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Closing 155 of its retail locations wasn't enough to prevent bankruptcy for Circuit City

The state of the global economy and that of the U.S. economy are making things difficult on many companies in the U.S. as sales fall and credit terms tighten. Consumer electronics retailers and computer manufacturers are among the companies that are feeling much of the economic pressure.

One of the biggest retailers to find itself in a serious economic crunch is Circuit City. The consumer electronics retailer announced today that it is filing for Chapter 11 bankruptcy to protect itself from creditors after cash flow problems began to prevent it from completing its turnaround efforts.

The bankruptcy filing is far from the first sign that the electronics retailer was suffering. Circuit City announced just last week that it was closing 155 of its stores across America. The massive store closures would eliminate 17% of Circuit City's U.S. workforce.

Reuters reports that out of the last six quarters Circuit City has reported a loss in five of them. The consumer electronics leader is Best Buy followed closely by Wal-Mart according to Reuters. Losing the competition posed by Circuit City in the markets where its stores are closing would at a glance seem to be a good thing for other consumer electronics retailers.

However, Circuit City is having massive liquidation sales at the closing locations that could prove to be a big problem for Best Buy – at least in the short term. In the beginning stages of the liquidation sales discounts at Circuit City are said to be at least 30%. As time goes by and the stores get nearer to closing, the discounts will only get bigger. The discounted merchandise could pull important holiday shoppers from the more stable electronics retailers into closing Circuit City stores.

Analyst Dan Binder from Jefferies & Co told Reuters, "Longer term, you've got Best Buy, who's dominant in the sector, taking share. But in the short run it could feel the pain of the liquidation activity."

Filings from Circuit City for Chapter 11 showed the company had $3.4 billion in assets and $2.32 billion in debt as of August 31 with more than 100,000 creditors. Circuit City first started to consider closing stores in October. At the time the Wall Street Journal reported that the closing of the stores was an attempt to stave off Chapter 11.

Only a few weeks later Circuit City announced on November 3 its plans for closing the 155 stores across the country. A big factor in the decision to file Chapter 11 was the fact that Circuit Creditors had tightened credit terms extended to the retailer considerably. Some creditors were even requiring upfront payments before shipping goods.

Circuit City CFO Bruce Besanko wrote in a court filing, "In large part, a Chapter 11 filing is due to three factors, all of which contributed to a liquidity crisis that prevented the company from completing its turnaround goals outside of formal proceedings: erosion of vendor confidence, decreased liquidity and a global economic crisis."

Best Buy had said previously that it would consider taking over locations that rivals closed. There is no word from Best Buy on whether it will take over any of the Circuit City stores that are closing.

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By Exterous on 11/10/2008 11:00:43 AM , Rating: 3
A big reason Circuit City is facing a crisis was their 'Drive to 65' program. Their goal was to open 65 new stores over the past 2 years with low regard to market conditions. Not to mention the bungeling of a new register system that failed, leaving about 15-20% of stores that can't communicate with the rest. Want to check stock there? Too bad.

The part about leaving 'less successful stores open' is not true. Older maybe. The closings were based on performance in relation to expenses. The new stores might bring in a few more dollars, but the property is probably mroe expensive and so is the upkeep.

As an employee of Circuit City in Michigan I can tell you that the stores that closed were really of no suprise to us (well, one of the 6 was - we didn't expect them to close that many in one of the best districts in the company). They were contantly under-performing and rarely met their daily goals.

The new stores never got a chance to get off the ground. They looked nice, but didn't ahve the customer base that a lot fo the older ones did. Would they have done better? Probably if the they had gotten a chance to grow. Unfortunately, this is not about the long term right now

*crosses fingers that I get to keep my job till I find another one*

By Exterous on 11/10/2008 11:02:09 AM , Rating: 2
Edit: I ment one of the six that closed in our district - the east side of michigan

By FITCamaro on 11/10/2008 2:43:16 PM , Rating: 2
Not to mention the bungeling of a new register system that failed, leaving about 15-20% of stores that can't communicate with the rest. Want to check stock there? Too bad.

Interesting. I always thought Circuit City had a better inventory management system. I know with Best Buy, their in-stock product numbers aren't always up to date. I was told with Circuit City they could track in real time whether or not a product was available.

RE: Unsurprising for a business completely out of touch
By aj28 on 11/11/2008 11:57:05 AM , Rating: 1
They can, yes, however the problem lies in their POS systems. Traditionally Circuit City had used either DPS and Magellan in their stores, but most new stores (as well as some old ones) recently moved over to a system called rPOS which, while allowing for a more streamlined GUI and internet access at every terminal, could not be remotely logged into by either of the other two systems.

Coincidently, if you purchased an item from an rPOS store, it's an absolute bitch to return at stores using another system because the only way is by returning it as "no history" which is basically a direct hit to that store's bottom line. Most of them will do it anyway so long as you have a receipt, it's just a pain is all...

By Oregonian2 on 11/11/2008 11:08:22 PM , Rating: 2
A newspaper article I read about it today said that a big problem was that when CC was king, they went and made major blunders in the 1990's by expanding by getting great deals on land in bad locations. Locations that didn't bring in the crowds.

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