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Circuit City’s Prospects Mixed: Analysts

11/10/2008 02:51:00 PM Eastern

New York — Analysts are spinning several scenarios for a post-Chapter 11 Circuit City and none of them are good.

The rosiest projection, by Banc of America Securities’ David Strasser, envisions a vastly smaller multiregional chain, with 200 to 300 stores at best. In a research note, Strasser said he expects the company will look to close “significantly more” than the previously announced 155 stores, and that it will be able to “more aggressively market parts of the business to a variety of buyers” once it enters bankruptcy.

Others were less sanguine, and saw the Chapter 11 reorganization as a holding action that will only delay an inevitable company-wide liquidation.

“We have not seen a consumer electronics retailer successfully reorganize in Chapter 11 in our 24 years in this space,” observed Gary Balter of Credit Suisse Securities. Both he and Michael Lasser of Barclay’s Capital described in separate research notes a self-fulfilling prophecy in which consumers may be less inclined to shop Circuit City, let alone purchase high-margin warranties and highly profitable gift cards, for fear that all its stores will close.

“We have seen other companies pursue the strategy of trying to use Chapter 11 to reorganize and shrink their store base, only to completely liquidate at a later time,” Lasser said, citing CompUSA and Linens ’n Things.

In a worse case scenario, Balter believes that Best Buy would pick up a disproportionate amount of Circuit City’s approximately $10.5 billion in total sales — more than its current 21 percent CE market share — due to what he described as a common and “extremely high” consumer bias toward the CE specialty channel. Other beneficiaries of Circuit City’s demise would include Wal-Mart, Costco, hhgregg and Sears, he noted.

Complete liquidation would not necessarily be disruptive to the marketplace, Balter added, based on weekend pricing at Circuit City’s 155 closing stores, which he said was actually higher than prices at the chain’s remaining locations.

But in the meantime, liquidation is off the table, at least for now, the analysts said, and Circuit City doesn’t appear to be going away in the near-term.

Vendors, rocked by the back-to-back bankruptcies of Circuit City and Tweeter, the industry’s third-largest A/V specialty chain, are only girding themselves for what they believe is more to come.

“Unfortunately, you’re going to be hearing more and more,” said Gordon Tetreault, sales and marketing director at Maxell. “Maybe not just in the electronics industry, but you’ll be hearing more over the next five or six months. Consolidation continues. And any time a retailer files Chapter 11 it affects much more than just the retailer itself. It affects the employees and consumers.

“I’m surprised they didn’t just avail themselves of Capitol Hill and ask for a bailout,” Tetreault commented. “Take a number.” — Additional reporting by Lisa Johnston

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

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