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November 10, 2008

Circuit City Files for Chapter 11 Protection

By Susan J. Campbell, TMCnet Contributing Editor

Last week, TMCnet reported the dismal news that Circuit City was in dire straights. It seems the electronics giant is feeling the strain of the economic turmoil and has announced its plans to close 155 retail locations and restructure its business. It appears now that the company has decided that bankruptcy is the best option for restructuring.

Reuters (News - Alert) reported on CNBC today that the No. 2 U.S. consumer electronics retailer has filed for bankruptcy protection. This announcement comes just weeks before the start of the key holiday shopping season, one that drives the majority of retail purchases. Circuit City is the largest retailer to file under Chapter 11 this year. 

The slump of the credit market did not bode well for Circuit City as the company struggled to maintain positioning while losing market share to Best Buy, Wal-Mart and other retailers.

Chapter 11 protection from creditors was filed by Circuit City and 17 affiliates with the U.S. bankruptcy court in Richmond Virginia, home to Circuit City headquarters. This filing is only one week after the company’s original announcement to close stores and eliminate 17 percent of its U.S. workforce.

In the company’s court filing, Chief Financial Officer Bruce Besanko said that the retailer filed for Chapter 11 in an effort to continue its turnaround efforts. The company is considering all options to restructure.

"In large part, a Chapter 11 filing is due to three factors, all of which contributed to a liquidity crisis that prevented the company from completing its turnaround goals outside of formal proceedings: erosion of vendor confidence, decreased liquidity and a global economic crisis," Besanko said in the CSNBC report.

Circuit City has been on a broken path for sometime as the company has lost money in five of the last six quarters. Suppliers have been pinched by the global credit crunch and have tightened terms. In recent weeks these suppliers have often required up-front payments before shipping goods.

This announcement could be good news for larger rival Best Buy. The Minneapolis-based retailer said that it may take over stores that its distressed rivals close, but all may not be rosy for this rival.

According to Jefferies & Co, analyst Dan Binder, there is the challenge of a flood of discounted merchandize from liquidating Circuit City stores that could hurt Best Buy and other retailers this holiday season.

"Longer term, you've got Best Buy, who's dominant in the sector, taking share. But in the short run it could feel the pain of the liquidation activity," Binder said, in the CSNBC report. "There's already soft demand out there and probably too much supply. This exacerbates the situation.”

The filing stated Circuit City had $4.3 billion in assets and $2.32 billion in debt as of August 31. The company is also accountable to more than 100,000 creditors. Circuit City has arrangement a commitment for debtor-in-possession financing of $1.1 billion, which will allow it to continue to operate during the bankruptcy proceeding.

As to be expected, shares of Circuit City last traded Friday at 25 cents, falling to 13 cents in premarket trading.

Susan J. Campbell is a contributing editor for TMCnet and has also written for eastbiz.com. To read more of Susan's articles, please visit her columnist page.

Edited by Stefania Viscusi

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