Circuit City files for bankruptcy protection

ATLANTA Mon Nov 10, 2008 5:00pm EST

1 of 4. The logo for Circuit City store is seen in New York, October 10, 2008.

Credit: Reuters/Shannon Stapleton

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ATLANTA (Reuters) - Circuit City Stores Inc, the No. 2 U.S. consumer electronics retailer, filed for bankruptcy on Monday just weeks before the start of the holiday shopping season, becoming the largest retailer to file for Chapter 11 since Kmart in 2002.

Circuit City fell victim to tighter credit terms from vendors, a dwindling cash position and decreased consumer spending amid a deepening economic crisis.

The filing comes one week after the 59-year-old retailer said it would close 155 U.S. stores, or more than one-fifth of its retail base, and cut 17 percent of its U.S. work force.

The retailer and 17 affiliates filed for protection from creditors in U.S. bankruptcy court in Richmond, Virginia, where it is based. Its Canadian operations also filed for creditor protection in an Ontario court.

Analysts said there was now a possibility the company would close more U.S. stores as it negotiates to exit costly leases in Chapter 11.

"Don't rule anything out yet," said Jefferies & Co analyst Dan Binder. "You could go away, you could restructure to something smaller, maybe somebody buys the brand and a couple hundred stores and maybe it ends up a regional player."

The company could face an uphill struggle to reorganize and emerge from bankruptcy since credit is tight and consumer spending has plummeted.

"It has a lot to do with the macroeconomic crisis in the world right now," said Aravindh Vanchesan, program manager for the retail systems group at consulting firm Frost & Sullivan. "Right now, customers are cutting back on spending."

U.S. home-goods retailer Linens 'n Things tried to maintain operations by closing a portion of its stores after its May Chapter 11 filing, but finally liquidated altogether. Last week, smaller electronics chain Tweeter filed Chapter 11 and said it was holding store-closing sales.

RECENT LAYOFFS

In Monday's filing, Chief Financial Officer Bruce Besanko said the company hoped to secure financing to continue its turnaround. The company expressed hope it would be able to emerge from Chapter 11 in the first half of 2009.

"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.

Besanko's statement said 1,300 workers were laid off on November 7. That day, the Richmond newspaper reported that hundreds of workers had been let go from company headquarters.

The Chapter 11 filing caps a tough two years for the company, which posted losses for five of the past six quarters and faced a proxy contest from a major shareholder this year. Movie-rental firm Blockbuster Inc withdrew a takeover bid for Circuit City in July.

The company's stock has swooned 99 percent since January 2007 and now trades at less than 50 cents. The shares were suspended by the NYSE on Monday.

SUPPLIER SQUEEZE

In recent weeks, suppliers pinched by the global credit crunch tightened terms, sometimes requiring upfront payment from Circuit City before shipping goods.

Industry leader Best Buy Co, discounter Wal-Mart Stores and regional retailers such as hhgregg are expected to benefit from electronics store closures in the longer term, analysts have said.

But the flood of discounted merchandise from liquidating Circuit City stores could hurt Best Buy this holiday shopping season, which is expected to be one of the bleakest in recent years as consumers grapple with rising unemployment and the soft economy.

"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.

According to the filing, Circuit City had $3.4 billion of assets and $2.32 billion of debt as of August 31, and more than 100,000 creditors.

The company has arranged a commitment for debtor-in-possession financing of $1.1 billion, which will allow it to continue to operate.

Among the company's largest unsecured creditors are Hewlett-Packard Co, which is owed $118.8 million; Samsung Electronics Co, owed $115.9 million; and Sony Corp, the filing shows. The largest shareholders include HBK Master Fund LP and First Pacific Advisors LLC, according to the filing.

Best Buy shares closed down 38 cents, or 1.5 percent, to $25.21 on the New York Stock Exchange on Monday, and hhgregg fell 18 cents, or 3.5 percent, to $4.93.

(Additional reporting by Jonathan Stempel, Chelsea Emery and Martinne Geller in New York; Editing by Steve Orlofsky, Brian Moss and Matthew Lewis)

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