Holidays to test Circuit City rebound plan

ATLANTA (Reuters) - The clock is ticking on Circuit City Stores Inc's CC.N turnaround.

The holiday season may be crucial for the second-biggest U.S. electronics retailer, which some analysts believe could face possible bankruptcy if consumers continue to shun its stores and spend their dollars elsewhere.

"The outlook isn't good," said William Armstrong, an analyst with CL King & Associates who owns Circuit City shares. "The question is what happens next year."

This week, Circuit City reported a wider second-quarter loss on disappointing sales and withdrew its outlook. Now, it is counting on a new marketing brand campaign, improved in-stock positions and customer service to reverse a significant decline in traffic.

Lately, a number of analysts have said Circuit City could be headed toward bankruptcy should holiday results be weak and suppliers cut off support.

"The risks of bankruptcy are very real, in our opinion," Stifel Nicolaus analyst David Schick wrote. Last week, Deutsche Bank's Michael Baker said in a note to clients that without a strong holiday season, Circuit City "significantly increases bankruptcy risk."

Circuit City's stock, which has fallen 82 percent this year and now trades at less than a dollar, reflects very negative investor sentiment in the wake of the company's downward spiral and dim hopes of a takeover since Blockbuster Inc (BBI.N) pulled its bid in July.

Reviving sales will be no easy task given expectations that the 2008 holiday season will be one of the worst in recent years, and could be highly promotional given weaker consumer spending.

Add to that the slowing U.S. economy and competition from stronger rivals Best Buy Co (BBY.N) and Wal-Mart Stores Inc (WMT.N), and Circuit City's efforts could be too little, too late.

"The gap between Circuit City and its competitors may simply be too wide to close," Jefferies & Co analyst Dan Binder said in a research note. He said negative headlines are making buyers skittish about shopping there.

Electronics is one of the most competitive spaces in retail, and Best Buy and Wal-Mart gained market share this year with an improved brand selection.

LENDER, SUPPLIER SUPPORT

In response to the bankruptcy speculation, Circuit City cited support from its vendors and lenders.

"We have adequate liquidity given our asset-backed credit facility," spokesman Bill Cimino said in an e-mail on Wednesday. He added that "our lenders, in addition to our vendors, continue to support the company's turnaround efforts."

Acting chief executive officer James Marcum, named to the top job last week when Philip Schoonover agreed to step down, is scaling back expansion. Other than existing commitments, no stores will be opened next year, and Circuit City may close underperformers.

Circuit City suspended its dividend earlier this year to save cash and has also slashed its back-office expenses.

But without sales, cost cuts can only help so much.

"The potential need to seek creditor protection will emerge if the holiday selling season proves weak and if vendors finally decide to tighten credit terms," RBC Capital Markets analyst Scot Ciccarelli said in a research note.

VENDORS HOLD THE KEY

The retailer's $1.3 billion credit line with Bank of America Corp (BAC.N) should provide enough cash to get through the holidays.

Circuit City borrowed $215 million against that line of credit in the second quarter and said it would likely borrow more in the current period.

Analysts are concerned that vendors might change terms next year if results do not improve in the second half of this year.

"Our worries are not so much for this holiday season," said Brad Thomas, analyst with KeyBanc Capital Markets. "This is just going to be a very tough year for all retailers, and Circuit City is going to be left in a very weakened position next year."

Given the credit line, Thomas said he is not expecting Circuit City to go bankrupt in the next six months.

Not all analysts are bearish on the company. Scott Tilghman, an analyst with Soleil Securities, said he expects the new advertising and other moves to stabilize traffic. For example, customer training programs for store staff are about to start, spokesman Cimino said.

Tilghman added he expects management to renegotiate lease terms for some stores and try to exit unprofitable locations.

"The company remains on track to be successful in its turnaround longer-term," Tilghman said in a Tuesday research note.

(Editing by Patrick Fitzgibbons)