VOL. 123 | NO. 221 | Tuesday, November 11, 2008
Circuit City Files for Bankruptcy Protection
By Tom Wilemon
One week after announcing it would close 155 of its stores, including two in the Memphis area, Circuit City Stores Inc. reported Monday that it had filed for Chapter 11 bankruptcy protection.
The company also said in a statement it had cut another 700 jobs. The elimination of these corporate and regional support positions is in addition to about 7,300 jobs that will be lost when the 155 stores close by Dec. 31.
The newly opened Collierville store on East Shelby Drive and the Memphis store at 6491 Winchester Road are on the closure list. The company’s stores at 8045 Giacosa Place in Memphis and at 6680 Southcrest Parkway will remain open.
“We recently have taken intensive measures to overcome our deteriorating liquidity position,” said James A. Marcum, the chief executive officer of Circuit City Stores, in the statement. “The decision to restructure the business through a Chapter 11 filing 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.”
Shares in Richmond, Va.-based Circuit City fell 14 cents, or about 56 percent, to 11 cents on Monday before being halted.
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.
More companies are likely to follow Circuit City in asking for temporary protection from creditors, said legal and business experts at Vanderbilt University and the University of Memphis. The filings are an echo effect from the freezing of credit during this autumn’s financial crisis, said Margaret Blair, a professor of law at Vanderbilt University with expertise in corporate law and finance.
“There’s a lot of companies in a normal credit economy that would have been able to get new credit to pay off their old credit,” Blair said. “Many corporations borrow money on a short-term basis because they expect to be able to pay it with cash flow or they expect to refinance if they need to.”
Several companies have successfully navigated through Chapter 11 bankruptcy, including Kmart and United Airlines.
Ronald W. Spahr, the chair of the Department of Finance, Insurance and Real Estate at the University of Memphis, said this type of bankruptcy is a better option than government bailouts in some cases.
“Some think that bankruptcy is a solution to a company’s problems,” Spahr said. “But bankruptcy is merely a forum for a troubled company to engage in collective negotiations (and potentially litigation) in a court-supervised process. Although the Chapter 11 process brings clarity, urgency and a focal point to restructuring, it is up to a company and its stakeholders – not the court – to implement that restructuring in an organized and strategic manner.”
The purpose of the law that allows Chapter 11 bankruptcy filings is to give companies breathing room when they get behind on debt payments, Blair said. Otherwise, creditors could say the company is in default, demand the entire debt payment or even try to seize assets, she said. This scenario would close companies that could otherwise survive a financial downturn.
“It’s like they want to keep the vultures away,” she said. “I don’t mean to imply that the creditors are vultures. I mean, literally, they want to keep everybody away while they give the company a little time to heal.”
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 less than $1 for more than a month and the company received a warning about that last month from the New York Stock Exchange.
The Associated Press contributed to this report.