Circuit City Stores Inc., the nation's second-biggest electronics retailer, filed for bankruptcy protection on Monday but plans to stay open for business as the busy holiday season approaches.
It said it decided to file for bankruptcy protection because it was facing pressure from vendors who threatened to withhold products during the holiday shopping period. The company also said it cut 700 more jobs at its headquarters, after announcing a week ago that it would close 20 percent of its stores and lay off thousands of workers.
Circuit City filed under Chapter 11 of the bankruptcy code, which will allow it to hold off creditors and continue operations while it develops a reorganization plan. Its Canadian operations also filed for similar protection.
Doing so "should provide us with the opportunity to strengthen our balance sheet, create a more efficient expense structure and ultimately position the company to compete more effectively," James A. Marcum, vice chairman and acting president and chief executive, said in a statement.
The Richmond, Va.-based company, which has had only one profitable quarter in the past year, has faced significant declines in traffic and heightened competition from rival Best Buy Co. and others. While the retail industry overall is facing what's expected to be the weakest holiday season in decades, Circuit City's struggles have intensified as nervous consumers spend less and credit has become tighter.
In court documents, Chief Financial Officer Bruce H. Besanko said three factors led to the bankruptcy filing: erosion of vendor confidence, decreased liquidity and the global economic crisis.
"Without immediate relief, the company is concerned that it will not receive goods for Black Friday and the upcoming holiday season, which could cause irreparable harm to the company and its stakeholders," Besanko said in the filing.
The company's biggest creditors are its vendors: Hewlett-Packard has a $118.8 million claim followed by Samsung ($115.9 million), Sony ($60 million), Zenith ($41.2 million), Toshiba ($17.9 million) and others. Smaller creditors include GPS navigation system maker Garmin, Nikon, Lenovo, Eastman Kodak and Mitsubishi.
Circuit City Stores Inc. announced a week ago it planned to close 155 of its more than 700 U.S. stores by Dec. 31. The stores are spread throughout 28 states, including multiple locations in areas like Phoenix and Atlanta. It is laying off about 17 percent of its domestic work force, which could affect up to 7,300 people.
"This isn't a surprise," JPMorgan analyst Christopher Horvers said of the bankruptcy filing, adding that the reorganization could help the company get out of leases for certain bad store locations.
Circuit City also said last week that it will further cut back on new store openings and planned to work with landlords to renegotiate leases, lower rent or terminate agreements while it dealt with tightening credit from its vendors.
"At the end of the day I think it's really about an inventory position," Horvers said. "If they can get inventory into the stores, I can think they'll remain competitive."
Horvers also found it encouraging that the company was able to secure financing. Circuit City said it had lined up $1.1 billion in loans to provide working capital while it is in bankruptcy protection. That replaces a $1.3 billion asset-backed loan it had been using.
Loans to operate while in bankruptcy are called debtor-in-possession, or DIP, loans.
"That's a big DIP in the current market," said John Penn, a partner at law firm Haynes & Boone who is not involved in the case. "To secure that size DIP now is quite a achievement. With the news of the cuts last week - and vendors wanting to know they can get paid - having a recognizable source like a DIP can calm a lot of vendor concerns."
The company said in its filing that it had $3.4 billion in assets and $2.32 billion in liabilities, as of Aug. 31.
Circuit City posted a wider second-quarter loss in September with a 13 percent decline in sales at stores open at least a year. The company has been under new leadership since late September when Chief Executive Philip J. Schoonover agreed to step down.
Shares in Circuit City have traded under $1 for more than a month and the company received a warning about that last month from the New York Stock Exchange.
(Copyright 2008 by The Associated Press. All Rights Reserved.)