Your browser is out-of-date!

Update your browser to view this website correctly. Update my browser now

×

Circuit’s Prospects Seen As Mixed

Industry observers are forecasting several scenarios for a post-Chapter 11 Circuit City, and none of them are good.

Projections range from a radical downsizing to a complete liquidation of the ailing chain.

The rosiest projection, by Banc of America Securities’ David Strasser, envisions a vastly smaller multiregional Circuit City with 200 to 300 stores at best. In a research note, Strasser said he expects the company will look to close “significantlymore” 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.

Harlan Platt, Ph.D., a turnaround expert and finance professor at Northeastern University College of Business Administration in Boston, believes Circuit will begin shutting additional stores shortly, leaving a potentially profitable, albeit smaller, chain. “If that happens, credit will probably be available to finance an emergence from bankruptcy,” he said. “Failing that, it is probably curtains.”

Dave Workman, executive director of the Progressive Retailers Organization (PRO Group), believes there is room in the marketplace for a smaller Circuit City, and that it is possible for the company to be healthy and prosperous with annual sales of $5 billion to $7 billion — assuming it can redefine itself.

“The industry doesn’t need a second Best Buy,” he said. “They need to establish a clear, definable strategy with different merchandise and selling procedures and to communicate that to consumers.”

The company should also leverage its core e-commerce and Firedog service assets, Workman said.

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 Comp-USA and Linens ‘n Things.

PRO Group’s Workman would be “very surprised if Circuit City went away” given the equity in its name, although he acknowledged the enormous challenges it faces. The holidays are “the most devastating period” to enter Chapter 11, he said, and agreed that consumer misperceptions about bankruptcy protection could further stall traffic.

A different set of problems will emerge post-Chapter 11, when vendors will demand cash in advance until Circuit City can establish new lines of credit. This will create “a huge drain on cash flow,” Workman said, while the absence of a traditional forecasting mechanism will make it difficult for vendors to plan their business with the chain.

Meanwhile, manufacturers are only girding themselves for what they believe are more retail failures 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 [Circuit City] didn’t just avail itself of Capitol Hill and ask for a bailout,” Tetreault said. “Take a number.”

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

Nevertheless, former Circuit City chairman and CEO Alan Wurtzel, son of founder Sam, seemingly eulogized the company in a recent interview with the Richmond Times-Dispatch.

“We made mistakes,” he told the hometown paper. “It’s very, very sad when you see your baby die.” — Additional reporting by Lisa Johnston

Featured

Close