Circuit City to close 155 stores in response to liquidity woes

By Caroline Salls

Pittsburgh, Nov. 3 - Circuit City Stores, Inc. will close 155 of its underperforming domestic segment stores, reduce future store openings and aggressively renegotiate leases to lower rents as a result of the company's deteriorating liquidity and the continued weak macroeconomic environment, according to a company news release.

The company said it is also considering all available options and alternatives to restructure its business.

According to the release, a number of factors have severely impacted the company's liquidity over the last several weeks, including waning consumer confidence and a significantly weakened retail environment, which have hurt the company's sales and gross profit margin rate to a greater degree than management had previously expected.

Following the company's second-quarter results announcement, Circuit City said its liquidity and the sharply worsened overall economic environment led some of its vendors to take restrictive actions on payment terms and the credit they make available to the company.

The company said the recent disruption in the financial markets has led some of its vendors to face insurmountable challenges in obtaining credit insurance for the company's purchases. As a result, some of the vendors have set more restrictive payment terms than in previous quarters, including in some cases requiring payment before shipment.

Circuit City said vendors also have limited the credit available for purchases, and some will not provide customary increases in credit lines for holiday purchases.

In addition, the company said it has been unable to collect an $80 million income tax refund that the company believes it is owed from the federal government.

Also, Circuit City said a recent third-party appraisal conducted for its asset-based credit facility resulted in a reduction of the estimated net orderly liquidation value of the company's inventory, leading to a lower-than-expected borrowing base and reduced availability.

"Since late September, unprecedented events have occurred in the financial and consumer markets causing macroeconomic trends to worsen sharply," vice chairman and acting president and chief executive officer James A. Marcum said in the release.

"The weakened environment has resulted in a slowdown of consumer spending, further impacting our business as well as the business of our vendors.

"The combination of these trends has strained severely our working capital and liquidity, and so we are making a number of difficult, but necessary, decisions to address the company's financial situation as quickly as possible."

Store closure details

The company said the stores identified for closure are located in 55 U.S. media markets. Circuit City will exit 12 of these markets.

Impacted stores are not expected to open on Tuesday, and store-closing sales will begin on Wednesday and be completed no later than the end of the year.

For fiscal 2008, the stores that are being closed generated $1.4 billion in total net sales. The company said the closing stores on average had lower net sales, a lower close rate and a lower gross profit margin rate than the stores that are staying open.

Meanwhile, Circuit City said it will not open at least 10 locations that were previously expected to open this year.

The company said it still expects to open up to two incremental stores during the remainder of fiscal 2009. Other than existing commitments, management intends to suspend store openings beginning in fiscal 2010, the release said.

As a result of the store closures, Circuit City said it expects to reduce store operating, payroll and marketing expenses, with the store closures expected to result in a reduction of roughly 17% of its domestic segment workforce.

Exploring alternatives

In connection with the evaluation of its alternatives, the company said it will continue to take actions to conserve cash, reduce expenses and improve liquidity, as well as evaluate additional near-term cost reduction initiatives that may be necessary to address its financial condition.

The company said it is also in negotiations with its lenders and other third parties regarding various financing alternatives.

Circuit City is a Richmond, Va., electronics retailer.

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