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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 HaB1971 on 11/10/2008 2:49:53 PM , Rating: 2
Here in Georgia where they are cutting a lot of stores, there is a new store that had it's grand opening in July that is one of the closing stores. This one had the casual approach with associates in jeans, it was hard to tell them apart from the 5 customers normally found in the stores.

Being curious on the sale prices (like the rest of the scavengers) I paid the store a visit and found the prices for a close out were a joke. 5% on PC's and laptops, with up to 20% off of stuff like DVD's etc.

This is my perception of the situation.. you need to close 155 stores to stop the hemorrhaging of money to have some liquidity. Each moment these stores are open you are loosing money on rent, utilities, employee pay and benefits.
Instead of just loading up all the product in a truck and delivering it to the open stores they have this liquidation team sell off the product at prices that really won't drive any foot traffic. Not to mention they took those stores off the CC website so you could not even check inventory.

If they want to stop the rot then either redistribute the stock to other stores so they can sell it or gut the prices so they can shut the stores ASAP therefore saving some money.

Don't expect to find PS3's or Xbox 360's on sale they'll get their butts handed to them by Sony and Microsoft for trying.

Yes it sucks to lose your job because of inept management and the inability to adapt. The company laid off about 3,400 retail employees last year and replaced them with lower-paid workers, a move analysts said could backfire, hurting morale and driving away customers. hmmm... ya think??

By FITCamaro on 11/11/2008 7:32:21 AM , Rating: 2
They pissed off a lot of people when they moved from commission to hourly as well. I worked in a Circuit City for Sprint when the transition happened. I understand why they did it. There was no incentive to move up in the store because commission based employees could make more than the managers. There were guys clearing $60,000 a year working there while managers might get $35-40,000. Some places more, a lot more(was told a guy in Tampa was clearing $100,000 a year).

So it sucks that they did it, but they kind of had to. But I'm sure it alienated a lot of people.

By HaB1971 on 11/11/2008 1:57:18 PM , Rating: 2
I also happened to work there at the time of the transition from comissioned to hourly and though you can argue that people were making too much money on comission they only did so because they knew how and what to sell to people and only kept that money if the product was never returned.

Got to feel sorry for those losing their jobs though.

By aj28 on 11/11/2008 12:07:40 PM , Rating: 2
To be fair, I'm pretty sure the remaining product in those stores was already sold off to liquidators - It's no longer Circuit City setting the prices at those locations. Also, much of the product is being moved to other stores or returned to their manufacturers (one of the perks of buying on credit) as a means of recouping their losses.

Also keep in mind that this is in fact a legitimate reorganization effort. They're not just slashing prices and pleading for people to come back to them... Lots of people on district and regional levels are losing their jobs because the positions have been deemed unnecessary. For the most part unless you are an overarching district manager or store-level, you risk being gutted. Specialty people like district firedog and operations managers have already been removed from the loop... They're going back to a streamlined, sales-driven business like they always should have been and for the good of the industry, let's hope it works out.

(Also, as a side note to the online-only people, keep two things in mind 1) Online stores will almost NEVER pay for return shipping, and 2) Laptops and desktops are often sold very near, at, or below cost at retail outlets, so don't fool yourself into thinking NewEgg will always have a lower price, regardless of their significantly reduced overhead.)

“Then they pop up and say ‘Hello, surprise! Give us your money or we will shut you down!' Screw them. Seriously, screw them. You can quote me on that.” -- Newegg Chief Legal Officer Lee Cheng referencing patent trolls

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