Circuit City to Retrench

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TECHNOLOGY NOVEMBER 3, 2008

Circuit City to Retrench
Electronics Chain Is Shutting 155 Stores Amid Credit Squeeze
By MIGUEL BUSTILLO

Circuit City Stores Inc., the second largest consumer electronics chain in the U.S., said it will immediately close and liquidate 155 stores and lay off thousands of employees as it struggles to survive an increasingly dreary holiday shopping season.

Citing a deteriorating economy, tightening credit limits by its suppliers, and an updated assessment that found its inventory was worth less than it expected, Circuit City said it would close the stores in 55 U.S. markets Tuesday and immediately begin liquidation sales on Wednesday.

Circuit City also said that it planned to reduce about 17% of its domestic work force, and slash operating, payroll and marketing expenses. Circuit City currently operates 721 stores and outlets in the U.S. as well as 770 mostly smaller locations in Canada, and employs roughly 55,000 workers including holiday help. Best Buy Co. is the largest consumer electronics chain in the U.S. by sales.

"The weakened environment has resulted in a slowdown of consumer spending, further impacting our business as well as the business of our vendors," Circuit City's acting chief executive, James A. Marcum, said in a prepared statement. "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."

The Wall Street Journal reported last month that the Richmond, Va., company was considering closing 150 stores and laying off thousands of employees in order to stave off bankruptcy at least until next year. People with knowledge of the talks said the company had hired bankruptcy counsel, a liquidator and other crisis advisers as it studied its increasingly limited options heading into the worst Christmas shopping season since the early 1990s.

In announcing the closures Monday, Circuit City revealed that some of its vendors have taken "restrictive actions with respect to payment terms and the credit they make available to the company."

Circuit City said that some vendors were unable to get credit insurance for the company's purchases, and have set more-rigorous payment terms than before, in some cases demanding payment in advance. Circuit City also said that some vendors had not boosted credit lines for holiday purchases as they normally did.

Additionally, Circuit City disclosed that a recent third-party appraisal found that the liquidation value of the company's inventory was less than expected due to the worsening economy, even though the mix was essentially unchanged from a year ago. That reduced how much money Circuit City could borrow under a $1.3 billion asset-based line of credit the company had established, worsening its financial condition.

As a result, Circuit City said it would cancel 10 new store openings planned for later this fiscal year, and would immediately start negotiating with landlords to lower rents or exit leases altogether. The company reiterated that it is considering all available options to restructure its business, leaving open the possibility of bankruptcy.

Circuit City, which has been losing market share to archrival Best Buy for years, has been on a precipitous slide in recent months as the retail economy has bottomed out.

The company has not had a profitable quarter in more than a year and was down to less than $100 million in cash according to its most recent quarterly financial report. It has seen its stock lose more than 90% of its value this year, hurt first after Blockbuster Inc. withdrew an offer to buy Circuit City for at least $6 per share in July, then even more after it ousted chief executive Philip J. Schoonover in September.

The New York Stock Exchange formally warned the company last week that its stock, trading at 26 cents as of closing on Friday, was in danger of being delisted for falling to penny status. Meanwhile, one of its largest shareholders, Classic Fund Management AG, reduced its stake from 9.5 million shares to 8.2 million shares, or about 4.8% of the company, according to a Securities and Exchange Commission filing.

Write to Miguel Bustillo at miguel.bustillo@wsj.com