Circuit City: Outlook Is Grimmer Than Ever

Includes: BBI, CCTYQ
by: Todd Sullivan

Five years after Circuit City (NYSE:CC) refused an $8-a-share offer from Mexican billionaire Carlos Slim and a 2005 $17-a-share offer by hedge fund Highfields Capital Management LP, Schoonover and his crew messed up a $6 to $8 offer from Blockbuster (BBI). Shares today sit at $1.75. Why did Blockbuster back out? Lack of disclosure from Circuit City.

Now word comes word that  the company has put on hold the completion of a $45 million distribution facility near Scranton, PA., which had been slated to begin operations later this year. The facility was to replace two others in an effort to streamline operations and save money. When you don't have the cash to spend (even after canceling the dividend) to save cash, things are really tight.

The WSJ ran a piece yesterday that has a classic paragraph:

In July, Mr. Schoonover asked investors to forget much of the Richmond, Va., company's recent history: turnarounds that didn't materialize, a revolving door of top executives and burgeoning losses. Instead, he held out a vision of a company "on the right track with the right strategies, the right talent and improved processes," he said in a conference call with investors.

Schoonover then went out and destroyed investors' last hope of seeing more than $3 each for their shares anytime this decade. In a final irony, Schoonover, who was interviewed by the Journal last year about "how to execute a turnaround" declined to be interviewed for this story. Good idea.

The Journal continued:

Circuit City has a secured credit line of about $1 billion that could allow it to withstand losses for the rest of the year, assuming continued support by its big suppliers. Supplier discontent helped send retailers Linens 'n Things, Steve & Barry's and Mervyn's to seek bankruptcy protection this year.

Circuit City also recently filed a shelf registration that would allow it to bolster its capital by selling new shares or to find debt-assuming buyers. A Circuit City spokesman says that "the vendors are still supporting us.

OK. Who would buy it? Really? CC has enough credit available to hang on for a while assuming vendors will continue to sell them product on credit. That is by no means a sure thing. Credit is tightening for companies with good outlooks and this little thing called profits. For a struggling company, hemorrhaging money using the credit card to buy products to lose more money, credit will evaporate.

If we believe the economy will struggle or flatline through 2009, then CC is done. The company cannot make it through another year like this. Perhaps it'll buy a lifeline if it can sell its Canadian stores, but not a lengthy one.

I think in six months it will be proven that the Blockbuster offer was the "last chance" for shareholders. What Schoonover and The Board has done there should be criminal.

Disclosure: None