Circuit City Goes Bust

America's second largest electronics retailer, Circuit City, has filed for Chapter 11 bankruptcy. Two years ago, it was worth more than $5 billion. Today, it's worth nothing. It is firing 6,800 employees and the remaining 40,000 may want to polish up their resumes. Very little of this it the fault of Circuit City's management, however.

This isn't to say that management is entirely off the hook. Analysts in the consumer electronics market say that Circuit City didn't move its stores into convenient locations several years ago, which gave WalMart, Best Buy and others an advantage. It didn't get into the gaming segment of the business quickly enough. Its web presence still isn't all that good. Finally, the company didn't take advantage of in-store promotions with suppliers like Apple, thus missing the iPod boom.

Nevertheless, the electronic retail business itself rises and falls on credit. If there is lending, the TVs and laptops go flying off the shelves. If there isn't, they don't. Worse, suppliers get nervous and demand upfront payments for goods delivered. That weakens the retailer's balance sheet, making suppliers even more nervous. This is what happened to Circuit City.

The company isn't going into liquidation, at least not yet. Its current lenders led by Bank of America have extended it $1.1 billion in new capital. However, that was only after it had filed for Chapter 11 and only on condition that the company agree to pay off existing debt. Bloomberg reports that Hewlett Packard and Samsung are both owed around $120 million.

The timing of the bankruptcy is important as the holiday shopping season lies ahead. If Circuit City can get reluctant consumers into their remaining stores and convince them to spend, things could be looking up by summer. Kmart went bust in 2002, and it has staged a comeback. By the same token, Linens 'N Things decided liquidation was the only way forward. The jury is still out on Circuit City.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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