the status of the operations up here. Because the stock is only traded down south, they're oblivious to what could amount to several thousand jobs...
You seem to have really done your homework on this one.
If you had to call it, on a scale of 1 to 10, what's the likelihood CC will be around come March?
Thank you for the kind words. I've been watching this slow motion train wreck for nearly two years.
And I'd give the company almost no chance (less than 20%) that it will be around as it looks today in March.
The Canadian chain seems to me to be a relatively viable business. The problem I see is twofold: True, sales were up, but margins got killed. You can sell yourself out of business if you don't watch it. The management team applauded the Canadian group for holding up the profit end despite falling gross margins. That's the first thing.
The second is this: If someone does purchase InterTAN, they won't have access to the buying power that CC does, unless it's a bigger company. (BBY wouldn't be a good fit--the stores are too small and generate too little revenue/location. I've never seen one, but to me it sounds like the units resemble RadioShack.) Limited buying power means higher costs for product, which means lower margins unless you raise your prices. In the current environment, raising prices is exactly the wrong thing to do if you want to maintain your market share. People are voting with their wallets, looking for the cheapest way to meet their needs. (At least here in the US.) If that's happening in Canada as well, an acquirer would need to strike purchasing arrangements with larger players to preserve margins without resorting to raising prices.
So it's an interesting problem to be sure. I look for a CC with markedly fewer stores and a regional, rather than national, footprint after the holidays.
One way this could work is if CC spins off the retail side (store network) as an operating entity but retains the distribution channel. Then, the Canadian operation could manage itself (apparently it did OK on its own) but continue to benefit from the financial backing of a CC-sponsored credit facility and purchasing power, among other things. That would also unlock the value of the land holdings in Ontario. There's a large distribution center that CC has owned for some time. Throw that in, and you've got some hard assets to play with.
Just a thought.
It's a good thought, but there's only so much margin to go around between the supplier and the end user of the product. Splitting the two branches increases creates much more admin expense.
Intertan's market niche is much different than CC's. Store size is more boutique, much smaller footprint than the big box CC profile. They have a network of dealer stores in smaller towns. Dealers are normally more diverse retailers that cherry pick their product and are not full line stores. Intertan's product mix is also much different. They're Radio Shack stores with a different sign above the door. Parts and accessories, gadgets and gizmos are what are giving them their margin, not big ticket items. Intertan was originally the international operations of RSH. They depended heavily on RSH's buying power. Today, they depend as heavily on CC's buying power. As a stand alone retailer, they'd have a tough time without the buying clout of the bigger players, as you've said.
Here's something to consider: Radio Shack experienced some severe internal problems a couple of years ago, but at some point, I'm sure that they'll get back into Canada with all of the leverage of their US operations behind them. They have a pretty good eye for a bargain too. It wouldnt surprise me to find out that they're waiting for the final death rattle at CC. At that point, they could basically pick up the whole retail operation for pocket change. It's a great fit too. After all, they designed and developed Intertan's infrastructure in their own image. The Canadian operations would do a lot better than they are presently in a structure that is much more similar to their own than CC's.
Unfortunately, this poses a huge strategic issue as a result of the "flip-flop" of the trade names...
We really question whether the Canadian buying public is ready for another name change...
The confusion that resulted when both CC and RS were here simultaneously, (albeit RS 's operations were miniscule by comparison - 30 stores or so) was disasterous for both brands.
With all of the competion in CE, it seems the only part of InterTan's operation that is successful is their small town dealer base. (Who I might add seem to be leaving like rats from a sinking ship...)
At this stage of the game are small store electronics retailers (other than perhaps high-end boutique and/or custom home operations - which InterTAN couldn't be further from) a thing of the past?
Thanks for the data on InterTAN. I think you're spot on with your view that when CC does go down (.60/share today) and the InterTAN piece is unwound, RSH would love to get it back. That would bode well for RSH, because they could immediately broaden their footprint in North America without having to go to great lengths acquiring sites, negotiating leases, etc.
That's similar to the deal that BBY did by buying up some CompUSA leases on closed stores that were close to locations already scoped out for new BBY stores. BBY bought 17 leases and will include those stores in the fiscal 2010 store opening strategic plan. Lots cheaper than starting from ground zero.
Depends. If there isn't much competition in the market segment, the RS idea could work.
What if CC sells the brand name too? That way store branding would remain in place and it wouldn't be as confusing.
I believe there is a place for small footprint accessory stores in good locations. The ultimate in 'grab and go'--cabling, parts, batteries--even though inventory management is a nightmare (try sorting 50 different kinds of batteries when your shipments arrive).
And from your comment, it doesn't seem likely that the existing network could be converted to boutique style stores without major capital infusions--and there's no guarantee it would pay off,
RSH has done reasonably well in the US, although they were starting from a big hole. If they stay focused on the accessory side, the company should be fine. But I've noticed a trend toward stocking more full-product items (TVs,GPS units) which erode margins 2 ways: They carry lower margins to start with, and higher average selling prices. And with products like those, it helps to have staff that knows something about them. I get the impression that RSH stores don't have staff that's knowledgeable about those items. Many of them are really good at parts and accessory recommendations, though.
Interesting to see what becomes of all of this.
The alternatives are straight forward in your scenario. Intertan is too small to carry on as an independent retail chain. The big kids would slaughter them. One of the problems Intertan had with rebranding is name recognition. ("WTF is 'The Source'?"). On the other hand, Radio Shack has huge brand name recognition. A flip-flop that cost them one way will benefit them the other way.
RSH failed in Canada after CC's Intertan takeover for a number of reasons. They were starting from scratch. They had no stores or warehouse facilities in Canada. They had no expertise and no presence outside of the US. They were locked out of the best retail spaces already occupied by The Source. The Source dealers were contractually committed to non-competition clauses so they couldn't jump the fence if they wanted to. Shortly after their foray into Canada, a senior management scandal rocked RSH's executive ranks which threw their whole management and administration off balance. They had to retrench, leaving Canada out in the cold. (Hey, Bill! I can do puns too!) The scenery has changed a lot since then.
The success of any Intertan evolution would depend on execution. RSH has already learned that trying to play 'BigBox' in a 1200 sq. ft. retail space does not work. How the target market is defined and courted makes all the difference. High end boutique excludes a vast portion of the public which would limit too many possibilities. Lots of snob appeal, but not enough snobs to support it is a recipe for disaster. Even in hard retail times, you can still make a buck selling a patch cord or a battery when your audiophile section is becoming a dust farm and you're selling HDTV at a loss to save a sale and to keep the inventory turning over. Intertan did well before CC. They'll do better again if RSH chooses to play that hand. Looks like the only Win-Win so far!
Good pun. And I agree with you that execution spells the difference between success and failure.
Look at WMT. Whatever you want to say about the company (exploitative, drives out local competition, inflexible, anti-community), it consistently produces above average returns to investors, which is all that counts in the final analysis.
And why is that? Because it consistently executes its strategic plan successfully.
You're right, as usual, about WMT. I love to hate that store, but if i had any sense at all, I'd buy their stock instead of some of the other stars in my portfolio. You might think that I'm quoting a hooker here, but "Ya dont have to like em to make money off em!"
Thanks again. I love to hate the store too, but when you want to buy something cheap, it's the place to go.
Example: I ran out of lighter fluid for my BBQ grill and went to the local Save-mart to find some. They wanted $3.59 for a 28 oz. bottle. The local WMT (less than a mile away) had quarts for $2.44. Guess where I bought it?
WMT has already thrown down the Christmas gauntlet. The company has cut prices on selected toys effective 10/1. They want to be known as the low-price leader this holiday season.
www.twice.com/blog/170...
Toys R Us, Kohls, Penneys and Sears should be quaking in their boots.
www.twice.com/blog/170...
This is the correct one.
The Divx mistake hurt them but was repairable. Disgruntle top sales assosiates was the biggining of their end. I still have friends that will not set a foot at cc. I think cc tried to change to quick and did not account for all the bad publicity created by this situation.
This was a good company and it just fell apart from within! I felt we were tring to clone bby in every aspect. In order to succed as a business you need to make youself different and not remind people of them.
I wish cc the best, but this Christmas looks terrible.
Like we figured, with WMT casting the first stone in order to be the "low price leader". Since electronics is such a huge part of the holiday shopping list, price cuts in consumer electronics cant be far behind. That is the start of a margin squeeze that wont help anybody in the CE biz. Great news for the consumer; more bad news for CC and the rest of the retail players. That's WMT's biggest strength. Their size and diversity of product lets them systematically steamroll a whole retail sector such as consumer electronics, crushing smaller specialty stores. Lost margin in that dept. is made up by other departments so their overall numbers still look phenomenal.
Good grief! I just realized... If you cashed in one share of CC,(57cents), you wouldnt even have enough to buy something at a dollar store (unless it was half-price)!
Well put. Noticing the relationship between stock prices and mundane stuff like dollar store prices is a great analogy.
Happened to get a look at a blank avialiblity schedule for CC. All employees are expected to be available for work all weekend. That's not unusual, but the schedule had the phrase "All hands on deck!" in the Black Friday-Sunday period.
All hands on deck. Spare me the references to ships. Just stay away from the rail because your bow is already flooded, and the engines and electricity just quit. Wait--is this the Titanic?
ahoy matey! keep your eyes peeled for fleeing rats! aharrrrrr!
Remember--women and children first to the rafts!!!
Maybe they're still only lying at this point. This morning I needed some good humor, so I re-read Bill Cimino's comment about how the board of directors are dedicated to preserving stockholder equity. Wow ...
After the gurgling stops, and the funeral for CC is held, perhaps he can go to work for one of the major political parties as a spokesperson. The magnitude of the spin he puts on concerning CC's current footing is second only to the degree exhibited by our politicians this season.
Truly outstanding stuff there, Bill! We suppose it's true that you can say just about anything, when it's your last week on the job.
You have to admit, as spin-doctor for the world's worst company, he has what is probably the world's worst job. Some may admire his pluck or gumption. I almost feel sorry for the guy....'til he comes out and says that CC: "has adequate liquidity to support its business through a multi-quarter turnaround, given the support of its vendors." (www.reuters.com/articl...) Well, there ya go! When they go down, it won't be CC's fault at all! It was those greedy, impatient damn suppliers! If vendors get burned because they couldn't or wouldn't recognize the credit risk involved with CC, I'll have a tough time feeling sorry for them too.
Forgive me if I dont get this paraphrase exactly right, but I've heard it said that any baseball team can beat any other baseball team if you give them enough innings. What CC is asking for more innings.... LOTS more innings! Cimino would have us believe that they can win the World Series of consumer electronics if they take 4 out of 7 and if they dont, then they'll make it 5 out of 9, or 6 out of 11 if that's what it takes, and so on. Would somebody please draw a line in the sand?!
CC Closed at $0.41 today...
Great baseball analogy, and with the
Last I checked, you were only able to go to extra innings if you tied up the game first...
It appears to me like there's two out in the bottom of the ninth, they're down seven runs, and facing Rodrigez with an empty bench...
Soon the suppliers will have to pull out the carpet... Won't they?
The three of us have been keeping this thread alive for two weeks now.
Should they call us the Three Stooges or the Three Musketeers?
But all kidding aside, the baseball analogies are spot on. I'm into football (US, not world) and to me it's similar to trailing 49-0 going into the fourth quarter with your starting quarterback hurt and his replacement a walk-on you signed the Tuesday before the game. He's got plays written on his wristband, and confuses the running back and tight end because they stand together in the huddle.
And it's 4th down and 35. You're on your own 6 yard line. So what do you call?
I say you call time-out, give the ball to the ref, and walk off the field.
As long as the bank group is shoveling dollars out to the suppliers, the vendors will stay happy. All they care about is getting paid for the orders.
Now if the banks alter the terms of the credit agreement, it's a whole new ball game. I remember a clothing retailer that was sold to Men's Wearhouse some years back after its bank changed the terms on its credit facility. At the end, bankers were in each store collecting cash receipts and applying them to the loan balance first. Men's Wearhouse paid almost nothing for the locations, assumed the leases, and paid off the bank from its own credit line.
Look for the same scenario to play out here. BofA is the lead bank, and ChaseJPMorgan is a primary agent. Money center banks are having trouble funding loans to each other, much less honoring commitments to struggling companies.
Stay tuned.
The analogies get better and better. How well they fit! We've become the 3 analogy guys now. We're the sports commentators covering the end of a really bad game. The fans that havent left are throwing garbage onto the field, all the cheerleaders except the ugly one have gone home and the grim reaper is the new team mascot.
re: credit situation
Credit reporting agency, "Bernard Sands has pulled its recommendation that manufacturers ship goods to the retailer"(Circuit City). (www.inrich.com/cva/ric...)
Thanks for the link. Here's another tidbit to chew on: CC is in danger of being delisted from the NYSE if its stock price stays below $1 for 30 days.
www.bloomberg.com/apps...
NASDAQ is seeking an accommodation to the rules governing that exchange, but the Big Board doesn't do that.
So the only way to buy stock after that happens is on the pink sheets.
If you recall, CC was removed from the S & P 500 in January.
True enough, but maybe more importantly, it's the only way one would be able to SELL them.
There's not much more to say, is there?
It's a lot harder to find BUYERS without the exposure to the NYSE.
CC would also violate the minimum market cap rule ($100 million, if I read it right).
They flunked the earnings and cash flow rules long ago.
It's harder to find buyers, therefore it's harder to sell. haha... we're on the same page, old buddy!
Interesting article about retail in general and CC's place from the Dow Jones Newswire: "Retailers traditionally close the most stores in January and February following the holiday season," the firm (Credit Suisse) said. "We expect many struggling retailers to try to make it through the holiday season and then declare bankruptcy and close stores early next year." The same article also noted: "restructuring for Circuit City Stores Inc. (CC) is "a very real possibility," McGranahan said. The retailer "has no realistic potential for asset sales, with a liquidity situation that now depends almost entirely on its vendors' willingness to maintain credit terms," "( www.djnewsplus.com/al?...) - a good read on the state of retail this year.
Good one, huh?
I couldn't access the link because I'm not a subscriber to the service, but your summary is just about what we've expected all along. Limp through the holidays, close nonperforming stores in January, and go away.
BBY reported a same store sales decrease of 2% in Sept., citing lighter traffic. I wonder what CC's same store sales did?
I work at BBY as a part time sales associate, and I've seen less buying traffic but more window shopping. The close rate for our store has dropped by double digits (proprietary data) since August, but traffic counts are up over last year. What that means to me is that people are price-conscious, and looking in person to get the best deals they can. We're still profitable (proprietary) but not blowing the doors off by any stretch.
And BBY is opening a new store in a brand new mall not 5 miles away. The new mall will feature an expanded Target, eventually a casino-hotel, and is anchored by Scheel's, a 240,000 s.f. sporting goods store.
I expect good traffic for Black Friday, but lower average revenue per transaction through the holiday season. Profits will get squeezed, but I believe BBY will be all right.
CC will have a stroke.
If you want to see it, drop your email off at blueser_07@YAH00.ca.
A 2% drop in this market aint bad. People are a lot more careful with a buck, so expect a lot more tire kicking before purchasing. You're getting the traffic, and that means interest and that means lots of em will be back with the cash. From all reports, CC isnt even getting the snoopers. That doesnt bode well for them. As long as BBY has the inventory, they have a huge leg up already. If they get aggressive with their seasonal promotion, they'll do fine. Good luck and good selling!
I like tire-kickers, because I get to practice my selling techniques with them, whether they buy or not.
Some of them actually come back, too. I had one couple who visited the store three separate times before purchasing a fridge. Now, the problem with that is they were counted as 6 people entering the store, but only one sales transaction resulted from it. That's a 16% close rate (bad), but I saw it as a 100% close rate (good).
Some of the managers aren't as clued into the fact that people are coming in to shop, rather than to buy. I think even senior management is guilty of expecting a higher close rate than would be reasonable in the current environment. But that's just me.
I tell the folks I work with that if you can establish a relationship with a customer, the likelihood that they will come back to you when they are ready to purchase is far greater than if you treat them like everyone else.
Some listen, some don't. Age makes a difference. The younger the salesperson, the less likely they'll listen. And as you know, BBY definitely has a young tilt to its sales and management staff.
In the 2nd quarter earnings report, BBY said they would be beefing up inventory for the holidays. We've already begun receiving holiday-specific SKUs, but haven't got new planograms yet. So all the stuff is piling up in the warehouse. We have the buying power, the good relations with vendors, the space, the staff, and the financing (HSBC handles the proprietary cards). And there will be great promotions over the holidays.
I'm cautiously optimistic.
On an unrelated note, I recently was "let go" from CC for discussing their current financial state with a fellow employee; not necessarily my best move, but ultimately satisfying in that I do not have to stress about job security now. Besides, as a student, my focus is school, not dealing with haphazard management in a busting company.
I believe that most of your questions are dealt with in the comments above. It's a lot of speculation, but none of us have perfect knowlege. If I could predict stuff like that for certain, I'd be hanging with Buffett (Warren or Jimmy). We're all waiting for the next shoe to drop so like it says earlier on.... stay tuned.
I'm sorry to hear that you were 'let go', especially for that reason, but in the long haul, you're probably better off. The grounds for dismissal speak to the insecurity and fear in their ranks. The heavy handed way that it's dealt with makes it sound like a russian gulag. Now that you're out of the line of fire, I'd be curious to get your spin on what the general feeling is among the staff there. The folks that are still there are all scared of repercussions like you went through and they have their best game face on anyway, so that source of info is suspect at best.
I too am sorry to hear that you were let go for discussing financial matters. And as far as the discussion itself, I'm curious--why would management care? Information we discuss here is based on review of public data that's readily available--SEC reports, stock market analysis, company communications and the like--so it puzzles me about why an employee would be let go for talking to another employee. (I'd understand if you were telling a customer proprietary information.) As phil said, it's the loss of freedom of expression that is disturbing. And if line management is that defensive with employees, how will customers be treated?
I believe the company will be split up after the holidays, and the Canadian division sold to raise cash. It won't bring as much value as management was looking for, but it will be better than nothing.
I read today that the letter of credit market was showing signs of stress. LOCs are how most companies finance imports. But the stress was on the banking side, not the customer side. The loan commitment includes a subline for letter of credit issuance (principally to guarantee payment for inventory shipped from overseas). If the LOC line is restricted, then CC will have real trouble fulfilling its vendor agreements.
But please understand, this is all speculation, based on a review of current market conditions.
Meanwhile, the fat lady is halfway through the first stanza.
That is when I realized CC was in trouble. From that day forth I have seen the stock tumble. 'Removal' of then CEO R S for reasons unknown to the installment of A M. Who then though that removing White Goods from the store was a good Idea, total revenues from those sales were only 10% of the companies income and it occupied 20-25% of the floor. To be replaced with CD's and other small electronics. Napster took the CD market out (guess nobody saw that coming) leaving CC struggling again. Then the disappointing DIVX fiasco (a good product that should have been shared with Block Buster). And then of course the replacement of experienced sales force with min. wage earning associates that have no clue on everything from how to sell to customer service.
Unfortunately too many mistakes and no one to fix them.
I due believe this stock can be played, on the down buy a couple of grand and on the high sell again. A wise trader can make a few $$.
you have more guts than i do.CC had 14 down days and only 6 up days in the last month. at $0.42, CC is trading awfully close to zero. The VIX was still above .6 the last time i looked. there are lots of other stocks out there to play that way without the risk of a terminal crash and burn.
That response is similar to how the CEO of GM, Mr. Wagoner, responded when a reporter asked him about the impact of Toyota on GM's domestic sales. He replied (paraphrase) that he wasn't focusing on what the competition was doing, but rather the progress of the cost-savings plans for GM.
Shortly after that, Toyota surpassed GM in market share.
It's funny how management in different industries makes similar mistakes. If GM could figure out how to speed up its new product cycle (and didn't leave obsolete brands on sale [Oldsmobile ceased being relevant fully 7 years before GM pulled the plug]), it would represent formidable competition to Honda, Toyota, et al. Instead, its debt trades at a 34% yield, and the stock is within a hair of its all-time low, notwithstanding the surge today.
CC said its target customer wasn't Wal-mart's. They've discovered that their target customer isn't anybody. WMT takes the bargain shoppers, and BBY takes the rest.
Like the old saying "Stay at our hotel for a change and a rest. The bellboy takes the change, and the hotel takes the rest."
I've been in retail since the 80s, and have been in college stores for 11 years (don't get me started on the politics and upcoming changes around textbooks)- so it was interesting to see viewpoints from the "outside" investor and a few snippets from the pt worker.
you nailed it with your answer about CC's target market. a little while ago, i watched an interview with a consumer electronics 'somebody' who was asked about how much market share CC was taking from BBY. The guest interrupted and hastened to contradict, saying that CC should be considered one of BBY's best market share contributors. *ouch*! talk about playing for the other team, whether you know it or not!
thanks for your input! it's flattering that we have a fan club! but... then again, the bar is pretty low if you're used to reading textbooks. (sorry, couldnt resist an easy cheap shot like that!) glad to hear that you're getting something from all of this. best!
I trust you watch for entertainment, not investment advice.
But aside from that, why does CC need 3,500 people at HQ in the first place?
And what do they do?
With the bar so low, do you think giggler's reading legal textbooks?
A research analyst in Cleveland said a Chapter 11 filing was 'likely':
www.twice.com/article/...
He also mentioned that the company needed to secure vendor support, and if one pulled out, the others would swiftly follow.
CC already put 3400 of their most capable staff out on the street. that was sad. CEO was put out on the street. the sad part about that was his entirely undeserved $1.8 million parting gift. although i'm just speculating, the 3400 that he purged were probably offered somewhat less. at the very least, he owes each and every shareholder a personal thank you card and an abject apology. Unlike the 3400 who were completely blindsided by their dismissal, the folks still employed there have to see the writing on the wall. If they choose to not to have a "Plan B" in place, they are puposely flirting with disaster.
Booyah!
yes, legal textbooks are a possibility, but accounting and actuarial texts could give them a run for the money too. if giggler worked at a clown college, do you think the textbooks would be more entertaining?
re: analyst report
his opinion had some conviction behind it too..... more a matter of 'when' rather than 'if'. i agree. suppliers will want to get what they can from the holiday shopping, regardless of how bad the year-over-year numbers are from CC, but once into the new year, the 'nice guys' will disappear and the 'muscle' will be making the calls to CC.
The tale to be told will be what orders will look like for CC after the holidays. I submit that if there's a glut of inventory left over, orders will be much lighter. That's when, in my opinion, you'll see pushback from the vendors. I don't believe they'll be willing to take back what's already been shipped, and if the orders come in light, vendor support may vanish into the haze.
And if a clown college is where giggler spent time (makes sense), perhaps the makeup and wardrobe books would be the driest. All that powder, don't you know.
I did more research on the NYSE angle, and the delisting process takes awhile--90-120 days.
The question is this: Which will happen first--delisting because of violating the rules, or delisting because of bankruptcy?
vendors, like the rest of us, look after themselves first. at that level, consignment selling of any serious scale just doesnt happen. merchandise return policy varies widely depending on a number of circumstances. first and foremost, the customer's ability and willingness to repay existing obligations is analyzed. if that's the only way they'll get back what is owed to them, then be assured that they'll take what they can get, but that's the end of the 'kum bayah'(sp?) relationship between the 2 parties. i cant see a vendor allowing a return of merchandise for cash at all. they'd likely allow a percentage of overall purchases to be returned for credit toward future purchases, assuming that CC is current with their payables to that vendor. that percentage may also be affected by the resalability of the goods to be returned. ie: if CC really loaded up on and stuck themselves with a turkey, vendor may not be anxious to take it back at all. with product life cycles being as short as they are with some lines, the stuff may be at or near obsolete or discontinued status by the time CC needs to dump it. the vendors already know that this holiday season is a 'hail mary' play for CC. barring a miracle of unprecedented magnitude, even if CC survives to the end of the year, they all know about the post holiday slump. vendor confidence, as tenuous as it may already be, will drop precipitously. of course, at the first sign of mortal weakness, the first vulture in gets the best part of the corpse but the others will be crowding in for the smorgasbord very shortly thereafter.
my reading has told me that delisting is a complex and tedious process that could take up to 6 months from the first step. if the catalyst for a delisting is bankruptcy, it would be a relatively simple matter. if it's for rule violation, like poor performance or below allowable share price etc, the extra time is granted to give them a chance to turn it around. the question then seems to be which grounds will be cited as reason to delist. i offer back to you your previous advice: stay tuned.
Next: vendors, returns, and customer relationships. I agree with the last posting completely. One would hope that the big-wigs (its that clown college thing) at CC's vendors have already looked at where CC is with them. If CC is delinquent at all, CC may have an extremely tough time getting anything to try and sell during their last season. CC looking for "vendor cooperation" is optomistic at best.
As for returns, again you are correct: returns to vendors are issued credit...often with a fee for restocking. If you choose never to use that vendor again, you can apply for reimbursement, but different vendors have different rules. We've had to take full write-offs on credits from companies who would not issue a check.
Vendors in many fields (not just electronics) are tightening their belts and being concerned with all companies...not just those on the edge of failure. Those on that edge contribute to the general unease....if the vendor has to take the loss of merchandise not paid for, it spills out all over. In my industry, we've noticed vendors checking in; eg. if I'm on "net 30" with a publisher, I've been getting calls at day 25 asking if the check is in the mail. Credit limits have appeared where there weren't any, and returns are being limited by dollar amount, % of sales in a more rigorous fashion than before.
I'm not sure vendors would be willing to even try to get CC thru the holiday season. The only reason I can see vendors willing to sell to CC at this point is that if they had manufactured too many to spread among their other distribution channels and hope to sell some thru CC rather than not at all. However, with the ability of manufacturers and vendors to sell directly to public and possibility of cutting deals with other distribution units, I would call even that reason "unreasonable."
Ah yes, I will hie myself hither.
And I appreciate your commentary about the nuts and bolts of retail merchandising.
I'm tempted to think, though, that the vendors will remain satisfied if only because of the credit line CC got from its bankers (see the link farther up this thread). That credit line (which includes a sublimit for letters of credit) will allow the company to pay all of its vendors according to terms.
Unless, of course, the bankers change the terms of the credit agreement.
If BofA, JPMorganChase, or any of the subparticipant banks get nervous, you can bet the due diligence people will be in Richmond poring over the books.
If I were part of the crew, I'd be particularly interested in the impairment charge that CC took in the second quarter. Which assets were deemed impaired? What's the remaining value according to the company? Are there other assets that need to be written down? Is the company carrying store fixtures at cost, when liquidation value is 10% of that? Are stores bulging with stale inventory? Are there off-balance sheet liabilities that need to be recognized?
The only financial restriction I can recall is that the company's assets have to exceed its liabilities. With asset values going down, losses eroding capital, and debt rising, it's plausible to think that CC may become technically insolvent shortly. (They've got company--GM and Ford are too.)
That would qualify as a Material Adverse Event, according to my reading of the loan documents. At that point, the banks could change the terms of the agreement, restrict advances, or even call the outstanding balance due and payable.
If CC can't draw on the credit line, it can't pay its suppliers. If it can't pay its suppliers, vendor support disappears.
And if vendor support disappears, so does the company,
I started a thread on fool.com entitled "Circuit City Shorts Out." That was nearly a year and a half ago.
And Here. We. Are.
re fixtures and other store assets they shouldn't be carrying store fixtures at liquidation in financials...they should have put them in at true cost at time of purchase, then depreciated them over set time frame. If you're right and they still have 10-20 year fixures in book at full cost..then yup, someone in big trouble.......As far as real estate assets plumeting, I wonder how many CFOs are gonna think "gee, I think I'll run right over and adjust our balance sheets to reflect that." what figures would they choose? National, regional, local and based on what?
re the "stale" merchandise...diff retailers have different time-lines. Electronics notoriously short shelf-life. But that not true for all items. That YMCA CD you're playing in the background can move from Hot Stuff to Novelty but still keep selling (albeit in differing quantities and prices) for years.
You're right about the YMCA CD. If you can find it.
As far as the fixtures, etc., if you're looking at a scenario where you're trying to get the worst case value, depreciated value for a bunch of shelves may be less than liquidation value. Just depends on how old the shelves are.
I tend to think that about 40% of the domestic stores are unprofitable and should be closed. And all but 5 stores are leased, so there will be lease termination costs associated with the stores that shut down. Most of the leases extend for 5-20 years into the future, so you're talking a lot of money to close them. (On the 10-K the company is still paying for leases on stores that closed 5 years ago. The present value of the terminated leases is $340 million, I think.) Add severance packages for employees and that's even more.
As you know from your MBA studies, there's more to a restructure than just handing the keys to the landlord. You did a great job detailing how vendor credits would work, if they would exist at all, and how short the product cycle is for CC's principal merchandise mix.
This isn't going to be easy or painless.
On a unrelated note (feel free to delete), ever think about blogging about the l-t implications of why not a whole lot of you financial wizards have ever put together some of the impact the current population (US) would have on market outside of the current crises...or even impact on them?
To whit: for the first time in the nation's history, population as of 2009 is a reverse bell curve....we will have more people 60+ and <18 than we do in the middle. Who drives the stock market? Traditionally that middle group. Who buys real estate? ditto. Who drives the contribution to taxes etc...well, the list is endless.
I started asking portfolio managers, bank execs, etc when I first heard about the trend about 8 years ago. If I didn't get a blank look, I got "well, its a global market so that's safe and immigration should take care of the housing thing"
Hmmm...how's that working as a theory today? Worth thinking, blogging about? Creating investment strategies around? Naw, it's a global market and immagration should take care of that housing thing.....
That's brilliant! You just gave the guys in the big chairs the best excuse yet in the last paragraph! The housing situation is because of...... the immigrants! They're the ones that are letting us down! HAHAHA
That's frightening. I suppose demographers would say that it's the result of 1)the baby boomer generation aging; 2)their children drastically scaling back family size; and 3)young immigrant families moving to the US with higher than median birth rates.
If the baby boom generation is the 'basketball in the python,' the population <18 is the volleyball at the neck.
Now this presents an interesting investment problem. What do the young people of America want in products and services?
I have two teenage daughters. They're tech-savvy, need cellphones with video sharing, spend more time online on their phones than on standalone computers, and scoff at reading books in the traditional sense.
And since I'm a parent, they don't talk to me. Which is OK, because I didn't speak to my parents for about 5 years when I was a teenager. Useless.
But anyway, if someone figures out what this group wants, both now and in the future, they'll get rich. er. (AAPL looks good from here.)
I review the foreclosure rolls from my area each week. About one-third of the foreclosures show ethnic (primarily Hispanic and Asian) names.
If that's a trend affecting the country, then it's simple to fix--just prevent home sales to ethnics....oh wait, then the CRA promoters would have apoplexy and we wouldn't be providing 'affordable housing for minorities.'
I don't think there's any solution. But I refuse to use the 'C' word (starts with c, ends with s, two syllables), because it's possibly the most overused word of the year.
regarding a play on age demographics, you're right in saying that the list of factors is endless. complex volumes could be and will be written about them... and some of them might even be right. not including myself in the wizard camp, i'd prefer to confine my focus to a narrower field. it's a tough enough job to predict what's going to do ok for the next while and to avoid being creamed in the chaos that is today's market. looking at my sickly portfolio, i hasten to add that i pretty much suck at those skills too.
about defaults and the housing crisis, i remember one saying. (i forget who said it, so ben franklin or mark twain will eventually get credit for it)
"There are 2 kinds of fools. Them that offer and them that refuse."
After today, everybody sucks at stock picking.
And you thought the bottom formed last week!
Stocks have farther to fall. CC closed at 0.37 today.
But an analyst at KeyBank upgraded BBY to a buy, with a $32 12-month price target.
BBY is trading at close to its intrinsic value. When you see that same phenomenon begin to spread throughout the stock market, then the bottom will be reached, and advances can commence.
I don't follow very many issues. I have no investment dollars, and just look at sectors I'm personally familiar with--right now that's commercial banks, specialty retail, automotive and real estate.
None of those sectors have fallen enough to warrant investing in (my opinion), because they're still trading higher than their intrinsic values, and P/E ratios are still too high.
If I gave advice (which I rarely do), I'd hold any cash to the sidelines for another week or so, and then buy selectively based on company fundamentals.
But that's just me.
re: analyst upgrade of BBY
it would be interesting to find out how much of a bump his target price got from CC's declining ability to compete in the market. if he upgraded BBY, he obviously wasnt penalizing BBY for being in the same sector as CC or citing CC's non performance as a sign of overall sector weakness.
The analyst said that if CC closes stores or files bk, it will add to BBY's earnings.
Here's a link:
www.fool.com/news/asso...
I tend to believe him. BBY is run by some really smart people. Example: I'm one of the highest paid people in my department, and I get the fewest hours. The reason? When labor is allocated, it cascades from the lowest paid to the highest. So people who share my availability get more hours than I do, because they make less.
Just one example of how the company runs. The future looks bright, and BBY may find itself the last man standing as far as national CE chains.
Everyone else is gone.
Another thing. If you recall, BBY closed its Beijing office in January of this year, and during the summer reorganized the international division. I think the company is looking at opening additional stores in China but with smaller footprints. The Shanghai store is massive, and it probably has higher fixed costs than can be recovered in a reasonable amount of time.
When the next stores are opened, I'd expect them to be around 45,000 s.f.--the size of the largest stores in the US.
BBY is also opening 'mobile life' stores, to leverage off of its Best Buy Mobile store-within-a-store. These will be standalone units that don't sell TVs or appliances--just phones, laptops and associated accessories.
Here's a link:
www.bizjournals.com/tw...
So, the company continues to change its business model in response to changing consumer tastes and market conditions. All 'very good things,' as Martha Stewart would say.
thanks for the links! i got the answer to my question when he estimated CC's closing would add 37 cents/share to earnings. that's 10%+ of his 12 mo. target. that's huge, man!
We're over 100 comments on this thread!!
Yesterday CC announced One Price Pricing. The company will now offer the lowest price available through its various channels, whether in-store or online.
That's the first sign of the ship breaking up. Other retailers have been price-matching their own websites for years. To promote this policy like it's just been discovered is like having someone ask 'what is an iPod, anyway?' after 160 million of them have been sold.
Useless hype.
on 100 posts:
CC must be giddy with excitement at getting this much attention.
on one price pricing:
i saw the press release yesterday. i thought it was kinda like the elephant man putting on a brightly colored bowtie so you wouldnt notice the rest of him.
Another good visual. I wonder what their credit line balance is now? As you pointed out, they'd borrowed $215 million at the end of the second quarter.
The other thing that will hurt their earnings is the interest rate. Now, the banks gave them options on which rates to apply to outstanding balances, but from my reading, they could choose from either a prime rate base or a Libor rate base. Recently, there's been almost no difference in them because of the freezeup in credit markets. I don't think anyone expected the 3 month Libor to be higher than the US prime rate. But the increase in interest expense will be another hit to the bottom line.
Think of AIG. They're paying 3 month Libor + 8.5% on draws, and Libor on the unused portion of the line. When the deal was first negotiated, Libor was 2.9%, roughly. Now it's 4.5%. So on the $85 billion, they're paying 13% interest, when just 2 months ago, they were a AAA rated credit risk.
I can only wonder what the rate is on CC's credit line. But it's probably higher than the rate AIG is paying.
i wish i had your nose for details. the deal is almost surely much worse than AIG's simply because they really had nothing in the way of a bargaining position. (unless that position was on their knees with palms outstretched). matter of fact, i'd be regarding it as charity at this point rather than as a loan. with the drop in the share price since the loan was made, their market cap tanked accordingly ($62MM +/- today). their balance sheet and other vitals like debt/equity ratio are gonna look downright scary. i suspect that the precise rate they're paying is the least of their worries. toss in the anticipated YOY drop in sales and their financials will be completely pillaged.
It's the way I think. I've been a financial analyst in commercial banking for 20+ years.
The rate options were marked 'confidential' in the SEC filing, so you can't tell what the rate really is. Most of the deals like that have rate escalators based on operating performance, so it would be logical to assume that as the operating results get weaker, the rate rises.
It'll be interesting to see what shakes out.
now that i see where you come from, it makes sense. your explanation reinforces the 'house of cards' analogy... and the leaky boat analogy. but don't miss the canasta tournament on the lido deck!
I'd forgotten about the canasta tourney. But remember, it's hard to play bocce ball on a tilting deck.
What do you suppose the default interest rate is? Normally, the default rate is a lot higher than the regular interest rate, 3-5 points, maybe more. So for example, let's assume that CC pays Libor + 4.50 basis points on its regular loan. (The AIG deal was made this year, not last, so rates aren't totally comparable.)
These deals are typically floating, so if the rate is 4.5 over the 3-month Libor (normal terms for a syndicated deal), then CC pays 9%. That translates to $1.5 million a month on the balance outstanding at the end of the second quarter.
Figure the burn rate at $200 million a month. That's another $1.5 million a month in interest expense on top of the existing balance. And by the end of October, the balance is up to $600 million.
November is when the big shipments for the holidays start. Figure an additional $100 million in draws for November-January to pay for additional inventory, staffing, extended hours, etc. Let's assume that the burn rate falls during the holidays, and they only spend $100 million a month on the line for supporting operations (after all, there are sales going on now). Now, at the end of January, your line balance is $1.1 billion. That's the credit limit.
If CC can't get additional financing after January, they won't have any credit available to keep the operation running. That's wnen you'll see the stores start to close.
They're right: They have sufficient liquidity to last through the holidays. But not past that.
And when the line is tapped out, the company's debt will exceed its asset values. Triggering the default interest rate if the banks want to play hardball.
Now it may be that Libor may fall to a more reasonable level by January. If that happens, their interest costs will drop sharply. But just one month of a fully drawn credit line generates $7,500,000 in interest expense. And if Libor drops but the default rate kicks in, the interest cost will be about the same.
The new finance guy is already earning his keep. I just hope he has a large bottle of Maalox in his office. But I suppose Scotch works just as well..
you're probably right in the park with those rates that you worked up. your projections are back-up for what i've been figuring all along... that the great unwind would likely happen sometime early in the new year. The finance guy should consider a trip to Office Depot to exchange all of the black pencils for red ones.
Been a busy few days up here - Canadian Thankgiving last weekend - a federal election earlier in the week...
Haven't had the opportunity to check in until today. Lots of interesting new comments and posts to feed my morbid curiosity into CC's demise. The escalating interest charges on the LOC are an angle I hadn't yet considered, and obviously something that could max the credit line much faster. (Especially given the purchasing cycle at this time of year.)
Anyway, just thought I'd fill you in on what appears to be happening at the store level up here.
"The Source by CC" stores are certainly looking more fresh, (a few new fixtures, better signage, etc.) and the website looks better than it has in months. - The guys working behind the counter are still only about 15, and still clueless, however.
Also of interest, "The Source by CC" appears to be opening, (or have recently just opened) at least three new stores in the past month. It would seem that according to their "career" section (as if one could call $9/hr. a career...) of the website, they've also got several more openings scheduled in towns and cities they've not had presence in before...
Please note, that I DO NOT have confirmation that these stores are actually open, just that they are listed as new locations on the website. (thesourcecc.ca) However, I do know for certain that one of the stores posted on the site is NOT at the location the site claims it is, nor does it appear that any renovation is imminent, although the space is open for lease.
Given the state of the parent company, and that of the economy, I am amazed by these apparent upwardly optomistic moves.
Obviously, compared to a CC superstore down south, the scale of these locations and their relative expense to open would be puny by comparison. But, so are the relative returns. Right now, in Canada, we too are feeling the effects of lower consumer confidence and purchasing by customers. (Depending on the part of the country, electronics manufacturer's sales reps are claiming 5-25 percent sales decreases as compared to last year.)
It is as if the executives running this company think they are bulletproof and can make it a success if they simply steer the company by the sheer will of their respective egos.
Remember that this company is already nearly two hundred stores smaller than it was when they sold it to CC... (They had approximately 950 stores at that time, it is now around 775.)
They've been written down almost $120M in the past two-three years.
They've had no profitable years since their sale to CC.
(One or two quarters were all they could manage, it appears... Although I may be incorrect on my interpretation of the "international segment" of the CC reports.)
These are troubles that require more than a few new pieces of furniture and some new price tags...
Or, have they perhaps found a buyer... (or courting one) for this company? (InterTan)
Is that the reason for the recent jump on "The-Happy-Bus" to expansion and their ultimate salvation?
Who knows?
One would think that any potential buyer would wait to get it for a song off the scrap heap in a couple of months, if they thought it a good idea at all...
Any thoughts?
Thanks for the update on thesource. Amazing what a little borrowed money can do for your stores, isn't it?
But aside from that, the company announced about a week ago that they were halting all new domestic store openings for the balance of the 2009 fiscal year. I find it amusing that they're still opening stores in Canada, when the returns are as puny as they seem (let's face it, you're not going to get a lot of upward sales momentum from a 1200 sf box).
Remember this: Any draws directed to the Canadian operation must be repaid first, if I read the loan docs correctly. And that applies to both direct draws, and advances against letters of credit. So the draws creating 'fresher' inventory in Canada will have to be repaid before draws for the US operation. I think the bankers did it that way to limit their currency translation risk--although they probably hedged the advances with a counterbalancing currency.
There's an indication that the rate on Canadian advances is different, as well. In the interest rate section of the docs, there are separate disclosures for Canadian and US advances. Again, the rates themselves are confidential, but why separate them if they are the same index? Canadian draws may very well carry a higher rate--again, because of currency translation effects.
I see your point about consumer confidence taking a hit, but I don't think it will affect thesource stores as much as full-line electronics outlets. As we've said, the accessory business should remain stable--in fact, it may strengthen, as consumers fix, rather than replace, what they have.
And to phil,
Thanks. This is what i'm good at. And while I don't have the benefit of a college education (more on that later), I have learned how to read a set of financial statements.
I'm waiting for CC execs to announce a junket to Costa Rica to celebrate the whopping success of the holiday season. Financed with the last draw on the credit line.
Are they actually new stores, or are they corporate replacement stores in locations that were vacated (for one reason or another) by a dealer? are they new locations or are they new postings for established stores? i couldnt tell from the website.
new openings can take a fair bit of time from start to finish. they may have been past the point of no return by the time their crisis was recognized and acknowleged so they had to follow those through to completion. same story with fixtures. there's a lead time from order to installation, and furniture and fixtures are usually planned for and built for several stores at a time to keep the costs down through the purchasing of larger lots. also, because intertan is doing relatively better than the parent company, they may be held to more generous budgetary rules than the rest of CC. as a bit of an aside, i THINK i recall in their loan repayment documents, a clause stipulating that canadian debts be satisfied before those in the US were paid.
as you rightly point out, freshening the look of a store can be done for minimal cost. they need signage anyway. new theme or format is an easy adjustment. poo filters down, so if the district managers got yelled at, they turned around and yelled at the store managers. presto! tidy stores!
they made no bones about it. they've been looking to sell intertan off for over a year now. it's really the only salable asset of any value that they can sell without a complete corporate restructure. if they have a buyer, they want it to look shiny and sparkly i dont think they do, but if one does exist (Radio Shack would be my odds-on favorite), any prospective buyer would know that they'll be able to cop a much better deal after CC's funeral. i believe that intertan has a fair bit of autonomy over their overall store cosmetics. cleaning up the stores' appearance is just basic responsible management and part of the usual pre-christmas pep-talk rally. after all, if CC has to tell intertan to clean up their stores, wouldnt that be like a toad calling a frog ugly?
Costa Rica? yeah, they're taking a page out of AIG's playbook! it's working out real well for them too! i think that with all the brainstorming we've been doing here, it would be a nice gesture on their part to invite us along on the trip!
last time i looked, CC is at 40 cents. that's up 3 cents! if that price holds to the end of the day, i'll be looking for the press release from CC pointing out that the 'turnaround' is already a resounding success! that way they can call it an incentive trip or a performance bonus.
Remember when I posted that CC had hired the same company that was advising Mervyns?
Well, today, Mervyns decided to close its remaining stores and liquidate:
www.bizjournals.com/tw...
So much for advising. Now they'll pick up a good sized check for their 'services,' and the landlords of the vacated stores will be in bankruptcy court....Oh wait, Mervyns Real Estate LLC is the landlord!
Guess the company will be suing itself. Like a Siamese twin taking its brother to court for forgery.
This is the company that spun off the retail stores but kept the real estate assets. The retail stores go bust, they kick out the old tenant, and try to get new ones.
Hey, I've got it!! Let's relocate all the bad CC stores to the empty Mervyns spaces! That way, the malls will stay filled, and the landlords won't need to look for new tenants.
Of course if low-line soft goods couldn't make it in those locations, what would make you think that consumer electronics could?
Shoot the wounded and get on with life.
yes, i remember that. i had a look at the article. history tends to repeat itself, and with the same consultants on the case here, i was struck by how ominously parallel mervyn's and CC's stories are unfolding. does this quote have any resonance here?... "(the company) proved unable to gain any traction on its turnaround efforts.The company had struggled in recent years, squeezed at the bottom by retailers like Wal-Mart (NYSE: WMT)..." if that one isnt prescient and foreboding enough for you, try this one on!... “We are disappointed with this outcome, but the company’s declining liquidity position and the extremely challenging retail environment, together with the fact that we’ve exhausted all other possibilities, requires that we take this action,”
in the interest of making CC's job a little easier in the new year, i offer them one suggestion ..... "copy and paste".
Well put, and spot on!
Declining liquidity position--maxed out line of credit
Challenging retail environment--DUH!!
Exhausted all other possibilities--Eddie, why didn't you call us back?
BBY hired fewer seasonal staff than projected, and let store managers decide how much seasonal help to put on. With bonuses on the line, look for thinly staffed BBY stores this holiday season. But the other thing that's at work is that turnover fell again (from 60% to 47%), making the seasonal hiring push less important.
Bargain shopping will rule the day this holiday. And margins will suffer as a result. But it helps when you're already making money. If you're losing money, shrinking margins is the last thing you want.
Mervyn's shared some of the same traits as CC--older stores in declining malls, with stale product and clueless salespeople. Kohl's freshened up its stores, stocked them like Macy's and countered with lower prices. As a result, Kohl's stores are inviting, bright and cheery. Mervyn's stores look like thrift shops, only bigger.
BBY has something they call 'customer-centricity.' It's a way to connect with customers and satisfy their needs based on where the customer is coming from, not the other way around. Customer centricity is what's driving the traffic, but good prices will keep them coming in and spending what little money they have this holiday season.
Like I said before, I'm cautiously optimistic. Profitability will be off, margins will get pressured, but at the end of the season, BBY will be left standing, and CC will (finally) expire.
(seekingalpha.com/artic...)
the reason given? alternative to filing for bankruptcy protection before the holiday season. "it might cause customers to doubt its ability to provide warranties. " oh, please. is there a customer out there that's stupid enough to think that if they make it to the new year that everything will be just fine? closer to the truth, it's what they have to do to remain liquid enough to operate and sell down for another 60-70 days. warranties and customer perception are the least of their concerns.back to the boat analogy: "all hands on deck!" now followed by "firing squad at the ready!"
Here's a more detailed account of the goings on at HQ:
www.twice.com/article/...
As we've speculated, it looks like the 'strategic review' has turned up some turkeys in the store count. But now it looks like the current credit line isn't sufficient to carry them through the holidays.
I guess the higher interest cost pushed the burn rate past $200 million a month. Or the overhang in inventory brought about with lower-than-forecast same-store sales. Or the inventory slated for new stores that are now on hold indefinitely.
Any number of reasons, but the bottom line is clear: CC is done.
Bill
that article explains in a bit better detail. so, let me get this straight. they're trying to raise $350MM. their LOC is either used up or collapsed. they're looking for DIP financing.... so chapter 11 looks like a foregone conclusion. that brings us back to our earlier conversations about the 'when'. i'm wondering if they can liquidate that much inventory that quickly. if they cant, they wont even make it to the end of the year and they'd be facing a total closure while in chapter 11. perhaps even sooner than we'd expected. after CC closes 150 stores, how willing are landlords going to be to renegotiate remaining leases with a company that's as shaky as CC? what is this going to do for the staff (what's left of them) morale and level of customer service offered from here on? what is their inventory fill/mix going to look like for the rest of the year? and possibly last but certainly not least.... how is the board going to wangle their severance packages out of the wreckage?