Can Circuit City survive bankruptcy?
Posted
Nov 10 2008, 12:46 PM
by
Anthony Mirhaydari
Rating:
Back in June, I wrote that Circuit City's shares were beginning to look like options on its survival. Well, those options expired out of the money: The second-largest U.S. electronics retailer has filed for Chapter 11 bankruptcy protection after losing more than $5 billion in market value over the last two years.
Even after announcing the closure of 20% of its 721 U.S. locations, the company couldn't convince vendors it could build inventory and pay its bills heading into the critical holiday season. Overall, the retailer owed its suppliers some $650 million, of which Hewlett-Packard and Samsung Electronics expect $119 million and $116 million, respectively.
Now, with the company pulling down $1.1 billion in bankruptcy financing to help stock shelves and extend credit to customers, it has retained FTI Consulting to help it plan a restructuring. Is there any hope?
As fears of a consumer slowdown spread across the retail sector, Circuit City's woes were magnified by intense competition from Best Buy, Wal-Mart, online retailers like Amazon, and manufacturers like Apple. In response, the company fired its higher paid but more experienced sales staff. It also shrunk its stores, as epitomized by its lean "The City" store concept. As the company continued to struggle, activist hedge funds descended and a deal to be purchased by Blockbuster fizzled back in May.
The problem is two-fold: Not only are the days of extracting home equity or charging up the credit card to splurge on electronics over, but Circuit City's very reason for existence is in question. Undercut by Wal-Mart and Costco on the low-end, and out-classed by Apple and small boutique electronics shops on the high-end, Circuit City is forced to share the middle tier with Best Buy -- a company with a clean, coherent operating strategy.
It is unlikely there is room enough for both, especially with HDTV adoption reaching saturation -- slowing what was a once-in-a-generation cash generator. Computer sales have also matured, with average selling prices on both desktops and notebooks falling rapidly. With household balance sheets asset rich, but overleveraged, expect a lot of used merchandise on eBay as consumers struggle to pay down debt -- which will only add to the deflationary pressure and further kill off foot traffic at retailers.
In its bankruptcy filing the company notes that as part of its turnaround effort, it tried to differentiate from competitors by "elevating the customer service standards" and "improving overall in-store environments." Prettier stores are nice, but the fact remains that electronics purchases are becoming increasingly transactional as shoppers become more tech-savvy. That doesn't bode well for the future of electronics retailers in general, as discount and warehouse retailers gain market share through low prices.
Over the near-term, most Circuit City locations will remain open and business will continue as normal. The good news is that anyone looking for bargains should find plenty as Circuit City goes forward with previously announced store closures. Check out the list of closures to find out where to go.
Long-term, the list of bankrupt retailers will grow as we add Circuit City to the death roll: Mervyns, Linens and Things, Levitz, Sharper Image, and Steve & Barry's. My guess is that the next casualty will be a specialty apparel retailer.
Disclosure: I don’t own or control shares in any of the companies mentioned. I can be contacted at anthony.mirhaydari@live.com
Related reading:
Circuit City closing 20% of stores
Can Circuit City be saved?
Circuit City starts taking Blockbuster seriously
Is the Circuit City deathwatch on?
HDTV shoppers tune out Best Buy
