Troubled electronics retailer Circuit City Stores Inc. considered its options but withheld comment Monday after a published report that it would close stores to ward off bankruptcy sent its shares down 10 percent on the New York Stock Exchange.
Circuit City spokesman Jim Babb said the Richmond-based chain wouldn’t address “rumors” as it continues “a comprehensive review of all aspects of our business” in order to accelerate its turnaround plan and boost its financial and operating performance.
Citing “several people familiar with the matter,” the Wall Street Journal said Monday that the nation’s second-largest consumer electronics chain was considering closing at least 150 locations and slashing thousands of jobs to avert a Chapter 11 bankruptcy filing.
Closing dozens of stores would allow the retailer to liquidate $350 million in inventory that could be used to pay real estate costs, including leases on abandoned sites.
Circuit City dropped 4 cents to 35 cents in New York Stock Exchange composite trading. The shares have dropped 92 percent this year, compared with a 53 percent decline for No. 1 electronics retailer Best Buy Co.
“I think they’re just not confirming or denying anything,” said Brad Thomas, senior research analyst at KeyBanc Capital Markets, who said Monday that he had not seen a press release from the company on the subject.
However, Mr. Thomas likened the success of closing at least 20 percent of Circuit City stores nationwide to rearranging deck chairs on a sinking ship.
“We [analysts] think that bankruptcy is more a matter of when for Circuit City than if,” he said. “I would be surprised if there were just a hundred stores that you can close that would be a silver bullet.”
A combination of antiquated business models, poor returns on investments and lack of consumer spending have put the one-time consumer electronics leader in a position with few options just six weeks away from Black Friday, the day after Thanksgiving that traditionally begins the holiday shopping season.
Anthony Chukumba, senior analyst with FTN Midwest Securities said that he predicted Circuit City’s plan to close a number of stores several weeks ago, but thought that major changes would take place after the holidays.
“They’ve sort of got their backs against the wall at this point,” he said.
Mr. Thomas said the retailer has enough liquidity to stock shelves through this holiday season, but the possibility of venders pulling out in the face of decreased consumer spending makes Circuit City stores vulnerable to big losses at Christmastime.
Another part of the problem is that about 90 percent of Circuit City stores are tied up in leases for at least the next five years. This makes it difficult to find a buyer for the chain because, “You can’t just go in, buy the chain and liquidate,” Mr. Thomas said.
Mr. Chukumba said that if credit markets were better, Circuit City would file Chapter 11 and close a few hundred stores, walking away from the leases which are part of the current problem. In the current market, however, the retailer hopes to close a number of stores and liquidate assets to pay the leases on the remaining stores.
“I think it’s a reflection of the tough times,” he said.
Even if the chain could make it though the holiday season, many of Circuit City’s structural problems have been around for years and there is no quick fix.
“These were problems that were started many years ago … when they were resting on their laurels as the top consumer electronics retailer,” he said.
The modern consumer usually does research on the Internet about a product they intend to buy before coming to a store, making the showroom format and commission-sales force out of date, yet Circuit City salespeople operated on commission until 2003.
Then in 2007, the company let go of 8 percent of its employees, many of whom were the more experienced salespeople, which led to decreased customer service, Mr. Chukumba said.
Circuit City also made some inventory changes at the wrong point in product cycles, Mr. Thomas said. In 2000, the retailer stopped selling appliances to make room for more DVDs and video games, which had been high-traffic big sellers for competitor Best Buy.
However, this change was made as digital downloading and digital video recording (DVR) devices became popular and DVD sales slowed.
In 2007, Circuit City made a number of changes in an attempt to get back on its feet, including changing the management structure and employee responsibilities in stores, but Mr. Thomas said it was too many internal changes too quickly and set in motion the problems that are manifesting themselves today.
As consumers tightened their purse strings in the face of a faltering economy, Circuit City’s situation became more dire.
“They’ve found themselves in a bad financial situation in the midst of one of the worst consumer recessions,” he said. “It’s hard to figure out how much of this is them and how much is this economy.”
Circuit City operates 1,480 stores, about half of which are in the U.S.
This article is base in part on wire-service reports.
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