Circuit City Files for Chapter 11 Bankruptcy Protection

November 11, 2008

circuit-city.jpgCircuit City Stores Inc, the No. 2 U.S. consumer electronics retailer,
filed for bankruptcy on Monday just weeks before the start of the
holiday shopping season, becoming the largest retailer to file for
Chapter 11 since Kmart in 2002.

Circuit City fell victim to tighter credit terms from vendors, a
dwindling cash position and decreased consumer spending amid a
deepening economic crisis.

The filing comes one week after the 59-year-old retailer said it
would close 155 U.S. stores, or more than one-fifth of its retail base,
and cut 17 percent of its U.S. work force.

The retailer and 17 affiliates filed for protection from creditors
in U.S. bankruptcy court in Richmond, Virginia, where it is based. Its
Canadian operations also filed for creditor protection in an Ontario

Analysts said there was now a possibility the company would close
more U.S. stores as it negotiates to exit costly leases in Chapter 11.

“Don’t rule anything out yet,” said Jefferies & Co analyst Dan
Binder. “You could go away, you could restructure to something smaller,
maybe somebody buys the brand and a couple hundred stores and maybe it
ends up a regional player.”

The company could face an uphill struggle to reorganize and emerge
from bankruptcy since credit is tight and consumer spending has

“It has a lot to do with the macroeconomic crisis in the world right
now,” said Aravindh Vanchesan, program manager for the retail systems
group at consulting firm Frost & Sullivan. “Right now, customers
are cutting back on spending.”

U.S. home-goods retailer Linens ‘n Things tried to maintain
operations by closing a portion of its stores after its May Chapter 11
filing, but finally liquidated altogether. Last week, smaller
electronics chain Tweeter filed Chapter 11 and said it was holding
store-closing sales.


In Monday’s filing, Chief Financial Officer Bruce Besanko said the
company hoped to secure financing to continue its turnaround. The
company expressed hope it would be able to emerge from Chapter 11 in
the first half of 2009.

“Without immediate relief, the company is concerned that it will not
receive goods for Black Friday and the upcoming holiday season, which
could cause irreparable harm to the company and its stakeholders,”
Besanko said.

Besanko’s statement said 1,300 workers were laid off on November 7.
That day, the Richmond newspaper reported that hundreds of workers had
been let go from company headquarters.

The Chapter 11 filing caps a tough two years for the company, which
posted losses for five of the past six quarters and faced a proxy
contest from a major shareholder this year. Movie-rental firm
Blockbuster Inc withdrew a takeover bid for Circuit City in July.

The company’s stock has swooned 99 percent since January 2007 and
now trades at less than 50 cents. The shares were suspended by the NYSE
on Monday.


In recent weeks, suppliers pinched by the global credit crunch
tightened terms, sometimes requiring upfront payment from Circuit City
before shipping goods.

Industry leader Best Buy Co, discounter Wal-Mart Stores and regional
retailers such as hhgregg are expected to benefit from electronics
store closures in the longer term, analysts have said.

But the flood of discounted merchandise from liquidating Circuit
City stores could hurt Best Buy this holiday shopping season, which is
expected to be one of the bleakest in recent years as consumers grapple
with rising unemployment and the soft economy.

“Longer term, you’ve got Best Buy, who’s dominant in the sector,
taking share. But in the short run it could feel the pain of the
liquidation activity,” Binder said.

According to the filing, Circuit City had $3.4 billion of assets and
$2.32 billion of debt as of August 31, and more than 100,000 creditors.

The company has arranged a commitment for debtor-in-possession
financing of $1.1 billion, which will allow it to continue to operate.

Among the company’s largest unsecured creditors are Hewlett-Packard
Co, which is owed $118.8 million; Samsung Electronics Co, owed $115.9
million; and Sony Corp, the filing shows. The largest shareholders
include HBK Master Fund LP and First Pacific Advisors LLC, according to
the filing.

Best Buy shares closed down 38 cents, or 1.5 percent, to $25.21 on
the New York Stock Exchange on Monday, and hhgregg fell 18 cents, or
3.5 percent, to $4.93.

Source: Reuters

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