ATLANTA Oct 20 Closing poorly performing stores may bring Circuit City Stores Inc (CC.N) some relief as it looks to restore profitability, but rival Best Buy Co (BBY.N) could benefit greatly from such actions, analysts said.
The Wall Street Journal reported on Monday that Circuit City was considering closing at least 150 stores and cutting thousands of jobs. Citing people familiar with the company, the newspaper reported that the consumer electronics retailer has also been exploring how much money it could raise by liquidating hundreds of millions of dollars in inventory.
"If you can renegotiate leases and can favorably exit some stores without getting clobbered on your cash flow, these are the things you want to do to try to survive a pretty difficult time," said Dan Binder, an analyst with Jefferies & Co.
Circuit City spokesman Jim Babb on Monday said the company does not speculate on rumors. The company said in September it would review its business and find ways to improve performance.
At that time, the No. 2 U.S. electronics retailer said all options, including store closures, were on the table as it tries to reverse a prolonged earnings and sales slump. Circuit City plans to suspend store openings in the next fiscal year.
Anthony Chukumba, an analyst with FTN Midwest Securities, wrote two weeks ago that Circuit City could close hundreds of stores in a restructuring after the holiday season. But he said the timetable could be moving up because access to credit has dried up severely in the global financial crisis.
"I certainly think (store closures) will help, but it's a question of will it help enough," Chukumba said on Monday. "It's a much more competitive landscape now," and consumers are less confident, he said.
Chukumba said 80 percent of Circuit City's stores have a Best Buy within five miles.
"We think there will be a pretty significant transference of sales from closed Circuit City stores to Best Buy," Chukumba said. "In addition to that, we think Best Buy's gross margins would benefit because they would have increased leverage with suppliers."
J.P. Morgan analyst Christopher Horvers wrote in a research note on Monday that sales from Circuit City could boost Best Buy's fiscal 2009 earnings by 14 cents to 19 cents a share.
Circuit City, whose shares have traded below the $1 mark since late September, fell more than 10 percent to 35 cents. It has lost about 91 percent of its value this year. Best Buy rose 1 percent to $25.01.
20 YEAR LEASES
Binder said Circuit City has about 400 stores that are in bad locations or have old formats.
"Because there are so many leases under prior management that were signed at 20 year terms instead of a more standard 10 year terms, they are locked into a lot of these leases for stores that are not ideally located or formatted," he said.
As of August 31, Circuit City had about 714 U.S. outlets and 772 Canadian stores through its InterTAN subsidiary. The U.S. stores accounted for about 94 percent of total sales in the second quarter.
Circuit City has been struggling with weaker earnings for more than a year.
The company has hired law firm Skadden, Arps, Slate, Meagher & Flom LLP and is working with investment bank Rothschild Inc as advisors, sources familiar with the matter told Reuters.
In September, Circuit City said it had adequate liquidity through a $1.3 billion credit line with Bank of America Corp (BAC.N). It said it borrowed $125 million against that line in the second quarter and added that it would likely tap more in the third quarter.
The Richmond, Virginia chain has been trying to rebuild profitability and restore investor confidence over the past year in the face of intense competition from Best Buy and mass retailers such as Wal-Mart Stores (WMT.N). (Additional reporting by Emily Chasan, Chelsea Emery and Caroline Humer in New York)