billddrummer

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    • Mon Oct 20th 19:18 PM | Rating: 0 0
      Commented on:
      Circuit City Falls Further: 'Bring Out Your Dead'
      "Buy now!!!" That's me channeling Jim Cramer.

      I looked back in my posts and recommended a buy when the stock was at $6/share. I thought someone was going to purchase the whole thing at around $8, and it would close before the 2nd quarter.

      Well, that didn't happen.

      My buy recommendation looks pretty dumb now. There hasn't been a period where it rose enough to dump it. And now, you just have to trust the lads in the board room to negotiate a truce with all the upset landlords that will have empty stores during the holidays. Those gross revenue rent kickers don't apply if your store is closed--unless the landlord is really shrewd and pulls numbers from the past three years, asking for a consideration of, say 90% of the average as part of the termination costs.

      But 2009 for the REIT business will be a bear.

      More to come.
      View article »
    • Mon Oct 20th 18:32 PM | Rating: 0 0
      Commented on:
      Circuit City Falls Further: 'Bring Out Your Dead'
      phil,

      I wouldn't be a bit surprised if an enterprising store manager does just that with some old open box sets left over from last year--with analog tuners.

      The unsuspecting customer wouldn't know that their bright shiny flat screen will go dark on February 19--unless they have cable or satellite.

      All indications are that the digital feed replacing the analog signals is notoriously fickle, and will more than likely require boosting unless you live next door to the broadcast tower. So be prepared to fork over some dough for an antenna anyway.
      View article »
    • Mon Oct 20th 17:43 PM | Rating: 0 0
      Commented on:
      Circuit City Falls Further: 'Bring Out Your Dead'
      phil,

      And back to your analogy, "There's not enough room on the boats. Either go down with the ship or jump--otherwise, the line for the firing squad forms to your right."
      View article »
    • Mon Oct 20th 17:41 PM | Rating: 0 0
      Commented on:
      Circuit City Falls Further: 'Bring Out Your Dead'
      phil,

      The severance piece will get taken care of first, in my opinion.

      The DIP financing will pay out the landlords on the vacated stores and provide severance for store managers that are laid off.

      With a grim holiday season coming up, CC will do almost anything to get foot traffic--like sell flat screen TVs for $199.99. Yes, it's stupid, but what's a body to do?

      You may see a bump in comp sales next month, but don't expect them to sell a lot of warranties. Margins will get crushed (again), and the idea will be to sell out to the walls, at whatever you can get.

      BBY may have to amend its price match policy to limit stupid price matching. If the company is in Chapter 11 and bleeding money every day, they won't care what margins are because they're closing it anyway.

      I've got some more, but duty calls.

      View article »
    • Mon Oct 20th 15:43 PM | Rating: 0 0
      Commented on:
      Circuit City Falls Further: 'Bring Out Your Dead'
      phil,

      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
      View article »
    • Fri Oct 17th 19:36 PM | Rating: 0 0
      Commented on:
      Circuit City Falls Further: 'Bring Out Your Dead'
      phil,

      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.


      View article »
    • Fri Oct 17th 17:57 PM | Rating: 0 0
      Commented on:
      Circuit City Falls Further: 'Bring Out Your Dead'
      To phil,

      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.
      View article »
    • Fri Oct 17th 14:47 PM | Rating: 0 0
      Commented on:
      Circuit City Falls Further: 'Bring Out Your Dead'
      To CanadaD,

      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.
      View article »
    • Fri Oct 17th 13:08 PM | Rating: 0 0
      Commented on:
      The Most Dangerous Place to Get Investing Advice
      Excellent article. Thanks!
      View article »
    • Fri Oct 17th 12:59 PM | Rating: 0 0
      Commented on:
      More Financial And Housing Layoffs
      Hi, Judy,

      Thanks for the compilation!

      In Northern NV, the municipalities are constrained by state law that limits property tax increases. With home values falling now after rising sharply in 2005-2007, many homeowners are seeing increases in their assessed valuation and taxes even as their houses drop in value.

      It's a cruel joke.

      I don't have any specific statistics on the number of people affected, but reappraisals are scheduled for the majority of properties in the next 18 months. I wouldn't be surprised if the tax rate changes to maintain revenue, since values are down about 20% overall.

      Thanks again for this resource!
      View article »
    • Thu Oct 16th 19:37 PM | Rating: 0 0
      Commented on:
      Circuit City Falls Further: 'Bring Out Your Dead'
      A further comment:

      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..

      View article »
    • Thu Oct 16th 19:32 PM | Rating: 0 0
      Commented on:
      Circuit City Falls Further: 'Bring Out Your Dead'
      Another thing:

      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.
      View article »
    • Thu Oct 16th 19:21 PM | Rating: 0 0
      Commented on:
      Circuit City Falls Further: 'Bring Out Your Dead'
      phil,

      I'd forgotten about the canasta tourney. But remember, it's hard to play bocce ball on a tilting deck.
      View article »
    • Thu Oct 16th 17:12 PM | Rating: 0 0
      Commented on:
      Circuit City Falls Further: 'Bring Out Your Dead'
      phil,

      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.
      View article »
    • Thu Oct 16th 14:12 PM | Rating: 0 0
      Commented on:
      Circuit City Falls Further: 'Bring Out Your Dead'
      phil,

      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.
      View article »
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