Circuit City files for Chapter 11 protection

NEW YORK -- Circuit City Stores Inc. filed for bankruptcy protection on Monday heading into the busy holiday season as analysts question whether the nation's second-biggest electronics retailer will be able to survive.

The company said it decided to file for bankruptcy protection because it was facing pressure from vendors who threatened to withhold products during the holiday period. The company also said it cut 700 more jobs at its headquarters, after announcing a week ago that it would close 20 percent of its stores and lay off thousands of workers.

Circuit City filed for Chapter 11 protection, which will allow it to hold off creditors and continue operations while it develops a reorganization plan. Its Canadian operations also filed for similar protection.

Doing so "should provide us with the opportunity to strengthen our balance sheet, create a more efficient expense structure and ultimately position the company to compete more effectively," James A. Marcum, vice chairman and acting president and chief executive, said in a statement.

Shares in Richmond, Va.-based Circuit City fell 14 cents, or about 56 percent, to 11 cents on Monday before being halted.

Circuit City, which has had only one profitable quarter in the past year, has faced significant declines in traffic and heightened competition from rival Best Buy Co. and others. The company laid off about 3,400 retail employees last year and replaced them with lower-paid workers, a move analysts said could backfire, hurting morale and driving away customers.

While the retail industry overall is facing what's expected to be the weakest holiday season in decades, Circuit City's struggles have intensified as nervous consumers spend less and credit has become tighter.

In court documents, Chief Financial Officer Bruce H. Besanko said three factors led to the bankruptcy filing: erosion of vendor confidence, decreased liquidity and the global economic crisis.

"Without immediate relief, the company is concerned that it will not receive goods for Black Friday and the upcoming holiday season, which could cause irreparable harm to the company and its stakeholders," Besanko said in the filing.

The company's biggest creditors are its vendors: Hewlett-Packard has a $118.8 million claim followed by Samsung ($115.9 million), Sony ($60 million), Zenith ($41.2 million), Toshiba ($17.9 million) and others. Smaller creditors include GPS navigation system maker Garmin, Nikon, Lenovo, Eastman Kodak and Mitsubishi.

Stifel Nicolaus & Co. analyst David Schick said in a note to investors that since Circuit City is a well-known brand it could re-emerge from bankruptcy, saying "We believe the marketplace has a slot for a higher-end chain with a commissioned sales force."

But Stephen Lubben, the Daniel J. Moore professor of law at Seton Hall Law School, said the company's surivial depends on "whether these folks here like Sony and Hewlett-Packard are going to be willing to work with Circuit City going forward or whether they think they're a lost cause and cut them off permanently."

Lubben said it has the added burden of facing Chapter 11 at a difficult time for retail.

Meanwhile, Deutsche Bank analyst Mike Baker told investors that consumers learning about Circuit City's bankruptcy may choose elsewhere due to a lack of confidence in the company.

Circuit City Stores Inc. announced a week ago it planned to close 155 of its more than 700 U.S. stores by Dec. 31. It is laying off about 17 percent of its domestic work force, which could affect up to 7,300 people.

"This isn't a surprise," JPMorgan analyst Christopher Horvers said of the bankruptcy filing, adding that the reorganization could help the company get out of leases for certain bad store locations.

Circuit City had also said last week that it would further cut back on new store openings and planned to work with landlords to renegotiate leases, lower rent or terminate agreements while it dealt with tightening credit from its vendors.

"At the end of the day I think it's really about an inventory position," Horvers said. "If they can get inventory into the stores, I can think they'll remain competitive."

Horvers also found it encouraging that the company was able to secure financing. Circuit City said it had lined up $1.1 billion in loans to provide working capital while it is in bankruptcy protection. That replaces a $1.3 billion asset-backed loan it had been using.

Loans to operate while in bankruptcy are called debtor-in-possession, or DIP, loans.

"That's a big DIP in the current market," said John Penn, a partner at law firm Haynes & Boone who is not involved in the case. "To secure that size DIP now is quite a achievement. With the news of the cuts last week -- and vendors wanting to know they can get paid -- having a recognizable source like a DIP can calm a lot of vendor concerns."

The company said in its filing that it had $3.4 billion in assets and $2.32 billion in liabilities, as of Aug. 31.

Circuit City posted a wider second-quarter loss in September with a 13 percent decline in sales at stores open at least a year. The company has been under new leadership since late September when Chief Executive Philip J. Schoonover agreed to step down.

Shares in Circuit City have traded under $1 for more than a month and the company received a warning about that last month from the New York Stock Exchange.

A look at the history of consumer electronics retailer Circuit City Stores Inc.:

1949: Samuel S. Wurtzel opens first Wards Company retail store in Richmond, Va.

1959: Wards operates four television and home appliance stores in Richmond with annual sales volume of about $1 million.

1960: Expands operations via licensed departments in mass merchandising discount stores.

1961: Makes first public offering with Stein Brothers & Boyce Co. of Baltimore. Offers 110,000 shares at $5.375 per share (split adjusted, 2 cents per share).

1966: Sales reach $23 million for the fiscal year.

1968: Moves from the over-the-counter market to the American Stock Exchange. Offers 1,700 shares at $19.75 per share (split adjusted, 55 cents per share).

1969-1982: Company acquires numerous electronics retailers and operates stores from New York to California.

1983: Sales reach $246 million for the fiscal year.

1984: Company name changes to Circuit City Stores Inc.; Stock listed on the New York Stock Exchange.

1987: Sales reach the $1 billion mark for the fiscal year ending Feb. 28, 1987.

1989: First personal computers hit Circuit City store shelves.

1990: Sales reach the $2 billion mark for the fiscal year ending Feb. 28, 1990.

1993: Begins testing CarMax, a retail venture selling used vehicles.

1996: CarMax announces plans for national expansion of the concept.

1999: Circuit City launches Web site to offer online shopping; annual sales for Circuit City store businesses exceed $10 billion and annual sales for the CarMax superstores exceed $2 billion.

2000: Circuit City exits the appliance business.

2002: Circuit City completes the separation of CarMax.

2003: The company rejects takeover bid from Mexican financier Carlos Slim Helu.

2004: Circuit City acquires Ontario-based InterTAN Inc., a consumer electronics retailer of private-label and internationally branded products.

2005: Company rejects unsolicited $3.25 billion cash buyout offer from Boston investment firm Highfields Capital Management LP

2006: Circuit City launches Firedog, a PC services and home-installation business.

2007: Circuit City announces plans to explore strategic alternatives for InterTAN Inc.; launches new store prototype "The City."

April 2008: Dallas-based movie-rental chain Blockbuster Inc. makes public a more than $1 billion takeover bid for Circuit City with dreams of creating a huge chain that would sell electronic gadgets and rent movies and games.

May 2008: Circuit City's board of directors authorizes the exploration of strategic alternatives to enhance shareholder value; Opens books to Blockbuster.

June 2008: Circuit City reaches agreement with shareholder Wattles Capital Management to nominate three directors, including James A. Marcum to its board to defuse proxy battle.

July 2008: Blockbuster withdraws takeover bid, citing market conditions.

August 2008: Marcum named vice chairman.

Sept. 22, 2008: Philip J. Schoonover steps down as Circuit City's chief executive, chairman and president; Marcum named as interim president and chief executive.

Sept. 29, 2008: Circuit City withdraws its outlook for the full year and posts a wider second-quarter loss as sales fell 10 percent; Shares fall more than 20 percent.

Nov. 3, 2008: Circuit City says it will close 155 stores in 55 U.S. markets by Dec. 31, laying off about 17 percent of its domestic work force. Company says it will further reduce new store openings and plans to work with landlords to renegotiate leases, lower rent or terminate agreements while it deals with tightening credit from its vendors.

Nov. 10, 2008: Circuit City files for Chapter 11 bankruptcy protection.

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