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Circuit City In Credit Crisis, Closing 155 Stores

11/03/2008 09:17:00 AM Eastern

UPDATE! Richmond, Va. — Circuit City said new credit and payment terms imposed by vendors are becoming “unmanageable” for the company, making it difficult to order holiday inventory and prompting it to close 155 underperforming stores and exit 12 markets in an effort to save cash.

Vendors tightened their terms in reaction to Circuit City’s worsening liquidity situation, as the economic downturn impacted sales and margins more severely than management had anticipated, the company said.

The recent turmoil in the financial markets has also made it virtually impossible for some of its vendors to obtain credit insurance from factors on Circuit City’s purchases, the retailer said.

As a result, key vendors are requiring payment up front and have curtailed their holiday credit lines.

Adding to the cash crunch was a reduction in Circuit City’s bank-based credit line, as the inventory that secures the loan was recently reassessed at a lower value.

The company has also been unable to collect an anticipated $80 million income tax refund from the federal government.

The No. 2 CE chain said it is “working diligently to secure the support of its vendors,” and is considering “all available options and alternatives for the business.” The company said it plans to continue operating without interruption while it negotiates with lenders and other third parties regarding various financing alternatives, and is working with its advisors to develop restructuring alternatives while conserving cash and cutting expenses.

In a statement, vice chairman and acting CEO James Marcum said the confluence of unprecedented events in the financial and consumer markets has “strained severely our working capital and liquidity,” forcing the company to close stores, reduce new store openings and renegotiate some of its leases.

The store closings will leave the chain with 566 locations, down 22 percent from the current 712, and will cut its workforce by about 17 percent. The 155 stores targeted for closure produced about $1.4 billion in revenue, or approximately 14 percent of total company sales, but were generally unprofitable, the retailer said. Liquidation sales will begin Wednesday, Nov. 5, and the stores are expected to close no later than the end of December.

Circuit City has reduced its new store openings from 12 to two for the balance of the year, and has dropped plans to open any new stores in 2009.

The company will also attempt to renegotiate terms with its landlords, including terminating the leases on the 155 marked stores and certain vacant locations, and lowering the rents on other properties in lieu of breaking the leases.

The announcements follow last week’s warning from the New York Stock Exchange that Circuit City is in danger of being de-listed because its share price has remained under $1 for more than 30 trading days. The stock was trading at 37 cents a share at noon EST Monday.

Michael Lasser, a retail analyst with Barclays Capital, believes Circuit City’s outlook is dire. In a research note, he suggested that consumers may be hesitant to shop the chain as they learn of its store closures and financial straights. He also argued that that previous attempts by retailers to reduce their store base, including CompUSA and Linens ‘N Things, have resulted in complete liquidation.

That fate awaits Tweeter, the 26-year-old A/V specialty chain that commenced going–out-of-business sales over the weekend.

Clickhereto read TWICE's complete coverage of Circuit City and Tweeter.