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Circuit City to Remain Open During Bankruptcy

10 Nov, 2008 By: Erik Gruenwedel

Circuit City Stores Nov. 10 said it will stay open (including Canadian operations) despite filing for Chapter 11 bankruptcy protection.

The Richmond, Va.-based No. 2 consumer electronics retail chain filed for reorganization relief in U.S. Bankruptcy Court for the Eastern District of Virginia, listing $3.4 billion in assets and $2.3 billion in liabilities.

Circuit City said it negotiated a $1.1 billion debtor-in-possession revolving credit facility (replacing a $1.3 billion asset-based credit facility) with existing lenders to provide for immediate liquidity needs.

In addition the retailer is seeking court approval to continue business operations, which include salary and employee benefits in addition to honoring consumer product returns, warranties, exchanges and gift cards.

James Marcum, vice chairman and acting president and CEO, said the bankruptcy filing was in response to “our deteriorating liquidity position.” He said he regretted the fiscal impact the filing would have on sales associates at the chain’s 1,400 stores.

Circuit City Nov. 7 reportedly let go 700 employees at its corporate headquarters.

Founded in 1949, Circuit City lost more than $5 billion in stock market value in the past two years. Earlier this month, it said it would shutter 155 stores, including 25 in California.

The retailer reported losses of more than $239 million in the most recent financial period, compared to losses of $62 million during the prior-year period.

Edward Woo, retail analyst with Wedbush Morgan Securities in Los Angeles, said the strategy is to emerge as Circuit City Lite, operating fewer stores with less overhead and favorable leases.

“With the economy and consumer spending in such bad shape, they have a tough road ahead,” Woo said.

The bankruptcy, which allows Circuit City to break existing contracts and secure new credit heading into the important holiday shopping season, was hardly an impulse decision and instead, part of a coordinated plan by Marcum and dissident shareholder Mark Wattles, according to Tom Arnold, professor of finance at the University of Richmond and longtime observer of Circuit City’s operations.

Wattles, who co-founded and sold Hollywood Video to Movie Gallery for $1.1 billion in 2005, this year commandeered three appointees (including Marcum) to Circuit City’s board, resulting in the resignation of chairman and CEO Philip Schoonover.

“After bankruptcy I believe Marcum will remain CEO with possibly some partial ownership of the new entity,” Arnold said. “I suspect Wattles will have some of the equity in the new entity as well, but I don’t know under what manner it will be awarded to him.”

Arnold isn’t sure how much of Circuit City will survive restructuring. He said bankruptcy allows management to close stores and initiate layoffs at will.

“In theory, the stores that were closed should have been the ones that were either underperforming or too difficult to maintain,” he said. “Even if more stores do not close, more management layoffs are likely.”

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