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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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Filing so soon.
By bmheiar on 11/10/2008 11:02:11 AM , Rating: 2
Filing so soon. Say it ain't so. It has only been a week since they notified the public that they were closing 155 stores. I have one down the street from me, that was just built earlier this year and it is closing. I walked in last week, for the first time to see what I could get a good deal on. It was just all a big joke. There were far more associates (a lot of plain clothed security aka Loss-prevention) than were customers in the store. I bet their payroll outpaced their sales.

Maybe if they wanted to drum up more sales, they should have done deeper discounts instead of 10% on higher dollar items (HDTVs, Blu-ray players, computers/laptops, game consoles, & most games) and only 20% on lower dollar items (DVDs, Blu-ray discs & etc). I was looking to see if I could get a good deal on a HDTV and Blu-ray player with some movies, but not at their prices they were still asking for even with those so called going out of business everything must go discounts. With the economy as it is, people do not have the money to be spending on items in stores even with discounts, if those items are still priced more expensive than online.

I worked retail for 12 years with the world's largest retail company, before I found something better that applied to my degree several years ago. After all those years working in retail, I know that sometimes you have to take a loss, to discount below your markup, to get the sale. They are still not willing to do that. And now they are filing for Chapter 11, I wonder why?

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