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Circuit City Closing 155 Stores

Last measure before possible bankruptcy, analysts say

November 4, 2008

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Struggling retailer Circuit City says it will close 155 stores in the U.S. because it's running low on cash and having a harder time getting credit from its supplier.

Analysts say the closings may be the last stop gap measure before declaring bankruptcy.

"I think at this point they should be able to get through December," Anthony Chukumba, an analyst with FTN Midwest Securities, told Reuters.

In a statement, Circuit City said it is also considering all available options and alternatives to restructure its business. It said that over the past several weeks, a number of factors have impacted severely the company's liquidity position. Waning consumer confidence and a significantly weakened retail environment have impacted negatively the company's sales and gross profit margin rate to a greater degree than management had anticipated previously, the statement said.

Things started to go rapidly downhill following the company's second quarter results announcement, officials said. The company's liquidity position and the sharply worsened overall economic environment led some of Circuit City's vendors to take restrictive actions with respect to payment terms and the credit they make available to the company.

Additionally, the recent disruption in the financial markets has contributed to certain of the company's vendors experiencing insurmountable challenges with obtaining credit insurance for the company's purchases, it said.

"As a result of this and other considerations, certain of the company's vendors have set more restrictive payment terms than in previous quarters, including in some cases requiring payment before shipment," Circuit City said in a statement. "Vendors also have limited the credit available to the company for purchases, including in some cases not providing customary increases in credit lines for holiday purchases. While management is working diligently to secure the support of its vendors and believes it has maintained good relationships with these important partners, the current mix of terms and credit availability is becoming unmanageable for the company."

Making matters worse, Circuit city said it has been unable to collect an income tax refund of approximately $80 million that the company believes it is owed from the federal government. At a time when credit is drying up, Circuit City seems to be another Main Street victim of the credit crunch.

"Since late September, unprecedented events have occurred in the financial and consumer markets causing macroeconomic trends to worsen sharply," said James A. Marcum, vice chairman and acting president and chief executive officer of Circuit City Stores. "The weakened environment has resulted in a slowdown of consumer spending, further impacting our business as well as the business of our vendors. The combination of these trends has strained severely our working capital and liquidity, and so we are making a number of difficult, but necessary, decisions to address the company's financial situation as quickly as possible."

Evaluating all options

As a result of unfavorable macroeconomic conditions and the company's deteriorating liquidity position, the company said it is considering "all available options" and alternatives for the business. Consistent with this evaluation, the company said it will continue to take appropriate actions to conserve cash, reduce expenses and improve liquidity.

In addition, the company is continuing to evaluate additional near-term cost reduction initiatives that may be necessary to address its financial condition. The company is also in negotiations with its lenders and other third parties regarding various financing alternatives.

"The company plans to operate its business without interruption while it engages in discussions with its lenders and works with advisors to determine the most appropriate restructuring alternatives," the statement said. "The company can make no assurance that the discussions will result in any agreements or transactions."

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