Circuit City Files for Bankruptcy

Circuit City, a Fortune 500 Company and the second largest electronics retailer in the U.S. with upwards of 46,000 employees and over 670 Superstores across the country, today filed for the protection of the United States Bankruptcy Court.

Circuit City stated that the filing was an effort to continue to receive merchandise from wholesalers, to whom it owes substantial sums of money. (If wholesalers believe they will receive payment for the new merchandise sold to Circuit City (CC), they may essentially treat the company as a new entity, looking at the likely earnings from the new sales, and "ignoring" the prior losses on which it may receive pennies on the dollar.)

Circuit City made a similar filing in Canada, where their subsidiary InterTAN Canada Ltd operates over 850 retail stores and dealer outlets.

Circuit City had been cutting costs and reducing workforce, replacing retail sales employees with lower-cost workers (in a move which could backfire as consumers become increasingly irritated with the retailer, taking their business elsewhere.) CC announced a cut of an additional 700 jobs from their Richmond, Virginia headquarters.

While Circuit City had been suffering a deteriorating position in the market, exacerbated by consumer nervousness and credit tightness, they claim that three factors led them to file for bankruptcy protection: erosion of vendor (wholesalers such as Hewlitt-Packard, Samsung, Sony, Zenith, Toshiba...) confidence, decreased liquidity (inadequate cash on hand, access to credit), and the global economic crisis.

From the Associated Press:

"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 in the filing.

The company's biggest creditors are its vendors: Hewlett-Packard has a $118.8 million claim followed by Samsung ($115.9 million), Sony ($60 million), Zenith ($41.2 million), Toshiba ($17.9 million) and others. Smaller creditors include GPS navigation system maker Garmin, Nikon, Lenovo, Eastman Kodak and Mitsubishi.

Stifel Nicolaus & Co. analyst David Schick said in a note to investors that since Circuit City is a well-known brand it could re-emerge from bankruptcy, saying "We believe the marketplace has a slot for a higher-end chain with a commissioned sales force."

But Stephen Lubben, the Daniel J. Moore professor of law at Seton Hall Law School, said the company's surivial depends on "whether these folks here like Sony and Hewlett-Packard are going to be willing to work with Circuit City going forward or whether they think they're a lost cause and cut them off permanently."

Lubben said it has the added burden of facing Chapter 11 at a difficult time for retail.

Meanwhile, Deutsche Bank analyst Mike Baker told investors that consumers learning about Circuit City's bankruptcy may choose elsewhere due to a lack of confidence in the company.

Circuit City shares were down 56% on the news, to 11 cents per share, before trading of its' stock on the NYSE was halted.

(Photo courtesy Wikipedia Commons.)