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
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
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
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
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)