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billddrummer
478 Comments
Circuit City Falls Further: 'Bring Out Your Dead'
The game is afoot, as you most aptly put it!
Or how about this one?
InterTAN is one of the creditors in the filing (there's an imbedded link in the CC press release that leads you to all the documents filed). Suppose either (or both) BBI and RSH tender an all-cash offer to the BK judge during the stay period.
That would maximize the proceeds of the chain, and the bidding war would commence before site liquidation, thereby preserving the most value.
The BK judge just wants to get as much cash for the assets as possible. So if the deal is proposed there, instead of after store closings, liquidation sales, etc., there's a better chance of getting that piece of the filing handled first.
There's a chance that there would be some overpaying, but with the idea that whoever buys the Canadian piece would close the stores that don't perform and terminate unprofitable dealers, you could make up for any 'premium' relatively quickly, I believe.
And remember--these aren't 44,000 sf superstores we're talking about. 1200 sf boxes that can be closed or rebranded easily.
Something to consider, eh?
Circuit City Falls Further: 'Bring Out Your Dead'
Ah, the BBI connection!!!
Look at this for a scenario:
Holidays are terrible. Margins get trashed, employees flee like rats, and store stock is decimated with discounts.
BBI offers 10 cents on the dollar to pick up the good locations in Canada, puts up blue signs and becomes the largest video chain in Canada without breaking a sweat, or putting out a lot of dough.
Meanwhile, RS looks at the remaining Canadian stores, decides they're not worth pursuing, and walks away. The CC successor closes them, sells the inventory to BBI for 5 cents/dollar, and moves it to the open stores.
Now, Thesource is gone. RS missed out, and BBI has a nationwide network for distributing videos, games and CE product.
Less competition than in the US, and easier to make money with smaller footprint stores.
Almost like 'thecity' in the US, without the brand destruction.
Circuit City Falls Further: 'Bring Out Your Dead'
The balance sheet numbers from the BK filing came from the company's quarterly financial statement. You know, the one that reported a $239 million loss for the quarter, a $292 million balance on the revolver, etc. etc.
Times have changed since August. I personally think my numbers are closer to current reality, and here's why:
If the August inventory numbers had held through the audit, the credit availability on the old line of credit would have been more than sufficient to carry the company through the holidays:
If the operating results had improved the way they said it had, they wouldn't have had to close 155 stores last week;
If vendors hadn't gotten skittish about getting paid for holiday shipments, they would have increased the credit limits on their purchase lines;
If the credit community weren't so skeptical about CC's chances, they would have written default insurance on the aforementioned credit lines without a problem.
So the numbers at bankruptcy court mask the cascade of events that have occurred in the past month.
We'll see what happens.
Circuit City Falls Further: 'Bring Out Your Dead'
With the auto industry on the ropes, what will be the status of those CarMax leases that CC is contingently liable for?
Do you thing the court will release CC from that liability so that the company can focus on the CE business?
And will SPG be made whole on its lease commitments through the BK? I think the conditions are still grim for CC emerging from BK, because the filing doesn't fix the underlying problems we've already identified--huge lease obligations that are now on-, rather than off-balance sheet.
The filing says they've got over $1 billion in equity, but I think the assets are overstated. I'd figure a 60% discount on inventory, %75-80% on fixed assets, and add about $750 million for off-balance-sheet liabilities. That would make total assets around $1.4 billion (compared to the filing total of $3.4 billion) and liabilities of $3.1 billion, making the company technically insolvent, with negative net worth of ($1.6 billion).
Bye bye, CC.
Circuit City Falls Further: 'Bring Out Your Dead'
As we expected, vendors weren't too interested in shipping without the assurance that the invoices would be paid. So in a sense, you could say that the vendors pushed them into bankruptcy.
But that's not the only thing. WMT, CC, TGT, and even BBI are now selling CE product. The other competitors are selling profitably, even with demand off and consumer wallets squeezed.
Poor execution sent them into BK, not the vendors, in my humble opinion.
But that's just me.
Circuit City Falls Further: 'Bring Out Your Dead'
Here's a couple of links for you:
www.twice.com/article/...
www.bloomberg.com/apps...
Trading was halted today after the stock fell to 11 cents (sorry, thepoordude).
$1.1 billion in DIP financing to get them through the holidays and allow the company time to prepare a restructuring plan.
As I predicted, the NYSE will most likely drop them this week because of the filing. The DIP financing was arranged by their existing bank group, and replaces the asset-based facility.
Too bad.
Circuit City Falls Further: 'Bring Out Your Dead'
Not to mention the Betamax player and DiVX machine.
I'd forgotten about that. But the store here that's closing is starting at 20% off.
I'll wait awhile.
The STORE CLOSING banner above the CC sign is nice, though.
Circuit City Falls Further: 'Bring Out Your Dead'
Thanks for the props and the link!
From what has happened with Tweeter, it sounds like it's a chapter 11 turning into a 7. The company filed a shutdown notice with the secretary of state, laid off all the headquarters staff and as you noted, appointed a trustee to handle final liquidation.
Anyone with a gift card is considered an unsecured creditor, and would be in line behind the vendors, landlords, and employees.
One thing I forgot with regard to CC--iniitial reports were saying they wanted to liquidate $350 million in inventory. If that's truly the retail value of the store stock, they've been carrying waaay too much product in their stores for too long. At an average of $2.2 million in in-store inventory, the company already has a lot of stale inventory. And a 30% discount on that won't generate a lot of interest among the vultures.
I tend to think the discounts will accelerate sooner, rather than later.
My store carries major appliances, and I don't know whether it has $2 million in inventory. CC dropped appliances back in 2001, so what's in the inventory? Lots and lots of high end plasmas? $4,000 computers? $20,000 stereo systems?
One wonders.
Circuit City Falls Further: 'Bring Out Your Dead'
My bad.
Circuit City Falls Further: 'Bring Out Your Dead'
Continuing on, if you compare the $97,340,000 to the retail start value of $141,050,000, that's 69 cents on the dollar.
But wait, there's more.
Stores that are closing will have to make good on the present value of the vacated leases. If average termination costs are $400,000/location, an additional $62,000,000 will have to come out of gross proceeds before the corporation gets to use the money.
So now you're down to $79,050,000 to CC for 'general corporate purposes.' Or about 4 cents on the retail value.
And that presumes that 100% of all the inventory is sold. Typically there's not 100% liquidation, what with the unsellable stuff every store seems to have. Some more than others. What's left over will probably be shifted to other stores, but suppose Hilco acquired title to the merchandise when the deal was struck? Then, CC would have to buy back any inventory that didn't get sold--effectively paying for the same stale merchandise twice.
And there will probably be deeper discounts as the season progresses. I remember the Linens N Things locally that started out with 30% discounts, and ended up at 90% discounts--well below cost.
The numbers above presume Hilco doesn't do any subsequent markdowns. Which I believe is false. If liquidation has to occur by 12/31, they'll do anything to move the product out.
My figure was based on the idea that the closing stores probably lose $150 million a year, and windup costs would add another $200 million to that number.
We'll see. And it will be interesting.
Circuit City Falls Further: 'Bring Out Your Dead'
I had a real detailed look ready to post earlier and it vanished. I'm going to try again. Before I go through the numbers, understand that I'm making several assumptions about store sizes, inventory carry, and costs.
So let's walk through the numbers. Let's figure that each location has between $750,000-$1,500,000 in inventory (at cost). Figure $1,000,000/location, or $155,000,000. Further assume that the average markup is 30%, making the retail start value $1,300,000. At a 30% discount, that equals $910,000/location in gross proceeds, or $141,050,000. If Hilco takes 20% (low end of your range), that's $28,210,000 off the top, leaving $112,840,000 in proceeds to CC.
Now, there will be a cost for remediating the spaces--figure that Hilco will sell off racking, shelving and fixtures too. If the average store is 20,000 s.f., and remediation costs are $5/s.f., then another $15,500,000 has to come out of the gross proceeds, leaving $97,340,000
Circuit City Blows a Fuse
That's a lot of it, but not all.
BBY trains its employees to care about customers. CC fired the employees who did.
The customer's experience is important at BBY. The customer is an afterthought at CC.
But I will agree with you that BBY has some really smart people at the top, and they earn all the millions they do because they're smart. If things don't always work the first time out, they refine them until they do. (BestBuy Mobile took two years from idea to launch, just to give you some perspective.)
I'm proud to say I work there.
Circuit City Falls Further: 'Bring Out Your Dead'
The CPA may have to restate previous years' operating results to split out the closed stores from continuing operations. Otherwise, you won't be able to compare sales, expenses or profitability accurately.
The bill for the financials will go up.
The good news? Perhaps the company will generate enough cash to pay out some of the old leases. But maybe the only thing they'll be able to do is keep some inventory on hand for the holidays.
Then, the second tier of stores will close, and the end of CC as we know it will be upon us.
Circuit City Falls Further: 'Bring Out Your Dead'
So true, so true. Last night I was trying to figure out how the CPA would classify 'loss from continuing operations.'
Usually, the sales and expenses for those stores would be shown below the line, with the cash received from liquidation applied to the total. Now, if the stores are already losing money, and the company has to pay the liquidator, the loss from discontinued ops will be far larger than the loss would have been if these stores had stayed within the regular operation.
I'm guessing about $350 million in losses from discontinued ops. If the rest of the chain is making money, that's going to look really weird, because CC will show positive operating results for the first time in 3 years, but a huge net loss anyway.
Factor in higher interest expense for borrowings, lower investment income because the cash got burned up, and the bottom line will be a hit to retained earnings that will probably be the fatal heart attack.
Circuit City Falls Further: 'Bring Out Your Dead'
Welcome Back!! Good to hear from you!!!!
You're comment about vendors tightening up terms was prescient.
CC got hammered by vendors pulling the plug on seasonal credit line increases (no default swap writers this year) and others seeking upfront cash payments.
Meanwhile, inventory securing the credit line was reappraised after the 2nd quarter numbers came out. And that $1 billion in overcollateral mentioned by management mysteriously vanished. Result--restricted draws on the line of credit.
I'm guessing that operating results have been worse than they thought, too.
So now, at the beginning of the holiday season, they've got no cash, no credit availabilty, and no operating flexibility (those pesky leases, don't you know).
The solution is to close the worst performing stores and turn over liquidation to a third party. The problem with that is that they won't have control over what the liquidator does, and may not get as much cash as they need from the inventory selloff.
They also said they'd be renegotiating leases on the remaining stores. Nice try, but 3 years too late. Strong operators will refuse, weak ones won't have a choice, so they'll push back as well. CC made a veiled threat in its press release that the company would pursue vacating leases if landlords didn't cooperate.
Legal costs will skyrocket as landlords sue for termination costs, damages, and other things. Meanwhile, the in-store experience will be more miserable than ever.
It's the end game, and CC has its king, two pawns, and one knight left on the board. Let's hope one of the pawns is close to the far rank, so that a queen can emerge as a savior.
I doubt it.