Circuit City (CC): A Chapter 11 Or Just Massive Cuts?

The Wall Street Journal reports that Circuit City (CC) is finally addressing just how desperate its situation is. The company is reportedly considering a plan to close 150 stores and slash jobs in an effort to save the company. But the company has also hired bankruptcy attorneys Skadden, Arps, Slate, Meagher & Flom LLP and other consultants as it mulls a possible bankruptcy filing and plans for the possibility of debtor in possession financing

It may be too late for Circuit City because of managerial bungling. Back in July, the company began bizarre expansion plans even as it bled red ink and suffered from poor same store sales.

The Journal adds that "Circuit City management, investors and advisers are trying to avoid a bankruptcy filing before the holiday season, people familiar with the matter said, fearing customers might doubt the ability of a retailer involved in bankruptcy proceedings to provide warranties on products like laptop computers and flat-screen TVs."

But here’s the problem: if Circuit City is trying desperately to avoid chapter 11 until after the holiday season, why on earth would anyone ship to them? Being a creditor in a bankruptcy filing isn’t exactly fun. If electronics manufacturers lose faith in Circuit City, as they probably should, the company is doomed. On the other hand, the weak economy and expected soft holiday season could leave a lot of suppliers desperate to move inventory, even at the possible expense of extended credit terms and the risk of future receivables writedowns.

Given how much trouble so many over-leveraged retailers are in, Circuit City is not alone as a company that could have trouble stocking its shelves with new merchandise. Golfsmith (GOLF) will be in trouble if the golf market remains weak, as evidenced by its declining stock price and cash burn. Pier 1 Imports (PIR) could also have a lot in common with Circuit City and that’s never a good thing.

Zac Bissonnette