Rich Pedroncelli/AP

Circuit City Bankruptcy Casts Shadow on 2008 Holiday Retail Season

November 10, 2008 04:50 PM
by Anne Szustek
Circuit City’s filing for Chapter 11 bankruptcy protection may be a harbinger of a lack of cheer in the retail sector this holiday season; industry analysts are predicting slow sales.

Circuit City Files for Chapter 11

After 59 years in business, Circuit City, the nation’s second-largest electronics retailer, applied for bankruptcy protection Monday under Chapter 11 at U.S. Bankruptcy Court in Richmond, Virginia.

The move comes after the electronics retail chain’s announcement last week that it was closing 155 locations, over 20 percent of its stores, and laying off 17 percent of its American staff. At that time Circuit City said that it was looking at all options to stay in business. But a final blow was dealt to the company when several of the store’s vendors cut off credit and demanded cash up front for new shipments of stock in light of concerns over lagging sales and cash flow. Circuit City had lost money during five of the six past financial quarters.

In all, Circuit City owes some $650 million to its vendors. In its bankruptcy filing, the store “listed $3.4 billion in assets and $2.32 billion in liabilities,” reported Bloomberg.

Among the suppliers to which Circuit City is indebted are electronics manufacturer Samsung, which the store owes $116 million, and personal computer producer Hewlett-Packard, to which Circuit City has $118 million in outstanding bills. Other Circuit City major suppliers include Sony, Zenith, Toshiba, Garmin and Nikon.

Circuit City also filed for bankruptcy in Canada. Company Chief Financial Officer Bruce Besanko was quoted by Reuters as saying, “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.”

Minneapolis-based Best Buy, a chief competitor of Circuit City, has said there is a possibility it would take over stores closed by struggling competitors. Jeffries and Co. analyst Jeff Binder told Reuters that such a move could hinder Best Buy during the heavy shopping season of the next seven weeks.

“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 told the wire service. “There’s already soft demand out there and probably too much supply. This exacerbates the situation.”

Background: 2008 holiday retail season looking less than jolly

For the period from Nov. 1 through Dec. 31, U.S. retail sales are predicted to reach $400 billion—a $50 billion decrease from the same period last year, according to management strategy firm Archstone Consulting. Should sales match forecasts, it would be the first holiday season decrease since 1991.

The 2008 holiday season is still expected to eclipse retail sales from earlier in the year, but not by much: Archstone forecasts sales growth of 0.5 to 1 percent for the holiday retail season above the rest of 2008. For a point of comparison, the current inflation rate is 2.6 percent.
Another indication of a potentially blue Christmas for retailers is the industry’s job market. The U.S. retail sector trimmed 31,100 jobs in October, marking the 11th straight month of employment losses in the sector—and signaling a tight budget for those who depend on holiday employment to tide them through the gift-giving season.

“It is a bleak season for retailers, and that is going to impact their hiring,” John Challenger, CEO of Chicago outplacement company Challenger, Gray & Christmas told the Associated Press.

Some retailers are adapting to the sluggish economy buy purchasing cheaper inventory. Anthony Sindoni, an owner of a Stamford, Conn., store selling hand-blown glass, told newspaper the Stamford Advocate that he’ll be stocking less-expensive items than usual this holiday season: only 20 percent of his orders will be for items retailing in excess of $200, and that for the first holiday season in his five years of business he would not order anything worth more than $2,000.

Reference: Bankruptcy, consumer protection


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