Circuit City Faces Bankruptcy or Closing Up To 150 Stores
Electronics retailing giant Circuit City is facing a classic Hobson's choice: file for bankruptcy protection or close as many as 150 stores. If the nation's second-largest seller of consumer electronics chooses Door #2, it could generate an estimated $350 million in inventory liquidation, job cuts, and infrastructure reductions.
According to The Wall Street Journal, which broke the news, the company is eager to avoid a high-profile bankruptcy filing right before the holidays. According to the Journal, company executives are concerned that the news would depress sales due to concerns among consumers that Circuit City would not be able to honor warranties on electronics purchases.
Circuit City spokesperson Bill Cimino told reporters that no decisions have been made. "The management team, board of directors, and its strategic financial advisers," Cimino said, "are conducting a comprehensive review of all aspects of our business to determine the best methods of accelerating our turnaround."
An e-mail to the Circuit City press office for elaboration was returned as undeliverable.
Credit Crunch Affects Plans
Like many companies, Circuit City is feeling the effects of the current economic crisis on Wall Street. Over the past year, the company's stock has fallen more than 90 percent; it finished trading Monday at 35 cents per share.
Real-estate costs are a particularly acute problem for Circuit City. According to financial experts, the cash from a massive inventory sale could be used to pay off leases on closed stores and abandoned sites, and would buy the company time to renegotiate leases on its remaining properties.
The Journal reported that the company has hired noted law firm Skadden, Arps, Slate, Meagher & Flom LLP to serve as its bankruptcy counsel, and is working with the investment bank Rothschild to line up debtor-in-possession financing. The funds would enable Circuit City to continue operating even if it files for bankruptcy.
However, the credit crunch is making it particularly difficult for Circuit City to secure such funding, which may be the prime reason that the retailer is considering a substantial fire sale of inventory.
Another option lurking in the background is the possibility of a merger with a more solvent company. Blockbuster offered $1.35 billion for Circuit City earlier this year, but withdrew its offer due to unspecified changes in the market.
Thousands of Jobs
If Circuit City elects to significantly reduce the number of stores it operates, the impact on the electronics retail industry would be significant. The move would eliminate thousands of jobs in the midst of a difficult economy, and would leave competitor Best Buy essentially unchallenged in the large-box electronics retail category. Circuit City currently has a workforce of about 45,000 in the United States and Canada.
However, Best Buy itself is facing stiff competition from a host of smaller retailers and from a growing number of increasingly successful online stores. As in so many other industries, the online stores benefit from not having to maintain the brick-and-mortar infrastructure that is proving such a drain to the Circuit City balance sheet.