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Monday, November 10, 2008

Circuit City Declares Bankruptcy-

Beleaguered No. 2 electronics retailer urges budget-conscious consumers not to shun its stores for holiday gifts.

NEW YORK ( -- Circuit City Stores Inc., the No. 2 electronics seller after Best Buy, filed for bankruptcy protection Monday, becoming the latest retailer hurt by a worsening economic downturn that has left more consumers with less money to shop.

The company's bankruptcy filing was also made at a crucial time of the year for merchants who are preparing for the year-end holiday shopping season.

The November-December period can account for 50% or more of retailers' annual profits and sales. But this year, many Americans have clamped down on their shopping habits amid a weak economy and a shaky job and credit market.

Industry analysts warn that retailers will have to do whatever they can this year if they hope to have at least decent holiday sales.

Circuit City (CC, Fortune 500) said it decided to file for bankruptcy at this time to ensure that it would have "adequate merchandise flow to stores during the important holiday season."

What's more, the retailer said that consumers should continue to shop at its stores.

"Chapter 11 is not a closing or liquidation," the company said in an e-mail to "We remain committed to doing a better job of taking care of our guests, and making it easier to shop at Circuit City."

For anyone that's on the hunt for a sweet deal on a flatscreen TV, Circuit City spokesman Jim Babb said it's "safe to assume" that consumers can expect deep discounts on TVs and other products in those Circuit City stores that are being liquidated.

In the rest of its stores, Babb said the company's prices will remain competitive with the market over the coming weeks.

Circuit City said it is seeking approval from the bankruptcy court to honor customer programs such as returns, exchanges and gift cards. "Approval of such programs normally is granted," the company said in the e-mail.

The electronics seller said it will still accept credit cards, including Circuit City-branded credit cards, which the company said are not be impacted by its bankruptcy.

Circuit City also said it will continue to honor its warranty plans, including its Circuit City Advantage Protection Plans.

Despite these measures, one industry watcher remained unconvinced that Circuit City could still attract shoppers from here on and especially through the holiday season.

"Consumers will be skeptical about buying a $1,000 or $2,000 flatscreen TV with a warranty at Circuit City," said Craig Johnson, retail analyst and president of Customer Growth Partners. "In their mind, there's no guarantee that the company will still be around in the future."

"Regarding gift cards, if you are buying a $50 gift card for Christmas, where would your comfort level be higher? At a Circuit City or a Best Buy (BBY, Fortune 500)?" Johnson said.

Will stay in business for now

According to the company's Chapter 11 filing with the U.S. bankruptcy court in Richmond, Va., Circuit City has 566 operating stores in the United States and will continue to do business and pay its workers while it restructures debt and its business operations.

Just last week the Richmond-based company announced that it would close another 155 stores and cut about 17% of its 40,000 domestic workers as it continues to face eroding sales at its stores.

Johnson said Circuit City's problems are partly its own making. On the external front, the retailer's competitive landscape has became much more formidable as Best Buy continues to enhance its product offerings and service.

Circuit City has also felt the squeeze from discounters like Wal-Mart (WMT, Fortune 500) who has aggressively expanded into electronics over the last few years.

More importantly, Johnson believes Circuit City shot itself in the foot when the company decided last year to fire more 3,000 of its highest-paid sales staff and replace them with lower-paid workers.

"This was a huge strategic blunder," said Johnson. "People want a knowledgeable sales person when they are spending $2,000 on a TV. They don't want to buy it from some kid at Wal-Mart," he said

The company said it has negotiated a commitment for a $1.1 billion credit line to supplement its working capital. The company said the credit line will replace the company's $1.3 billion asset-based line provided by its lenders.

Circuit City said the credit line will give it immediate liquidity while it works to reorganize the business and enable it to pay its vendors and employees.

"We recently have taken intensive measures to overcome our deteriorating liquidity position," James Marcum, Circuit City's acting president and chief executive officer, said in a statement.

"The decision to restructure the business through a Chapter 11 filing should provide us with the opportunity to strengthen our balance sheet, create a more efficient expense structure and ultimately position the company to compete more effectively," he said.


Anonymous November 10, 2008 at 3:47 PM  

Remember when Circuit City was a favorite in “Good to Great” by Jim Collins? Remember when we thought being big gave you clout with customers and vendors to produce long-term returns (Michael Porter’s 5 Forces Model)? It’s time we recognize that the old approach to management doesn’t work in a rapidly shifting competitive world. There are winners in today’s market, but they follow a different approach. Read more at